Effects of the Adjusting Entries Journalize transactions Post

Effects of the Adjusting Entries Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared. Make end-ofyear adjustments. Prepare adjusted trial balance. 1

End of Chapter 4 2

Chapter 5 THE ACCOUNTING CYCLE: Adjusted Trial Balance 3

This is the Adjusted Trial Balance for JJ’s. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. 4

Net income also appears on the Statement of Owner’s Equity. 5

Statement of Retained Earnings This statement summarizes the increases and decreases in Retained Earnings during the period. • Business Earnings • Dividends • Business Losses 6

Now, let’s prepare the Balance Sheet. 7

Next, let’s prepare the Statement of Cash Flows for JJ’s Lawn Care Service for May. 8

9

Drafting Notes to the Financial Statements Examples of Items Disclosed Notes to the Financial Statements ŸLawsuits pending ŸScheduled plant closings ŸGovernmental investigations ŸSignificant events occurring after the balance sheet date ŸSpecific customers that account for a large portion of revenue ŸUnusual transactions and related party transactions 10

Adjusted Trial Balance of “Net Solution” 11

Net. Solutions’ Adjusted Trial Balance for December 31, 2005 12

Net. Solutions Adjusted Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accumulated Depreciation Accounts Payable Wages Payable Unearned Rent Capital Stock Dividends Fees Earned Rent Revenue Wages Expense Rent Expense Utilities Expense 2 065 00 2 720 00 760 00 2 300 00 20 00 1 800 00 50 900 250 240 25 000 00 00 4 000 00 16 840 00 120 00 4 525 00 1 600 00 985 00 Continued 13

Net. Solutions Trial Balance December 31, 2005 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Utilities Expense Supplies Expense Insurance Expense Miscellaneous Expense 2 065 00 2 720 00 760 00 2 300 00 20 00 1 800 00 985 00 2 040 00 100 00 455 00 43 400 00 14

Work Sheet 15

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Dr Cr Adjusted TB Dr Cr Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, stockholders’ equity, revenues, and expenses. 16

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Dr Cr Adjusted TB Dr Cr Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered. 17

The Work Sheet Trial Balance Accounts Dr Cr Adjustments Dr Cr Adjusted TB Dr Cr Adjustments are combined with the trial balance. Account balances are now adjusted. 18

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 Adjustments Debit Credit Adjusted Trial Balance Debit Credit The Unadjusted Trial Balance 16, 340 42, 600 19

(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. 20

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 Adjusted Trial Balance Debit Credit (a) 1, 240 900 360 25, 000 16, 340 (a) 1, 240 42, 600 21

(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). 22

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 1 2 3 4 5 6 7 8 4, 000 9 10 4, 275 1, 600 11 985 12 800 13 455 14 42, 600 15 16 Insurance Expense 17 18 Accounts are added as needed. 19 Credit Adjustments Debit Credit Adjusted Trial Balance Debit Credit (a) 1, 240 (b) 100 900 360 25, 000 16, 340 (a) 1, 240 42, 600 (b) 100 23

(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 24

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 Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 Adjusted Trial Balance Debit Credit (a) 1, 240 (b) 100 900 360 25, 000 (c) 120 16, 340 (a) 1, 240 42, 600 (b) 100 (c) 120 25

(d) Wages accrued but not paid at the end of December total $250. 26

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Insurance Expense Rent Revenue 17 Wages Payable 18 19 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 Adjusted Trial Balance 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 27

(e) Fees accrued at the end of December, but not recorded, total $500. 28

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends Fees Earned Wages Expense Rent Expense Utilities Expense Supplies Expense Miscellaneous Expense 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Insurance Expense Rent Revenue 17 Wages Payable 18 19 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 Adjusted Trial Balance (c) (d) 500 Credit Debit Credit (a) 1, 240 (b) 100 120 250 (e) 500 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 29

(f) Depreciation of the office equipment is $50 for December. 30

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 Adjusted Trial Balance Adjustments Debit (e) 500 (c) 120 (d) 250 Credit Debit Credit (a) 1, 240 (b) 100 (e) 500 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 (f) 50 31

Net. Solutions Work Sheet For the Two Months Ended December 31, 2005 Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Account Title Cash Accounts Receivable Supplies Prepaid Insurance Land Office Equipment Accounts Payable Unearned Rent Capital Stock Dividends 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 Adjustments Credit Debit To make. Debit more space, let’s remove (e) the 500 heading. 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 (a) 1, 240 (b) 100 900 360 25, 000 16, 340 (c) (d) 120 250 (e) 500 (a) 1, 240 42, 600 (b) 100 (c) 120 (d) 250 (f) 50 32

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 Capital Stock Dividends 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 Adjusted Trial Balance Debit 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 33

Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance. 34

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 Capital Stock Dividends 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 Adjusted Trial Balance Debit 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 35

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 Capital Stock Dividends 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 Credit 900 240 25, 000 16, 840 120 250 50 43, 400 36

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Dr. Sheet Cr Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. 37

The Work Sheet Adjusted TB Accounts Dr Cr Income State. Dr Cr Balance Dr. Sheet Cr Asset, liability, and stockholders’ equity balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. 38

To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed. 39

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 Capital Stock Dividends 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 Balance Sheet Debit Credit 900 240 25, 000 16, 840 120 250 50 43, 400 40

Now, let’s extend the balances from the Adjusted Trial Balance column. 41

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 Capital Stock Dividends 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 Credit 900 240 25, 000 250 50 42

These four columns are summed. 43

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 Capital Stock Dividends 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, 960 900 240 25, 000 250 50 9, 755 Credit 33, 645 50 26, 440 44

The difference between the Income Statement column totals is the net income (or net loss) for the period. 45

The difference between the Balance Sheet column totals is also the income (or net loss) for the period. 46

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 47

Net. Solutions Income Statement For Two Months Ended December 31, 2005 Fees earned Rent revenue Total revenues Expenses: Wages expense Supplies expense Rent expense Utilities expense Insurance expense Depreciation expense Miscellaneous expense Total expenses 9, 755 Net income $ 7, 205 $16, 840 120 $16, 960 $ 4, 525 2, 040 1, 600 985 100 50 455 Every amount on this income statement was taken from the 48 Income Statement column of the work sheet.

Net. Solutions Retained Earnings Statement For the Two Months Ended December 31, 2005 Net income for November and December Less dividends Retained earnings, December 31, 2005 7, 205 4, 000 $3, 205 Either from the From the income statement Balance Sheet or the work sheet. debit column of the work sheet. 49

Net. Solutions Balance Sheet December 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash $ 2, 065 Accounts payable $900 the Accounts receivable 2, 720 Wages payable From 250 Supplies 760 Unearned rent Retained 240 Prepaid insurance 2, 300 Total liabilities $ 1, 390 Earnings Total current assets $ 7, 845 Statement Property, plant, and equipment: Land $20, 000 Office equip. $1, 800 Stockholders’ Equity Less accum. depreciation 50 1, 750 Capital stock $25, 000 Total property, plant Retained earnings 3, 205 28, 205 and equipment 21, 750 Total liabilities and Total assets $29, 595 stockholders’ equity $29, 595 50

End of Today’s Session 51