Chapter 4 Completing the Accounting Cycle Accounting 21

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Chapter 4 Completing the Accounting Cycle Accounting, 21 st Edition Warren Reeve Fess Power.

Chapter 4 Completing the Accounting Cycle Accounting, 21 st Edition Warren Reeve Fess Power. Point Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electroni presentation is used with the permission of NVTech Inc.

Some of the action has been automated, so click the mouse when you see

Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

Objectives 1. Review the seven basic steps of the accounting cycle. After studying this

Objectives 1. Review the seven basic steps of the accounting cycle. After studying this 2. Prepare a work sheet. you should chapter, 3. Prepare financial be statements able to: from a work sheet. 4. Prepare adjusting and closing entries from a work sheet. 5. Explain what is meant by the fiscal year and the natural business year. 6. Analyze and interpret the financial solvency of a business by computing working capital and the current ratio.

Seven Basic Steps of the Accounting Cycle 1. Transactions are analyzed and recorded in

Seven Basic Steps of the Accounting Cycle 1. Transactions are analyzed and recorded in the journal. 2. Transactions are posted to the ledger. 3. A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed. 4. Financial statements are prepared. 5. Adjusting entries are journalized and posted. 6. Closing entries are journalized and posted. 7. A post-closing trial balance is prepared.

Assets are commonly divided into classes and that two of these classes are current

Assets are commonly divided into classes and that two of these classes are current assets and property, plant, and equipment.

That’s correct. Cash and other assets that are expected to be converted into cash,

That’s correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a year are current assets.

For example? Well… besides cash, there’s notes receivable, accounts receivable, supplies, and other prepaid

For example? Well… besides cash, there’s notes receivable, accounts receivable, supplies, and other prepaid items.

There are some exceptions, but that’s basically correct. Assets such So, assets that have

There are some exceptions, but that’s basically correct. Assets such So, assets that have a life as office equipment, machinery, over a year are listed under buildings, and land would appear property, plant, and under that heading. equipment.

Liabilities due usually within one year or less and that are to be paid

Liabilities due usually within one year or less and that are to be paid out of current assets are called current liabilities. Ö Accounts payable Ö Wages payable Ö Interest payable Ö Unearned fees

Liabilities not due for more than a year usually are long-term liabilities. ü Mortgage

Liabilities not due for more than a year usually are long-term liabilities. ü Mortgage note payable ü Mortgage payable ü Bond payable

The work sheet is a useful device for understanding the flow of accounting data

The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to the financial statements.

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owner’s equity, revenues, and expenses.

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered.

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Adjusted TB Dr Dr Cr Cr Adjustments are combined with the trial balance. Account balances are now adjusted.

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit 900 360 25, 000 16, 340 42, 600 Adjustments Debit Credit Adjusted Trial Balance Debit The Unadjusted Trial Balance Credit

(a) The Supplies account has a debit of $2, 000. A count of supplies

(a) The Supplies account has a debit of $2, 000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1, 240 in supplies was used during the two-month period.

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit Adjustments Debit Credit (a) 1, 240 900 360 25, 000 16, 340 (a) 1, 240 42, 600 Adjusted Trial Balance Debit Credit

(b) The Prepaid Insurance account has a debit balance of $2, 400, which represents

(b) The Prepaid Insurance account has a debit balance of $2, 400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2, 400 ÷ 24).

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Adjustments Credit Debit Credit (a) 1, 240 (b) 100 900 360 25, 000 16, 340 (a) 1, 240 42, 600 (b) 100 Accounts are added as needed. Adjusted Trial Balance Debit Credit

(c) The Unearned Rent account has a credit balance of $360, which represents the

(c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months’ rent beginning with December 1. Thus, the rent revenue for December is $120. FOR RENT

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit Adjustments Debit Credit (a) 1, 240 (b) 100 900 360 25, 000 (c) 120 16, 340 (a) 1, 240 42, 600 (b) 100 (c) 120 Adjusted Trial Balance Debit Credit

(d) Wages accrued but not paid at the end of December total $250.

(d) Wages accrued but not paid at the end of December total $250.

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit Adjustments Debit Credit (a) 1, 240 (b) 100 900 360 25, 000 16, 340 (c) 120 (d) 250 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 Adjusted Trial Balance Debit Credit

(e) Fees accrued at the end of December, but not recorded, total $500.

(e) Fees accrued at the end of December, but not recorded, total $500.

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Adjustments Credit Debit (e) 900 360 25, 000 16, 340 (c) (d) 500 Credit (a) 1, 240 (b) 100 120 250 (e) 500 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 Adjusted Trial Balance Debit Credit

(f) Depreciation of the office equipment is $50 for December.

(f) Depreciation of the office equipment is $50 for December.

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit 900 360 25, 000 16, 340 Adjustments Debit (e) 500 (c) 120 (d) 250 Credit (a) 1, 240 (b) 100 (e) 500 (a) 1, 240 42, 600 (b) 100 (f) 50 (c) 120 (d) 250 (f) 50 Adjusted Trial Balance Debit Credit

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Adjustments To

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Adjustments To make more space, Debit Credit Debit 2, 065 let’s remove the 2, 220 (e) 500 heading. (a) 1, 240 2, 000 Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Adjusted Trial Balance 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 (b) 900 360 25, 000 16, 340 (c) (d) 100 120 250 (e) 500 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 (f) 50 Credit

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Summed and ruled Credit 900 360 25, 000 16, 340 Adjustments Debit (e) 500 (c) 120 (d) 250 Credit (a) 1, 240 (b) 100 (e) 500 (a) 1, 240 42, 600 (b) 100 (f) 50 2, 260 (c) 120 (d) 250 (f) 50 2, 260 Adjusted Trial Balance Debit 31 Credit

Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine

Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance.

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit 900 360 25, 000 16, 340 Adjustments Debit (e) 500 (c) 120 (d) 250 Credit (a) 1, 240 (b) 100 (e) 500 (a) 1, 240 42, 600 (b) 100 (f) 50 2, 260 (c) 120 (d) 250 (f) 50 2, 260 Adjusted Trial Balance Debit 33 Credit

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10

Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 220 2, 000 2, 400 20, 000 1, 800 4, 000 4, 275 1, 600 985 800 455 42, 600 Credit Adjustments Debit (e) 900 360 25, 000 16, 340 (c) (d) 500 Credit (a) 1, 240 (b) 100 250 (b) 100 (f) Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 120 (e) 500 (a) 1, 240 42, 600 Adjusted Trial Balance 50 2, 260 (c) 120 (d) 250 (f) 50 2, 260 4, 000 4, 525 1, 600 985 2, 040 455 100 50 43, 400 34 Credit 900 240 25, 000 16, 840 120 250 50 43, 400

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Sheet Dr Cr Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

To make room on the slides for the Income statement and Balance Sheet columns,

To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 4, 000 4, 525 1, 600 985 2, 040 455 100 50 43, 400 Credit 900 240 25, 000 16, 840 120 250 50 43, 400 Income Statement Debit Credit Balance Sheet Debit 38 Credit

Now, let’s extend the balances from the Adjusted Trial Balance column.

Now, let’s extend the balances from the Adjusted Trial Balance column.

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 4, 000 4, 525 1, 600 985 2, 040 455 100 50 43, 400 Credit Income Statement Debit Credit 120 250 50 43, 400 Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 900 240 25, 000 16, 840 Balance Sheet 4, 525 1, 600 985 2, 040 455 100 50 16, 840 120 4, 000 40 Credit 900 240 25, 000 250 50

These four columns are summed.

These four columns are summed.

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9

Adjusted Trial Balance Account Title 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Chris Clark, Capital Chris Clark, Drawing Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense Insurance Expense Rent Revenue Wages Payable Depreciation Expense Accum. Depreciation Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 4, 000 4, 525 1, 600 985 2, 040 455 100 50 43, 400 Credit Income Statement Debit Credit 120 250 50 43, 400 Debit 2, 065 2, 720 760 2, 300 20, 000 1, 800 900 240 25, 000 16, 840 Balance Sheet 4, 525 1, 600 985 2, 040 455 100 16, 840 4, 000 120 16, 960 Credit 900 240 25, 000 250 50 9, 755 42 33, 645 50 26, 440

The difference between the Income Statement column totals is the net income (or net

The difference between the Income Statement column totals is the net income (or net loss) for the period.

The difference between the Balance Sheet column totals is also the income (or net

The difference between the Balance Sheet column totals is also the income (or net loss) for the period.

Income Statement Balance Sheet 9, 755 16, 960 33, 645 7, 205 16, 960

Income Statement Balance Sheet 9, 755 16, 960 33, 645 7, 205 16, 960 33, 645 Net Income 26, 440 7, 205 33, 645 Net Income

Net. Solutions Income Statement For Two Months Ended December 31, 2005 Fees earned $16,

Net. Solutions Income Statement For Two Months Ended December 31, 2005 Fees earned $16, 840 Rent revenue 120 Total revenues $16, 960 Expenses: Wages expense $ 4, 525 Supplies expense 2, 040 Rent expense 1, 600 Utilities expense 985 Insurance expense 100 Depreciation expense 50 Miscellaneous expense 455 Total expenses Net income $ 7, 205 9, 755 Every amount on this income statement was taken from the Income Statement column of the work sheet.

Net. Solutions Statement of Owner’s Equity For the Two Months Ended December 31, 2005

Net. Solutions Statement of Owner’s Equity For the Two Months Ended December 31, 2005 Chris Clark, Capital, November 1, 2005 $ 0 Investment on November 1, 2005 $25, 000 Net income for November and December 7, 205 $32, 205 Less withdrawals 4, 000 Increase in owner’s equity 28, 205 Chris Clark, Capital, December 31, 2005 From the$28, 205 Either from the Balance Sheet income statement debit column of or the work sheet.

Net. Solutions Balance Sheet December 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash

Net. Solutions Balance Sheet December 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash $ 2, 065 Accounts payable Accounts receivable 2, 720 Wages payable Supplies 760 Unearned rent Prepaid insurance 2, 300 Total liabilities Total current assets $ 7, 845 Property, plant, and equipment: Land $20, 000 Office equip. $1, 800 Less accum. depreciation 50 1, 750 Owner’s Equity Total property, plant Chris Clark, Capital and equipment 21, 750 Total liabilities and Total assets $29, 595 owner’s equity $900 From the 250 240 Statement $ 1, 390 of Owner’s Equity 28, 205 $29, 595

Adjusting and Closing Entries Adjusting entries are recorded in the journal at the end

Adjusting and Closing Entries Adjusting entries are recorded in the journal at the end of the accounting period.

Adjusting and Closing Entries If a work sheet has been prepared, the data for

Adjusting and Closing Entries If a work sheet has been prepared, the data for these entries are in the Adjustments columns.

The Closing Process Income Summary 2 Expenses are transferred to Income Summary 3 1

The Closing Process Income Summary 2 Expenses are transferred to Income Summary 3 1 Revenues are transferred to Income Summary Net Income or Net Loss is transferred to Owner’s Capital OWNER’S CAPITAL 4 Drawings are transferred to Owner’s Capital

Adjusting and Closing Entries Income Summary 2 Expenses are transferred to Income Summary 1

Adjusting and Closing Entries Income Summary 2 Expenses are transferred to Income Summary 1 Revenues are transferred to Income Summary 3 The Summary Net Income or Net Loss is transferred to Owner’s account does not appear. Capital on the financial statements. OWNER’S CAPITAL 4 Drawings are transferred to Owner’s Capital

The Closing Process Fees Earned Wages Expense Bal. Income Summary 4, 525 Rent Expense

The Closing Process Fees Earned Wages Expense Bal. Income Summary 4, 525 Rent Expense Bal. Rent Revenue 1, 600 Bal. Depreciation Expense Bal. 50 Utilities Expense Bal. 985 Chris Clark, Capital Bal. 25, 000 Supplies Expense Bal. 2, 040 Insurance Expense Bal. 100 Miscellaneous Expense Bal. 455 Bal. 16, 840 Chris Clark, Drawing Bal. 4, 000 120 Note: The balances shown are adjusted balances before closing. The following sequence demonstrates the closing process.

The Closing Process Fees Earned Wages Expense Bal. Income Summary 4, 525 16, 960

The Closing Process Fees Earned Wages Expense Bal. Income Summary 4, 525 16, 960 Rent Expense Bal. 1, 600 16, 840 Bal. 16, 840 Rent Revenue 120 Bal. 120 Depreciation Expense Bal. 50 Utilities Expense Bal. 985 Chris Clark, Capital Bal. 25, 000 Supplies Expense Bal. 2, 040 Insurance Expense Bal. 100 Miscellaneous Expense Bal. 455 Chris Clark, Drawing Bal. 4, 000 Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525 9, 775 Rent Expense Bal. 1, 600 16, 960 1, 600 16, 840 Bal. 16, 840 Rent Revenue 120 Bal. 120 Depreciation Expense Bal. 50 50 Utilities Expense Bal. 985 Chris Clark, Capital Bal. 25, 000 Supplies Expense 2, 040 Bal. 2, 040 Insurance Expense Bal. 100 Miscellaneous Expense Bal. 455 Chris Clark, Drawing Bal. 4, 000 Debit Income Summary for the total expenses and credit each expense account for its balance.

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525 9, 775 7, 205 Rent Expense Bal. 1, 600 16, 960 16, 840 Bal. 16, 840 Rent Revenue 120 Bal. 120 Depreciation Expense Bal. 50 50 Utilities Expense Bal. 985 Chris Clark, Capital Bal. 25, 000 7, 205 Supplies Expense 2, 040 Bal. 2, 040 Insurance Expense Bal. 100 Miscellaneous Expense Bal. 455 Chris Clark, Drawing Bal. 4, 000 Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account.

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525

The Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525 9, 775 7, 205 Rent Expense Bal. 1, 600 16, 960 16, 840 Bal. 16, 840 Rent Revenue 120 Bal. 120 Depreciation Expense Bal. 50 50 Utilities Expense Bal. 985 Chris Clark, Capital 4, 000 Bal. 25, 000 7, 205 Supplies Expense 2, 040 Bal. 2, 040 Insurance Expense Bal. 100 Miscellaneous Expense Bal. 455 Chris Clark, Drawing Bal. 4, 000 Debit the capital account for the balance of the drawing account, and credit drawing for the same amount.

Review of the Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary

Review of the Closing Process Fees Earned Wages Expense Bal. 4, 525 Income Summary 4, 525 9, 775 7, 205 Rent Expense Bal. 1, 600 16, 960 16, 480 Bal. 16, 840 Rent Revenue 120 Bal. 120 Depreciation Expense Bal. 50 50 50 Utilities Expense Bal. 985 985 Chris Clark, Capital 4, 000 Bal. 25, 000 4, 000 7, 205 Supplies Expense 2, 040 Bal. 2, 040 Close Revenues Close Expenses Close Income Summary Insurance Expense Bal. 100 100 Miscellaneous Expense Bal. 455 445 Close Drawing Chris Clark, Drawing Bal. 4, 000

After the closing entries are posted, all of the temporary accounts have zero balances.

After the closing entries are posted, all of the temporary accounts have zero balances.

Post-closing Trial Balance Net. Solutions Post-Closing Trial Balance December 31, 2005 Cash 2 065

Post-closing Trial Balance Net. Solutions Post-Closing Trial Balance December 31, 2005 Cash 2 065 00 Accounts Receivable 2 720 00 Supplies 760 00 Prepaid Insurance 2 300 00 Land 20 00 Office Equipment 1 800 00 Accumulated Depreciation 50 00 Accounts Payable 900 00 Wages Payable 250 00 Unearned Rent 240 00 Chris Clark, Capital 28 205 00 29 645 00

Financial Analysis for Net. Solutions Working Current – = Capital Assets Liabilities Working $7,

Financial Analysis for Net. Solutions Working Current – = Capital Assets Liabilities Working $7, 845 – $1, 390 = Capital Working $6, 455 = Capital

Financial Analysis for Net. Solutions Current Ratio Current = Assets ÷ Liabilities = $7,

Financial Analysis for Net. Solutions Current Ratio Current = Assets ÷ Liabilities = $7, 845 ÷ = 5. 6 $1, 390

Financial Analysis for Net. Solutions This ratio implies that Net. Solutions is able to

Financial Analysis for Net. Solutions This ratio implies that Net. Solutions is able to pay its current liabilities.

Financial Analysis for Net. Solutions Current ratio Current = Assets ÷ Liabilities Current $7,

Financial Analysis for Net. Solutions Current ratio Current = Assets ÷ Liabilities Current $7, 845 ÷ $1, 390 = ratio Current 5. 6 = ratio

Financial Analysis for Net. Solutions can use the current ratio to make comparisons across

Financial Analysis for Net. Solutions can use the current ratio to make comparisons across companies and with industry averages.

Chapter 4 The End

Chapter 4 The End