Business Accounting Cycle Part II Checklist Chapter 6

Business Accounting Cycle Part II

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Period End Procedures At the end of a period, several steps must be completed. • Accounts must be adjusted to properly reflect their balances. • Financial Statements must be created. • Accounting records must be prepared for the next period. The trial balance created in the pervious chapter is the first step in beginning the period end procedures.

Trial Balance The trial balance ensures that debits are equal to credits. Trial Balance January 31, 2014 Account Cash This is the end result of creating journal entries and posting them to the general ledger. Also called an Unadjusted Trial Balance since adjustments must still be made. Debit Credit $4, 000 Prepaid Insurance 1, 200 Property, Plant & Equipment 8, 000 Unearned Revenue $1, 000 Bank Loan 2, 000 Capital Account 6, 700 Owner’s Drawings 1, 500 Service Revenue 6, 000 Rent Expense 800 Telephone Expense 200 Total $15, 700

Worksheet A worksheet is used to test account balances during period end procedures. The first three sets of columns (Unadjusted Trial Balance, Adjustments and Adjusted Trial Balance) are shown below. Account Cash Prepaid Insurance Property, Plant & Equipment Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Rent Expense Telephone Expense Total Worksheet January 31, 2014 Unadjusted Trial Adjustments Balance Debit Credit $4, 000 1, 200 8, 000 $1, 000 2, 000 6, 700 1, 500 6, 000 800 200 $15, 700 Adjusted Trial Balance Debit Credit

Adjustments The following accounts are typically adjusted at the end of the period. 1) Prepaid expenses (i. e. rent, insurance or office supplies) are reduced, which creates an expense on the income statement. 2) Property, Plant and Equipment is depreciated, which creates an expense on the income statement. 3) Interest on loans are accounted for, which creates an expense on the income statement 4) Unearned Revenue can become earned, which creates a revenue on the income statement.

Contra Accounts • Contra means opposite. • Accumulated depreciation is a contra asset account which reduces the value of property, plant and equipment. • Accumulated depreciation is subtracted from property, plant and equipment to calculate the net value of the asset. 7

Depreciation • Long-term assets have an estimated useful life. • The cost of the asset will be spread evenly over its useful life. Original Cost: Useful Life: $10, 000 5 years Annual Depreciation = $2, 000 8

Depreciation The entry to record depreciation is as follows: • Depreciation expense will increase with a debit entry. • Accumulated depreciation is a contra account and will increase with a credit entry. 9

Depreciation: Exercise Maple Company purchased equipment on January 1, 2013 for $30, 000. The equipment is expected to last four years and have no salvage value. For December 31, 2013: 1) Calculate the annual depreciation. 2) Record the transaction in the appropriate T-accounts. 1) Annual Depreciation = $30, 000 4 years Annual Depreciation = $7, 500 2) INCREASE (DR) + DECREASE (CR) PROPERTY, PLANT AND EQUIPMENT - DECREASE (DR) - INCREASE (CR) ACCUMULATED DEPRECIATION 7, 500 + INCREASE (DR) + DECREASE (CR) DEPRECIATION EXPENSE - 7, 500 10

Adjustments are entered in the Adjustments column. Make sure debits and credits are balanced by totalling the two columns. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Worksheet January 31, 2014 Unadjusted Trial Adjustments Balance Debit Credit $4, 000 1, 200 $100 8, 000 $0 60 1, 000 2, 000 6, 700 1, 500 6, 000 0 $60 0 100 800 200 $15, 700 $160

Adjusted Trial Balance Add or subtract the adjustments to the unadjusted balances to get the adjusted balances. Some accounts will have no change in their balance, so just copy their value over to the Adjusted Trial Balance columns. Be careful that the balances are placed in the proper columns. Examine the worksheet on the next slide.

Adjusted Trial Balance Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Worksheet January 31, 2014 Unadjusted Trial Adjustments Balance Debit Credit $4, 000 1, 200 $100 1, 100 8, 000 $0 $60 1, 000 2, 000 6, 700 1, 500 6, 000 0 60 60 0 100 800 200 $15, 700 $160 $15, 760 Prepaid Insurance $1, 200 - 100 $1, 100

Worksheet From the Adjusted Trial Balance, the financial statements can now be created. The accounts are separated into those that will appear on the Income Statement, and those that will appear on the Balance Sheet and Statement of Owner’s Equity.

Worksheet Notice that the totals of the Income Statement and Balance Sheet columns do not balance. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Worksheet January 31, 2014 Adjusted Trial Balance Sheet & Income Statement Balance Equity Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 $6, 000 60 $60 100 800 200 $15, 760 $1, 160 $6, 000 $14, 600 $9, 760

Worksheet The totals do not balance because the company is expected to earn an income or generate a loss. The difference between the debit and credit column on the Income Statement indicates the income or loss. The same difference on the Balance Sheet indicates the increase or decrease the income or loss creates in the capital account.

Worksheet This company earned a net income because revenue was higher than expenses. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Net Income (Loss) Total Worksheet January 31, 2014 Adjusted Trial Balance Sheet & Income Statement Balance Equity Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 $6, 000 60 $60 100 800 200 15, 760 1, 160 6, 000 14, 600 9, 760 4, 840 $6, 000 $14, 600 The net income balances the worksheet

Worksheet - Question Prepaid rent shows an unadjusted debit balance of $6, 000 and a credit adjustment of $2, 400. What is the adjusted balance of prepaid rent? a. b. c. d. $3, 600 Debit $6, 000 Debit $3, 600 Credit $2, 400 Credit

Worksheet - Question Unearned revenue shows an unadjusted credit balance of $4, 000 and a debit adjustment of $1, 600. What is the adjusted balance of unearned revenue? a. b. c. d. $2, 400 Debit $4, 000 Credit $2, 400 Credit $1, 600 Credit

Worksheet - Question Prepaid insurance is being adjusted for the amount used. What other account would be affected by this adjustment? a. b. c. d. Debit to Unearned Insurance Debit to Insurance Expense Credit to Unearned Insurance Credit to Insurance Expense

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Financial Statements Once the worksheet is completed successfully, the formal financial statements can be created. The values from the Adjusted Trial Balance will be used to create the statements: • Income Statement • Statement of Owner’s Equity • Balance Sheet

Income Statement The Income Statement only reports revenue and expenses. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 Income Statement For the Month Ended January 31, 2014 Service Revenue $6, 000 Expenses Depreciation Expense $60 Insurance Expense 100 Rent Expense 800 Telephone Expense 200 Total Expenses 1, 160 Net Income (Loss) $4, 840

Income Statement Net income on the Income Statement must match the net income shown on the worksheet. The net income (or loss) will be used on the next statement, the Statement of Owner’s Equity. Income Statement For the Month Ended January 31, 2014 Service Revenue $6, 000 Expenses Depreciation Expense $60 Insurance Expense 100 Rent Expense 800 Telephone Expense 200 Total Expenses 1, 160 Net Income (Loss) $4, 840

Statement of Owner’s Equity The Statement of Owner’s Equity reports any changes in equity over the reporting period. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit 4, 000 1, 100 8, 000 60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 15, 760 Statement of Owner's Equity For the Month Ended January 31, 2014 Capital Account, January 1 $6, 700 Add: Net Income 4, 840 Subtotal 11, 540 Less: Owner's Drawings 1, 500 Capital Account, January 31 $10, 040 Notice net income is the same figure from the Income Statement.

Statement of Owner’s Equity The ending value of the capital account from the Statement of Owner’s Equity will be used on the Balance Sheet. If the owner invested more cash or assets into the business during the month, the statement would look like: Statement of Owner's Equity For the Month Ended January 31, 2014 Capital Account, January 1 $6, 700 Add: Net Income 4, 840 Add: Investment 5, 000 Subtotal 16, 540 Less: Owner's Drawings 1, 500 Capital Account, January 31 $15, 040

Statement of Owner’s Equity The final value of the capital account that is shown on the Statement of Owner’s Equity will be carried over to the Balance Sheet. Statement of Owner's Equity For the Month Ended January 31, 2014 Capital Account, January 1 $6, 700 Add: Net Income 4, 840 Subtotal 11, 540 Less: Owner's Drawings 1, 500 Capital Account, January 31 $10, 040

Balance Sheet The Balance Sheet shows the financial position of the company at a point in time. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 Balance Sheet As at January 31, 2014 Assets Cash Prepaid Insurance Property, Plant & Equipment Less: Accumulated Depreciation Total Assets Liabilities Unearned Revenue Bank Loan Total Liabilities Owner's Equity Total Liabilities and Equity $4, 000 1, 100 $8, 000 (60) 7, 940 $13, 040 $1, 000 2, 000 3, 000 10, 040 $13, 040 Notice owner’s equity is the same figure from the Statement of Owner’s Equity

Balance Sheet The Balance Sheet uses the assets and liabilities from the Adjusted Trial Balance and the capital account balance from the Statement of Owner’s Equity. The accounts are set up to match the accounting equation: Assets = Liabilities + Owner’s Equity

Balance Sheet The value of Property, Plant & Equipment is decreased by the value of accumulated depreciation when calculating the value of total assets. Balance Sheet As at January 31, 2014 Assets Cash Prepaid Insurance Property, Plant & Equipment Less: Accumulated Depreciation Total Assets Liabilities Unearned Revenue Bank Loan Total Liabilities Owner's Equity Total Liabilities and Equity $4, 000 1, 100 $8, 000 (60) 7, 940 $13, 040 $1, 000 2, 000 3, 000 10, 040 $13, 040

Financial Statements - Question Which of the following statements is true about the statement of owner’s equity? a. b. c. It links the income statement to the balance sheet It includes an addition to net income for the total amount of owner’s drawings It is prepared after the balance sheet and income statement

Financial Statements - Question True or False? By analyzing the balance sheet, the revenue for the period can be observed. a. True b. False

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Adjusting Entries The adjustments made in the worksheet to test the account balances can now be entered in the journal. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Worksheet January 31, 2014 Unadjusted Trial Adjustments Balance Debit Credit $4, 000 1, 200 $100 1, 100 8, 000 $0 60 $60 1, 000 2, 000 6, 700 1, 500 6, 000 0 $60 60 0 100 800 200 15, 700 160 15, 760

Adjusting Entries These journal entries will update the general ledger balances to match what has been shown on the financial statements. JOURNAL Page 2 DATE ACCOUNT TITLE & EXPLANATION PR Jan 31 Insurance Expense 515 Prepaid Insurance DEBIT CREDIT 100 110 100 Adjust for insurance used Jan 31 Depreciation Expense Accumulated Depreciation Adjust for depreciation 510 125 60 60

Financial Statements - Question What type of entry to a prepaid insurance expense account is required to adjust it to the correct value at the end of the accounting period? a. b. Debit Credit

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Closing the Books At the end of each accounting period, accountants are required to close the books. Closing the books updates the capital account so the income statement and owner’s drawings account start fresh for the next accounting period.

Closing the Books INCREASE (DR) + DECREASE (CR) OWNER’S DRAWINGS - DECREASE (DR) - INCREASE (CR) REVENUE + INCREASE (DR) + DECREASE (CR) EXPENSES 1, 500 7, 500 4, 600 2, 000 6, 200 3, 900 8, 100 5, 100 The drawings account keeps growing with each transaction The revenue account keeps growing with each transaction - The expense accounts keeps growing with each transaction To close the books, the owner’s drawing, revenue and expense accounts need to be adjusted to zero (cleared) in preparation for a new fiscal year.

Closing the Books INCREASE (DR) + DECREASE (CR) OWNER’S DRAWINGS - DECREASE (DR) - INCREASE (CR) REVENUE + INCREASE (DR) + DECREASE (CR) EXPENSES 7, 500 4, 600 2, 000 6, 200 3, 900 3, 500 8, 100 5, 100 21, 800 13, 600 1, 500 3, 500 21, 800 To clear these accounts: • Revenues must be debited • Expenses must be credited • Owner’s Drawings must be credited - 13, 600

Close Directly to the Capital Account When revenue is closed to the capital account, the capital account increases in value. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 DECREASE (DR) - INCREASE (CR) SERVICE REVENUE 6, 000 DECREASE (DR) - + 6, 000 0 Closing Balance INCREASE (CR) CAPITAL ACCOUNT + 6, 700 6, 000 Opening Balance

Close Directly to the Capital Account The journal entry for closing the service revenue account is shown below: DECREASE (DR) - INCREASE (CR) SERVICE REVENUE 6, 000 0 6, 000 DECREASE (DR) - + Closing Balance INCREASE (CR) CAPITAL ACCOUNT + 6, 700 6, 000 Opening Balance JOURNAL DATE ACCOUNT TITLE & EXPLANATION Jan 31 Service Revenue Capital Account Close revenue account DEBIT CREDIT 6, 000

Close Directly to the Capital Account When expenses are closed to the capital account, the capital account decreases in value. . Adjusted Trial Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 INCREASE (DR) + Closing Balance VARIOUS EXPENSES 1, 160 0 DECREASE (DR) - DECREASE (CR) - 1, 160 INCREASE (CR) CAPITAL ACCOUNT 1, 160 + 6, 700 6, 000 Opening Balance

Close Directly to the Capital Account Each expense account must be listed separately in the journal entry. JOURNAL INCREASE (DR) + Closing Balance VARIOUS EXPENSES 1, 160 0 DECREASE (DR) - DECREASE (CR) - 1, 160 ACCOUNT TITLE & EXPLANATION Jan 31 Capital Account Depreciation Expense INCREASE (CR) CAPITAL ACCOUNT 1, 160 DATE + 6, 700 6, 000 CREDIT 1, 160 60 Insurance Expense 100 Rent Expense 800 Telephone Expense 200 Close expense accounts Opening Balance DEBIT

Close Directly to the Capital Account When owner’s drawings are closed to the capital account, the capital account decreases in value. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 INCREASE (DR) + Closing Balance OWNER’S DRAWINGS 1, 500 0 DECREASE (DR) - DECREASE (CR) - 1, 500 INCREASE (CR) CAPITAL ACCOUNT 1, 160 1, 500 + 6, 700 6, 000 Opening Balance

Close Directly to the Capital Account The journal entry for closing the owner’s drawings account is shown below: INCREASE (DR) + Closing Balance DECREASE (CR) OWNER’S DRAWINGS 1, 500 0 - 1, 500 JOURNAL DATE ACCOUNT TITLE & EXPLANATION Jan 31 Capital Account Owner’s Drawings DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 160 1, 500 Close owner’s drawings + 6, 700 6, 000 Opening Balance DEBIT CREDIT 1, 500

Close Directly to the Capital Account After all the closing entries, the capital account has a new balance, which matches the ending value on the Statement of Owner’s Equity. Statement of Owner's Equity For the Month Ended January 31, 2014 Capital Account, January 1 $6, 700 Add: Net Income 4, 840 Subtotal 11, 540 Less: Owner's Drawings 1, 500 Capital Account, January 31 $10, 040 DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 160 1, 500 + 6, 700 6, 000 10, 040 Opening Balance Closing Balance

Closing Using the Income Summary Instead of closing directly to the capital account, revenues and expenses can be closed to the Income Summary account, which indicates the income or loss the company earned. DECREASE (DR) - INCREASE (CR) REVENUE + INCREASE (DR) + DECREASE (CR) EXPENSES 7, 500 4, 600 6, 200 3, 900 8, 100 5, 100 21, 800 13, 600 DECREASE (DR) INCREASE (CR) 21, 800 - INCOME SUMMARY 13, 600 21, 800 8, 200 - 13, 600 + Closing Balance

Closing Using the Income Summary When revenue is closed to the income summary, the income summary account increases in value. Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 1, 100 8, 000 $60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 $15, 760 DECREASE (DR) - INCREASE (CR) SERVICE REVENUE 6, 000 DECREASE (DR) - + 6, 000 0 Closing Balance INCREASE (CR) INCOME SUMMARY + 6, 000

Closing Using the Income Summary The journal entry for closing the service revenue account is shown below: DECREASE (DR) - INCREASE (CR) SERVICE REVENUE 6, 000 DECREASE (DR) - + 6, 000 0 Closing Balance INCREASE (CR) INCOME SUMMARY + 6, 000 JOURNAL DATE ACCOUNT TITLE & EXPLANATION Jan 31 Service Revenue Income Summary Close revenue account DEBIT CREDIT 6, 000

Closing Using the Income Summary When expenses are closed to the income summary, the income summary account decreases in value. . Account Cash Prepaid Insurance Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Depreciation Expense Insurance Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit 4, 000 1, 100 8, 000 60 1, 000 2, 000 6, 700 1, 500 6, 000 60 100 800 200 15, 760 INCREASE (DR) + Closing Balance VARIOUS EXPENSES 1, 160 0 DECREASE (DR) - DECREASE (CR) - 1, 160 INCREASE (CR) INCOME SUMMARY 1, 160 + 6, 000

Closing Using the Income Summary Each expense account must be listed separately in the journal entry. INCREASE (DR) + Closing Balance VARIOUS EXPENSES 1, 160 0 DECREASE (DR) - DECREASE (CR) - 1, 160 DATE ACCOUNT TITLE & EXPLANATION Jan 31 Income Summary Depreciation Expense INCREASE (CR) INCOME SUMMARY 1, 160 JOURNAL + 6, 000 DEBIT CREDIT 1, 160 60 Insurance Expense 100 Rent Expense 800 Telephone Expense 200 Close expense accounts

Closing Using the Income Summary The income summary account now has a credit balance, which is the same value as the net income shown in the Income Statement. To close the income summary, we will have to debit the account to remove the net income. DECREASE (DR) - INCREASE (CR) INCOME SUMMARY 1, 160 + 6, 000 4, 840 Income Statement For the Month Ended January 31, 2014 Service Revenue $6, 000 Expenses Depreciation Expense $60 Insurance Expense 100 Rent Expense 800 Telephone Expense 200 Total Expenses 1, 160 Net Income (Loss) $4, 840

Closing Using the Income Summary Transfer the balance from the income summary to the capital account DECREASE (DR) - INCREASE (CR) INCOME SUMMARY 1, 160 4, 840 DECREASE (DR) - + JOURNAL 6, 000 4, 840 0 Closing Balance DATE ACCOUNT TITLE & EXPLANATION Jan 31 Income Summary Close revenue account INCREASE (CR) CAPITAL ACCOUNT + 6, 700 4, 840 Capital Account Opening Balance DEBIT CREDIT 4, 840

Closing Using the Income Summary Closing the owner’s drawings account is done the same way as shown earlier. INCREASE (DR) + Closing Balance DECREASE (CR) OWNER’S DRAWINGS 1, 500 0 - 1, 500 JOURNAL DATE ACCOUNT TITLE & EXPLANATION Jan 31 Capital Account Owner’s Drawings DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 500 Close owner’s drawings + 6, 700 4, 840 Opening Balance DEBIT CREDIT 1, 500

Closing Using the Income Summary As before, once the capital account is updated, the balance will match the final value shown on the Statement of Owner’s Equity. Statement of Owner's Equity For the Month Ended January 31, 2014 Capital Account, January 1 $6, 700 Add: Net Income 4, 840 Subtotal 11, 540 Less: Owner's Drawings 1, 500 Capital Account, January 31 $10, 040 DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 500 + 6, 700 4, 840 10, 040 Opening Balance Closing Balance

Closing the Books - Question Which one of the following types of entries is required to close an expense account? a. b. c. d. Debit the expense account Credit the income summary account Debit the owner’s drawings account

Closing the Books - Question Which one of the following types of entries is required to close the owner’s drawings account? a. b. c. d. Debit the owner’s drawings account Debit the capital account Debit the revenue account Credit the capital account

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Post-Closing Trial Balance After updating equity, it is important to ensure that the balance sheet is still in balance. Another trial balance must be generated, which will be dated the first day of the new fiscal period. Since the income statement and owner’s drawings balances are now zero, the post-closing trial balance will only include balance sheet balances.

Post-Closing Trial Balance List the assets, liabilities and capital account. Assets = Liabilities + Owner’s Equity Post-Closing Trial Balance February 1, 2014 Debit Account $4, 000 Cash 1, 100 Prepaid Insurance 8, 000 Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account $13, 100 Total Credit $60 1, 000 2, 000 10, 040 $13, 100

Post-Closing Trial Balance - Question Which accounts have zero balances in the post-closing trial balance? a. b. c. d. Owner’s drawings Revenues Expenses All of the above

Checklist Chapter 6 Complete a Worksheet Financial Statements Journalize Adjustments Closing the Books Post-Closing Trial Balance

Exercise Complete the following exercise.

Exercise A company has prepared the following unadjusted trial balance at the end of March, 2011. The following adjustments must be made: Rent of $800 has been used. Depreciation was $120. Unearned revenue of $400 has now been earned. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Unadjusted Trial Balance Debit Credit $4, 000 3, 200 8, 000 $0 1, 000 2, 000 8, 100 1, 500 6, 000 300 0 0 100 $17, 100

Exercise ·Rent of $800 has been used Create the Worksheet. · Depreciation was $120 · Unearned revenue of $400 has now been earned Worksheet March 31, 2011 Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Net Income (Loss) Total Unadjusted Trial Balance Debit Credit 4, 000 3, 200 8, 000 0 1, 000 2, 000 8, 100 Adjustments Debit Credit $800 120 $400 1, 500 6, 000 300 0 0 100 17, 100 400 120 800 17, 100 $1, 320 Adjusted Trial Income Statement Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 $1, 320 $6, 400 5, 080 $6, 400 Balance Sheet & Equity Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 $15, 900 $10, 820 5, 080 $15, 900

Exercise Based on the adjusted trial balance, create the Income Statement. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 Income Statement For the Month Ended March 31, 2011 Service Revenue $6, 400 Expenses Advertising Expense $300 Depreciation Expense 120 Rent Expense 800 Telephone Expense 100 Total Expenses 1, 320 Net Income (Loss) $5, 080

Exercise Based on the adjusted trial balance, create the Statement of Owner’s Equity. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner's Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 Statement of Owner's Equity For the Month Ended March 31, 2011 Capital Account, March 1 $8, 100 Add: Net Income 5, 080 Subtotal 13, 180 Less: Owner's Drawings 1, 500 Capital Account, March 31 $11, 680

Exercise Based on the adjusted trial balance, create the Balance Sheet. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 Balance Sheet As at March 31, 2011 Assets Cash Prepaid Rent Property, Plant & Equipment Less: Accumulated Depreciation Total Assets Liabilities Unearned Revenue Bank Loan Total Liabilities Owner's Equity Total Liabilities and Equity $4, 000 2, 400 $8, 000 (120) 7, 880 $14, 280 $600 2, 000 2, 600 11, 680 $14, 280

Exercise Based on the adjusted trial balance, close the revenue and expense accounts using the Income Summary account. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 JOURNAL DATE ACCOUNT TITLE & EXPLANATION Mar 31 Service Revenue DEBIT CREDIT 6, 400 Income Summary 6, 400 Close service revenue Mar 31 Income Summary 1, 320 Advertising Expense 300 Depreciation Expense 120 Rent Expense 800 Telephone Expense 100 Close expense accounts

Exercise Based on the adjusted trial balance, close the income summary account and owner’s drawings. Calculate the new balance of the capital account. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 JOURNAL DATE ACCOUNT TITLE & EXPLANATION Mar 31 Income Summary DEBIT CREDIT 5, 080 Capital Account 5, 080 Close income summary Mar 31 Capital Account 1, 500 Owner’s Drawings 1, 500 Close owner’s drawings DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 500 + 8, 100 5, 080 11, 680 Opening Balance Closing Balance

Exercise Based on the adjusted trial balance and the balance of the capital account, prepare a post-closing trial balance. Account Cash Prepaid Rent Property, Plant & Equipment Accumulated Depreciation Unearned Revenue Bank Loan Capital Account Owner’s Drawings Service Revenue Advertising Expense Depreciation Expense Rent Expense Telephone Expense Total Adjusted Trial Balance Debit Credit $4, 000 2, 400 8, 000 $120 600 2, 000 8, 100 1, 500 6, 400 300 120 800 100 $17, 220 Post-Closing Trial Balance April 1, 2011 Debit Credit Account $4, 000 Cash 2, 400 Prepaid Rent 8, 000 Property, Plant & Equipment $120 Accumulated Depreciation 600 Unearned Revenue 2, 000 Bank Loan 11, 680 Capital Account $14, 400 Total DECREASE (DR) - INCREASE (CR) CAPITAL ACCOUNT 1, 500 + 8, 100 5, 080 11, 680 Opening Balance Closing Balance

End of Chapter 6