pp for chapter 3 completing the accounting cycle - final

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Completing the Completing the Accounting Accounting

Cycle Cycle

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1. The Matching Concept2. Nature of the Adjusting Process3. Recording Adjusting Entries4. Summary of Adjustment Process5. Prepare the Financial Statement6. Prepare the Closing Entries

After completing this chapter, you should be able to:

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TWO METHODS

Reporting Revenue and ExpenseReporting Revenue and Expense

Cash Basis of Accounting

Accrual Basis of Accounting

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Cash Basis of AccountingCash Basis of Accounting

Revenue reported when cash is received

Expense reported when cash is paid

Does not properly match revenues and

expenses

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Accrual Basis of AccountingAccrual Basis of Accounting

Revenue reported when earned

Expense reported when incurred

Properly matches revenues and expenses

in determining net income

Requires adjusting entries at end of period

It just sounds mean – it really isn’t

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The Matching ConceptThe Matching ConceptThe Matching ConceptThe Matching Concept

Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Expenses Revenues

NetIncome

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Assets

Liabilities

Owner’sEquity

Debits = Credits

Net income is determined by properly matching expenses and revenues.

Expenses Revenues

NetIncome

matching

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NetSolutionsUnadjusted Trial Balance

December 31, 2002

1111 CashCash 2,0652,0651212 Accounts ReceivableAccounts Receivable 2,2202,2201414 SuppliesSupplies 2,0002,0001515 Prepaid InsurancePrepaid Insurance 2,4002,4001717 LandLand 20,00020,0001818 Office EquipmentOffice Equipment 1,8001,800

AssetsAssets

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,8002121 Accounts PayableAccounts Payable 9009002323 Unearned RentUnearned Rent 360360

LiabilitiesLiabilities

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 3603131 Chris Clark, CapitalChris Clark, Capital 25,00025,0003232 Chris Clark, DrawingChris Clark, Drawing 4,0004,000

Owner’sOwner’sEquityEquity

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,0004141 Fees EarnedFees Earned 16,34016,340RevenueRevenue

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,3405151 Wages ExpenseWages Expense 4,2754,2755252 Rent ExpenseRent Expense 1,6001,6005454 Utilities ExpenseUtilities Expense 9859855555 Supplies ExpenseSupplies Expense 8008005959 Miscellaneous ExpenseMiscellaneous Expense 455455

42,600 42,600

ExpensesExpenses

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December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,22014 Supplies 2,00015 Prepaid Insurance 2,40017 Land 20,00018 Office Equipment 1,80021 Accounts Payable 90023 Unearned Rent 36031 Chris Clark, Capital 25,00032 Chris Clark, Drawing 4,00041 Fees Earned 16,34051 Wages Expense 4,27552 Rent Expense 1,60054 Utilities Expense 98555 Supplies Expense 80059 Miscellaneous Expense 455

42,600 42,600

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NetSolutionsExpanded Chart of Accounts

Balance Sheet Income Statement

1. Assets11 Cash12 Accounts Receivable14 Supplies15 Prepaid Insurance17 Land18 Office Equipment19 Accumulated Depreciation

2. Liabilities21 Accounts Payable22 Wages Payable23 Unearned Rent

3. Owner’s Equity31 Chris Clark, Capital32 Chris Clark, Drawing

4. Revenue41 Fees Earned42 Rent Revenue

5. Expenses51 Wages Expense52 Rent Expense53 Depreciation Expense54 Utilities Expense55 Supplies Expense56 Insurance Expense59 Miscellaneous Expense

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Adjustments – Deferrals and AccrualsAdjustments – Deferrals and AccrualsAdjustments – Deferrals and AccrualsAdjustments – Deferrals and Accruals

Current Period Future Period

Cash Received Revenue Recorded Deferrals Cash Received

Revenues

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Accruals Revenue Recorded Cash Received

Revenues

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Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

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Expense Recorded Cash Paid

Cash Paid Expense Recorded

Expenses

Cash Paid


Revenues

Deferrals

Accruals

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Adjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred Expense

P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400

On December 1, NetSolutions purchased insurance for 24 months at a cost of $2,400.

Adjustment A1 – Record insurance used for December, $100.

Expenses

Assets

Example P1 – Purchase initially recorded as an asset.Example P1 – Purchase initially recorded as an asset.

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Adjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred ExpenseAdjustments – Deferred Expense

P1..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P1..... 2,400


Adjustment A1 – Record insurance used for December, $100.

A1..... 100

A1.....100 Expenses

Assets

A1

Example P1 – Purchase initially recorded as an asset.Example P1 – Purchase initially recorded as an asset.

A1

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Adjustments – Deferred ExpenseAdjustments – Deferred Expense

P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

Expenses

Assets

Example P2 – Purchase initially recorded as an expense.Example P2 – Purchase initially recorded as an expense.

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Adjustments – Deferred ExpenseAdjustments – Deferred Expense

P2..... 2,400

Cash

Prepaid Insurance

Insurance Expense

P2..... 2,400


Adjustment A2 – Record insurance unused as ofDecember 31.

A2..... 2,300

A2.....2,300 Expenses

Assets

A2

Example P2 – Purchase initially recorded as an expense.Example P2 – Purchase initially recorded as an expense.

A2

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Adjustments – Deferred RevenueAdjustments – Deferred Revenue

Cash

Unearned Rent

Rent Revenue

S1..... 360

On December 1, NetSolutions received cash of $360 for three months’ rent beginning December 1.

Adjustment A3 – Record rent earned for December.

S1..... 360

Revenues

Liabilities

Example S1 – Sale initially recorded as a liability.Example S1 – Sale initially recorded as a liability.

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A3..... 120

Cash

Unearned Rent

Rent Revenue

S1..... 360


Adjustment A3 – Record rent earned for December.

S1..... 360

A3.....120 Revenues

Liabilities

A3

Example S1 – Sale initially recorded as a liability.Example S1 – Sale initially recorded as a liability.

A3

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Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

S2.....360 Revenues

Liabilities

Example S2 – Sale initially recorded as revenue.Example S2 – Sale initially recorded as revenue.

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A4..... 240

Cash

Unearned Rent

Rent Revenue

S2..... 360


Adjustment A4 – Record rent unearned as of December 31.

A4..... 240

S2.....360 Revenues

Liabilities

A4

Example S2 – Sale initially recorded as revenue.Example S2 – Sale initially recorded as revenue.

A4

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Adjustments – Accrued ExpenseAdjustments – Accrued Expense

Wages Payable

Wages Expense

NetSolutions received employee services for the last two days of December amounting to $250, to be paid later.

Adjustment A5 – Record accrued wages of $250.

Bal.....4,275 Expenses

Liabilities

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Adjustments – Accrued ExpenseAdjustments – Accrued Expense

Wages Payable

Wages Expense

NetSolutions received employee services for the last two days of December amounting to $250, to be paid later.

Adjustment A5 – Record accrued wages of $250.

A5..... 250

Bal.....4,275 Expenses

Liabilities

A5

A5

A5.....250

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Adjustments – Accrued RevenueAdjustments – Accrued Revenue

Accounts Receivable

Fees Earned

As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month.

Adjustment A6 – Record accrued fees earned of $500.

Bal....16,340 Revenues

AssetsBal.....2,220

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Adjustments – Accrued RevenueAdjustments – Accrued Revenue

Accounts Receivable

Fees Earned

As of December 31, NetSolutions provided 25 hours of services at $20 per hour to be billed next month.

Adjustment A6 – Record accrued fees earned of $500.

A6..... 500

Bal....16,340 Revenues

Assets

A6

A6

A6.....500

Bal.....2,220

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Summary of AdjustmentsSummary of Adjustments

DeferredExpenses

Expenses

Assets

A1 A2

Buying SideBuying Side

Rearrangingthe Debits

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DeferredExpenses

Expenses

Assets

A1 A2

DeferredRevenues

Revenues

Liabilities

A3 A4

Buying SideBuying Side Selling SideSelling Side


Rearrangingthe Credits

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Expenses

Liabilities

A5

AccruedExpenses


Adding a NewTransaction

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Expenses

Liabilities

A5

Revenues

Assets

A6

AccruedExpenses




AccruedRevenues

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DeferredExpenses

Expenses

Assets

A1 A2

Expenses

Liabilities

A5

DeferredRevenues

Revenues

Liabilities

A3 A4

Revenues

Assets

A6

AccruedExpenses




Rearrangingthe Credits


AccruedRevenues

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NetSolutions Income Statement

For Two Months Ended December 31, 2002

Fees earned $16,840Rent revenue 120

Total revenues $16,960Expenses:

Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455

Total expenses 9,755Net income $ 7,205

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NetSolutions Statement of Owner’s Equity

For Two Months Ended December 31, 2002

Chris Clark, capital, November 1, 2002 $ 0

Investment on November 1, 2002 $15,000

Net income for November and December 7,205

$22,205

Less withdrawals 4,000

Increase in owner’s equity 18,205

Chris Clark, capital, December 31, 2002 $18,205

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NetSolutions Balance Sheet

December 31, 2002 ASSETSCurrent assets:

Cash $ 2,065 Accounts receivable 2,720 Supplies 760 Prepaid insurance 2,300

Total current assets $ 7,845Property, plant, andequipment:

Land $20,000 Office equipment 1,800 Less accum. depr. (50)

Total property, plant,and equipment 11,750

Total assets $29,595

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NetSolutions Balance Sheet

December 31, 2002

LIABILITIESCurrent liabilities:

Accounts payable $ 900Wages payable 250Unearned rent 240

Total liabilities $ 1,390

OWNER’S EQUITYChris Clark, capital 28,205Total liabilities and owner’s equity $29,595

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Wages ExpenseBal.

4,525Rent Expense

Bal.1,600

Depreciation ExpenseBal.

50Utilities Expense

Bal.985Supplies Expense

Bal.2,040Insurance Expense

Bal.100

Miscellaneous Expense

Bal.455

Fees Earned

Bal.16,840

Rent Revenue

Bal.120

Chris Clark, Capital

Bal.15,000

Chris Clark, Drawing

Bal.4,000

Income Summary

Note: Note: The balances shown are adjusted balances before closing. The following sequence demonstrates the closing process.

The Closing ProcessThe Closing Process3-1

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Wages ExpenseBal.

4,525Rent Expense

Bal.1,600


50Utilities Expense



Bal.100

Miscellaneous ExpenseBal.

455

Fees Earned

Bal.16,840

Rent Revenue

Bal.120

16,84016,840

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Income Summary

16,96016,960

Chris Clark, Capital Close RevenuesClose Revenues

Bal.25,000


Bal.4,000

TotalRevenues


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Wages ExpenseBal.

4,525Rent Expense

Bal.1,600


50Utilities Expense



Bal.100


455

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

Fees Earned

Bal.16,840

Rent Revenue

Bal.120

16,84016,840

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Income Summary

16,96016,9609,7559,755


Bal.25,000


Bal.4,000

Close ExpensesClose Expenses

TotalExpenses

TotalRevenues


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Wages ExpenseBal.

4,525Rent Expense

Bal.1,600


50Utilities Expense



Bal.100


455

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

Fees Earned

Bal.16,840

Rent Income

Bal.120

16,84016,840

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Income Summary

16,96016,9609,7559,755


Bal.15,000


Bal.4,000


The Closing ProcessThe Closing Process

7,2057,205

7,2057,205

Close Income SummaryClose Income SummaryNet Income

Closed

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Wages ExpenseBal.

4,525Rent Expense

Bal.1,600


50Utilities Expense



Bal.100


455

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

Fees Earned

Bal.16,840

Rent Income

Bal.120

16,84016,840

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Income Summary

16,96016,9609,7559,755


Bal.15,000

Chris Clark, DrawingBal.

4,000


The Closing ProcessThe Closing Process

7,2057,205

7,2057,205

Close Income SummaryClose Income SummaryNet Income

4,0004,000

4,0004,000

Close DrawingClose Drawing

Drawing

Closed

Closed

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Wages Expense

Rent Expense

Depreciation Expense

Utilities Expense

Supplies Expense

Insurance Expense

Miscellaneous Expense

Fees Earned

Rent Income

Income Summary

Chris Clark, Capital

Bal.15,000


Net IncomeNet Income

DrawingDrawing

Bal.18,205 All temporary accounts

now have zero balances and are ready for the next accounting period.

7,2057,205

4,0004,000


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NetSolutionsPost-Closing Trial Balance

December 31, 2002

11 Cash 2,06512 Accounts Receivable 2,72014 Supplies 76015 Prepaid Insurance 2,30017 Land 20,00018 Office Equipment 1,80019 Accum. Depreciation 5021 Accounts Payable 90022 Wages Payable 25023 Unearned Rent 24031 Chris Clark, Capital 28,205

29,645 29,645

AssetsAssets

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December 31, 2002


29,645 19,645

LiabilitiesLiabilities

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December 31, 2002


29,645 29,645

Owner’sOwner’sEquityEquity

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This is the last slide in Chapter 3. This is the last slide in Chapter 3.

Power Notes Analyzing Transactions Analyzing Transactions

Chapter 33-1

pp for chapter 3 completing the accounting cycle - final

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