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The General Journal and The General Ledger
The Accounting Cycle Step 1 Analyze and transactions classify transactions Step 2 Journalize the transactions data about transactions Step 3 Post transactions to the ledger Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Evaluate and communicate financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize closing entries Step 6 Journnalize adjusting entries 4 -5
1) Record transactions in the general journal 1) Journal l A journal is a diary of business activities. l There are different types of accounting journals. l Transactions are entered in the journal in chronological order. 4 -6
GENERAL JOURNAL DATE DESCRIPTION POST. REF. 1 PAGE DEBIT CREDIT 2016 Nov. 6 Cash 100, 000. 00 Carolyn Wells, Capital 100, 000. 00 Enter the account to be debited Enter the amount on the same line in the Debit column. Enter the account to be credited Enter the amount on the same line in the Credit column. 4 -7
GENERAL JOURNAL DATE DESCRIPTION POST. REF. 1 PAGE DEBIT CREDIT 2016 Nov. 6 Cash Carolyn Wells, Capital 100, 000. 00 Investment by owner, Memo 01 Then enter a complete but concise description of the transaction. Whenever possible, the journal entry should refer to the source of the information. Document numbers are part of the audit trail. 4 -8
1) Cash Investment by Owner On November 6 Carolyn Wells withdrew $100, 000 from personal savings and deposited it in a new business checking account for Wells’ Consulting Services. GENERAL JOURNAL DATE DESCRIPTION POST. REF. PAGE DEBIT 1 CREDIT 2016 Nov. 6 Cash Carolyn Wells, Capital 100, 000. 00 Investment by owner 4 -9
2) Cash Purchase of Equipment On November 7 Wells’ Consulting Services issued Check 1001 for $5, 000 to purchase a computer and other equipment. GENERAL JOURNAL DATE Nov. DESCRIPTION 7 Equipment Cash POST. REF. PAGE DEBIT 1 CREDIT 5, 000. 00 Purchased equip. , Check 1001 4 -10
3) Purchase of Equipment on Credit On November 10, Wells’ Consulting Services purchased office equipment on account for $6, 000. GENERAL JOURNAL DATE DESCRIPTION Nov. 10 Equipment Accounts Payable Purchased equipment on account from Office Plus, Inv. 2223, due in 60 days POST. REF. PAGE DEBIT 1 CREDIT 6, 000. 00 4 -11
4) Cash Purchase of Supplies On November 28, Wells’ Consulting Services purchased supplies for $1, 500, Check 1002. GENERAL JOURNAL DATE DESCRIPTION Nov. 28 Supplies Cash POST. REF. 1 PAGE DEBIT CREDIT 1, 500. 00 Purchased supplies, Ck. 1002 4 -12
5) Payment to a Creditor On November 30, Wells’ Consulting Services paid Office Plus $2, 500 in partial payment of Invoice 2223, Check 1003. GENERAL JOURNAL DATE DESCRIPTION Nov. 30 Accounts Payable Cash POST. REF. 1 PAGE DEBIT CREDIT 2, 500. 00 Paid on account, Office Plus, Invoice 2223, Check 1003 4 -13
6) Recording a prepayment of rent On November 30, Wells’ Consulting Services wrote Check 1004 for $8, 000 to prepay rent for December and January. GENERAL JOURNAL DATE DESCRIPTION Nov. 30 Prepaid Rent Cash Paid Dec. and Jan. rent in advance; Check 1004 POST. REF. 1 PAGE DEBIT CREDIT 8, 000. 00 4 -14
7) Services performed for cash Wells’ Consulting performed services for $36, 000 in cash. GENERAL JOURNAL DATE DESCRIPTION POST. REF. 2 PAGE DEBIT CREDIT 2016 Dec. 31 Cash Fees Income Performed services for cash 36, 000. 00 4 -15
8) Performed services on account Wells’ Consulting performed services on account for $11, 000. GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Accounts Receivable Fees Income POST. REF. 2 PAGE DEBIT CREDIT 11, 000. 00 Performed services on credit 4 -16
9) Received Cash From Credit Clients Received $6, 000 in cash from a credit client on account. GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Cash POST. REF. 2 PAGE DEBIT CREDIT 6, 000. 00 Accounts Receivable 6, 000. 00 Received cash from credit clients on account 4 -17
10) Paid Salaries Paid $8, 000 for salaries. GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Salaries Expense Cash POST. REF. 2 PAGE DEBIT CREDIT 8, 000. 00 Paid monthly salaries to employees, Checks 1005 -1006 4 -18
11) Paid Utility Bill Wells’ consulting paid $650 in cash for a utility bill. GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Utilities Expense Cash POST. REF. 2 PAGE DEBIT CREDIT 650. 00 Paid monthly bill for utilities, Check 1007 4 -19
12) Owner’s Withdrawal The owner, Carolyn Wells, withdrew $5, 000 from the company. GENERAL JOURNAL DATE Dec. 31 DESCRIPTION Carolyn Wells, Drawing Cash POST. REF. 2 PAGE DEBIT CREDIT 5, 000. 00 Owner withdrew cash for personal expenses, Check 1008 4 -20
2) Ledgers l The ledger contains a separate form for each account l The third step of the accounting cycle is posting to the ledger l The process of transferring data from the journal to the ledger is known as posting 4 -21
Posting QUESTION: What is posting? posting ANSWER: Posting is the process of transferring data from a journal to a ledger. 4 -22
Ledger Account Forms On the ledger account form shown below, notice the: Account name and number l Columns for date, description, and posting reference l Columns for debit, credit, debit balance, and credit balance l ACCOUNT DATE 2016 Nov. 6 DESCRIPTION ACCOUNT NO. CASH POST. REF. J 1 DEBIT 100, 000. 00 CREDIT 101 BALANCE DEBIT CREDIT 100, 000. 00 4 -23
Post journal entries to general ledger accounts Five Steps for Posting 1. On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. 2. On the ledger form, enter the general journal page in the Posting Reference column. 3. On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. 4. On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. 5. On the general journal, enter the ledger account number in the Posting Reference column. 4 -24
Step 1: 1 On the ledger form, enter the date of the transaction. Enter a description of the entry, if necessary. Usually, routine entries do not require descriptions. GENERAL JOURNAL DATE 2016 Nov. DESCRIPTION 7 Equipment Cash Purchased equipment Check 1001 ACCOUNT DATE 2016 Nov. 7 POST. REF. DESCRIPTION DEBIT J 1 CREDIT 5, 000. 00 ACCOUNT NO. Equipment POST. REF. 1 PAGE DEBIT 5, 000. 00 CREDIT 141 BALANCE DEBIT CREDIT 5, 000. 00 4 -25
Step 2: 2 On the ledger form, enter the general journal page in the Posting Reference column. The letter J refers to the general journal. GENERAL JOURNAL DATE 2016 Nov. DESCRIPTION 7 Equipment Cash Purchased equipment Check 1001 ACCOUNT DATE 2016 Nov. 7 POST. REF. DESCRIPTION DEBIT J 1 CREDIT 5, 000. 00 ACCOUNT NO. Equipment POST. REF. 1 PAGE DEBIT 5, 000. 00 CREDIT 141 BALANCE DEBIT CREDIT 5, 000. 00 4 -26
Step 3: 3 On the ledger form, enter the debit amount in the Debit column or the credit amount in the Credit column. GENERAL JOURNAL DATE 2016 Nov. DESCRIPTION 7 POST. REF. Equipment DEBIT DATE 2016 Nov. 7 DESCRIPTION CREDIT 5, 000. 00 Cash Purchased equipment Check 1001 ACCOUNT 1 PAGE 5, 000. 00 ACCOUNT NO. Equipment POST. REF. J 1 DEBIT 5, 000. 00 CREDIT 141 BALANCE DEBIT CREDIT 5, 000. 00 4 -27
Step 4: 4 On the ledger form, compute the balance and enter it in the Debit Balance column or the Credit Balance column. GENERAL JOURNAL DATE 2016 Nov. DESCRIPTION 7 POST. REF. Equipment DEBIT DATE 2016 Nov. 7 DESCRIPTION CREDIT 5, 000. 00 Cash Purchased equipment Check 1001 ACCOUNT 1 PAGE 5, 000. 00 ACCOUNT NO. Equipment POST. REF. J 1 DEBIT 5, 000. 00 CREDIT 141 BALANCE DEBIT CREDIT 5, 000. 00 4 -28
Step 5: 5 On the general journal, enter the ledger account number in the Posting Reference column. GENERAL JOURNAL DATE 2016 Nov. DESCRIPTION 7 Equipment POST. REF. DEBIT 141 5, 000. 00 Cash Purchased equipment Check 1001 ACCOUNT DATE 2016 Nov. 7 DESCRIPTION J 1 CREDIT 5, 000. 00 ACCOUNT NO. Equipment POST. REF. 1 PAGE DEBIT 5, 000. 00 CREDIT 141 BALANCE DEBIT CREDIT 5, 000. 00 4 -29
General Ledger Accounts In the general ledger accounts, the balance sheet accounts appear first and are followed by the income statement accounts The order is: l l l Assets Liabilities Owner’s equity Revenue Expenses This order of accounts speeds the preparation of the trial balance and the financial statements. 4 -30
2) Correct errors made in the journal or ledger Journal and Ledger Errors Sometimes errors are made when recording transactions in the journal. The method used to correct an error depends on whether or not the journal entry has been posted to the ledger. 4 -31
Correcting Journal and Ledger Errors l If an error is discovered before the entry is posted, neatly cross out the incorrect item and write the correct data above it. l To ensure honesty and provide a clear audit trail, erasures are not made in the journal. 4 -32
Error Correction BEFORE Posting On September 1 an automobile repair shop purchased some shop equipment for $18, 000 in cash. By mistake the journal entry debited the Office Equipment account rather than the Shop Equipment account. 4 -33
Before Posting GENERAL JOURNAL DATE 2016 Sept. DESCRIPTION 1 Shop Equipment Office Equipment Cash POST. REF. PAGE DEBIT 1 CREDIT 18, 000. 00 Purchased equipment Check 1104 l The accountant would neatly cross out Office Equipment and write Shop Equipment above it. l The correct account Shop Equipment would be posted to the ledger in the usual manner. 4 -34
Error correction AFTER posting l If the error is discovered after posting, a correcting entry is journalized and posted. l Do not erase or change the journal entry or the postings in the ledger accounts. l Note that erasures are never permitted in the journal or ledger. 4 -35
Error Correction After Posting On September 1 an automobile repair shop debited Office Equipment rather than Shop Equipment for $18, 000 by mistake. The debit was posted to the Office Equipment account in the general ledger. A correcting journal entry must be journalized and posted. 4 -36
Error Correction After Posting GENERAL JOURNAL DATE 2016 Sept. 1 DESCRIPTION POST. REF. Office Equipment Cash 141 101 PAGE DEBIT 1 CREDIT 18, 000. 00 Purchased equipment Check 2141 This erroneous journal entry was posted to the general ledger. 4 -37
Error Correction After Posting GENERAL JOURNAL DATE 2016 Oct. DESCRIPTION 1 Shop Equipment Office Equipment POST. REF. 151 141 PAGE DEBIT 1 CREDIT 18, 000. 00 To correct error made on Sept. 1 when a purchase of shop equipment was recorded as office equipment The correcting journal entry debits Shop Equipment and credits Office Equipment for $18, 000. l The entry transfers $18, 000 out of the Office Equipment and into the Shop Equipment account. l 4 -38
Adjustments and the Worksheet
1) Complete a trial balance on a worksheet. The worksheet has an Account Name column The worksheet also has five sections Each section has two columns Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE ACCOUNT NAME DEBIT CREDIT ADJUSTMENTS DEBIT CREDIT ADJ. TRIAL BAL. INCOME STMT. DEBIT CREDIT BALANCE SHEET DEBIT CREDIT 5 -40
Complete the Trial Balance section in four steps: 1. Enter the general ledger account names. 2. Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. 3. Total the Debit and Credit columns to prove that the trial balance is in balance. 4. Place a double rule under each Trial Balance column to show that the work in that column is complete. 5 -41
Step 1: Enter the general ledger account names. Wells’ Consulting Services Step 1: Enter the general ledger account names. Worksheet Month Ended December 31, 2016 TRIAL BALANCE ACCOUNT NAME DEBIT Cash ADJUSTMENTS ADJ. TRIAL BAL. Carter Consulting Service CREDIT DEBIT Worksheet Month Ended December 31, 2004 CREDIT INCOME STMT. BALANCE SHEET DEBIT CREDIT Accounts Receivable Supplies ACCOUNT NAME Prepaid Rent Equipment Cas TRIAL BALANCE DEBIT Accum. h Depr. —Equip. Accounts Payable Carolyn Wells, Cap. CREDIT ADJUSTMENTS DEBIT CREDIT ADJ. TRIAL BAL. DEBIT CREDIT INCOME STATEMENT BALANCE SHEET DEBIT CREDIT These four new accounts will be used for the adjustments. Carolyn Wells, Draw. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp. —Equip. Totals **If additional new expense accounts are needed in the adjustment process, add them to the bottom of the ACCOUNT 5 -42
Step 2: Transfer the general ledger account balances to the Debit and Credit columns of the Trial Balance section. Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE ACCOUNT NAME Cash DEBIT CREDIT ADJUSTMENTS ADJ. TRIAL BAL. DEBIT CREDIT INCOME STMT. DEBIT CREDIT BALANCE SHEET DEBIT CREDIT 111, 350 Accounts Rec. Supplies 101 Cash ACCOUNT ______________ ACCOUNT NO. ____ Prepaid Rent Equipment Accum. Depr. BALANCE DATE DESCRIPTION POST REF. CREDIT 2016 Nov. 30 Bal. forward DEBIT CREDIT 64, 400 87, 000 Accounts Pay. Dec. 31 J 2 C. Wells, Cap. Dec. 31 J 2 C. Wells, Draw. DEBIT 36, 00 0 2, 000 123, 000 125, 000 8, 000 117, 000 J 2 650 116, 350 J 2 5, 000 111, 350 Dec. 31 J 2 Dec. 31 5 -43
Step 3: Total the Debit and Credit columns to prove that the trial balance is in balance. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS DEBIT 5, 000 Supplies 1, 500 Prepaid Rent 8, 000 11, 000 DEBIT CREDIT 100, 000 Carolyn Wells, Cap. 5, 000 Fees Income Utilities Expense DEBIT 3, 500 Accounts Payable Salaries Expense BALANCE SHEET Step 4: Place a double rule under each Trial Balance column to show that the work in that column is complete. Accum. Depr. —Equip. Carolyn Wells, Draw. CREDIT INCOME STMT. 111, 350 Accounts Receivable Equipment CREDIT ADJ. TRIAL BAL. 47, 000 8, 000 650 Supplies Expense Rent Expense Depr. Exp. —Equip. Totals 150, 500 5 -44
2) Prepare adjustments for unrecorded business transactions. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT 5, 000 Supplies 1, 500 Equipment CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT 8, 000 11, 000 Accum. Depr. —Equip. 3, 500 Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. 100, 000 5, 000 Fees Income Salaries Expense Utilities Expense 47, 000 8, 000 650 Supplies Expense Adjusting entries are first entered in the Adjustments section of the worksheet Rent Expense Depr. Exp. —Equip. Totals 150, 500 5 -45
1) The Supplies Adjustment Wells’ Consulting Services began the month with $1, 500 in supplies. At the end of the month, $1, 000 in supplies remained. QUESTION: What dollar amount of supplies was used during the month? $1, 500 - 1, 000 ANSWER: $500 5 -46
Wells’ Consulting Services Worksheet Month Ended December 31, 2016 ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT 5, 000 Supplies 1, 500 Equipment CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT (a) 500 8, 000 11, 000 Accum. Depr. —Equip. 3, 500 Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. 100, 000 5, 000 Fees Income Salaries Expense Utilities Expense 47, 000 8, 000 650 Supplies Expense (a) 500 Rent Expense Depr. Exp. —Equip. Totals 150, 500 5 -47
2) The Prepaid Adjustment On November 20, 2016, Wells’ Consulting Services paid $8, 000 for the December and January rent. As of December 31, 2016, one month’s rent had already been used up. QUESTION: What dollar amount of rent was used during the month of December? $8, 000 - 4, 000 ANSWER: $4, 000 5 -48
Wells’ Consulting Services Worksheet Month Ended December 31, 2016 ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT 5, 000 Supplies 1, 500 Equipment CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT (a) 8, 000 11, 000 (b) 500 4, 000 Accum. Depr. —Equip. 3, 500 Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. 100, 000 5, 000 Fees Income Salaries Expense Utilities Expense 47, 000 8, 000 650 Supplies Expense (a) Rent Expense (b) 500 4, 000 Depr. Exp. —Equip. Totals 150, 500 5 -49
3) Depreciation The cost is recorded as an asset and charged to expense over the time the asset is used for the business. Asset Pie Expense De 20 c. 13 This expense is called depreciation b. Fe 4 1 20 Expense Jan. 2014 Expense 5 -50
There are several methods to calculate depreciation. Wells’ Consulting Services uses the straight-line method. QUESTION: What is straight-line depreciation? ANSWER: Straight-line depreciation (S/L) allocates an asset’s cost in equal amounts to each accounting period of its useful life. S/L depreciation = Cost - salvage value Estimated months of useful life 5 -51
Calculating Depreciation Wells’ Consulting Services purchased equipment in November, 2016. · Cost = $11, 000 · Useful life = 5 yrs or 60 months (5 yrs x 12 months) · Salvage value = $0 QUESTION: QUESTION What dollar amount of depreciation expense should be recorded for the month? Cost - salvage value Estimated months of useful life ANSWER: $11, 000 - $0 60 months $183/M 5 -52
Adjustment for Depreciation Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment + Asset account has a normal debit balance Accumulated Depreciation— Equipment + Contra asset account has a normal credit balance 5 -53
Book Value Equipment Accumulated Depreciation— Equipment 11, 000 183 Original cost of equipment Record of all depreciation taken on equipment Book value = Original cost – Accumulated depreciation = 11, 000 – 183 = 10, 817 5 -54
Wells’ Consulting Services Worksheet Month Ended December 31, 2016 ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT 5, 000 Supplies 1, 500 Equipment (a) 8, 000 11, 000 (b) Accum. Depr. —Equip. 183 When all adjustments are entered, total and rule the Adjustments columns. 5, 000 47, 000 8, 000 650 Supplies Expense (a) Rent Expense (b) Depr. Exp. —Equip. Totals CREDIT 500 100, 000 Fees Income Utilities Expense CREDIT 3, 500 Carolyn Wells, Cap. Salaries Expense CREDIT 4, 000 (c) Accounts Payable Carolyn Wells, Draw. CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT 4, 000 (c) 150, 500 500 183 4, 683 5 -55
3) Complete the worksheet. You have already seen how to prepare the first two sections of a worksheet: l Trial Balance l Adjustments You will now learn how to complete a worksheet. Preparing a worksheet is the fourth step of the accounting cycle. 5 -56
Step 1: Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns. ACCOUNT NAME TRIAL BALANCE DEBIT Cash ADJ. TRIAL BAL. DEBIT CREDIT 5, 000 Supplies 1, 500 Prepaid Rent 8, 000 (a) (b) CREDIT 4, 000 183 100, 000 5, 000 Fees Income 47, 000 8, 000 650 Supplies Expense (a) Rent Expense (b) Depr. Exp. —Equip. Totals DEBIT CREDIT 3, 500 Carolyn Wells, Cap. Utilities Expense DEBIT 500 (c) Accounts Payable Salaries Expense BALANCE SHEET 11, 000 Accum. Depr. —Equip. Carolyn Wells, Draw. CREDIT INCOME STMT. 111, 350 Accounts Receivable Equipment CREDIT ADJUSTMENTS 4, 000 (c) 150, 500 500 183 4, 683 5 -57
The accounts that do not have adjustments are extended from the Trial Balance section to the Adjusted Trial Balance section. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT 5, 000 Supplies 1, 500 (a) Prepaid Rent 8, 000 (b) Carolyn Wells, Draw. 500 4, 000 11, 000 Accum. Depr. —Equip. (c) Carolyn Wells, Cap. 183 3, 500 100, 000 5, 000 Fees Income 5, 000 47, 000 Salaries Expense 8, 000 Utilities Expense 650 Supplies Expense (a) 500 Rent Expense (b) 4, 000 Depr. Exp. —Equip. (c) 183 Totals CREDIT 5, 000 11, 000 Accounts Payable CREDIT 111, 350 Accounts Receivable Equipment CREDIT 150, 500 4, 683 5 -58
The Supplies account has a $1, 500 debit balance in the Trial Balance section and a $500 credit in the Adjustments section. ($1, 500 debit and $500 credit = $1, 000) ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT 5, 000 Supplies 1, 500 Equipment CREDIT Carolyn Wells, Draw. Utilities Expense (b) 4, 000 11, 000 183 CREDIT 183 3, 500 100, 000 5, 000 47, 000 8, 000 650 Supplies Expense 8, 000 650 (a) 500 Rent Expense (b) 4, 000 Depr. Exp. —Equip. (c) 183 Totals 1, 000 (c) Fees Income Salaries Expense 500 (a) Accum. Depr. —Equip. Carolyn Wells, Cap. CREDIT 5, 000 8, 000 11, 000 Accounts Payable CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT 150, 500 4, 683 500 4, 000 183 4, 683 5 -59
Step 2: Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT 5, 000 Supplies 1, 500 (a) Prepaid Rent 8, 000 (b) Accum. Depr. —Equip. Carolyn Wells, Draw. Utilities Expense 4, 000 11, 000 183 3, 500 100, 000 5, 000 47, 000 8, 000 650 Supplies Expense 8, 000 650 500 4, 000 4000 183 4, 683 183 (a) Rent Expense (b) Depr. Exp. —Equip. Totals 1, 000 3, 500 Fees Income Salaries Expense 500 (c) Carolyn Wells, Cap. CREDIT 5, 000 11, 000 Accounts Payable CREDIT 111, 350 Accounts Receivable Equipment CREDIT (c) 150, 500 4, 683 150, 683 5 -60
For accounts that appear on the balance sheet, enter the amount in the appropriate column of the Balance Sheet section. For accounts that appear on the income statement, enter the amount in the appropriate column of the Income Statement section. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT 5, 000 Supplies 1, 500 (a) 8, 000 11, 000 (b) Equipment Carolyn Wells, Draw. Utilities Expense 1, 000 4, 000 11, 000 183 3, 500 100, 000 5, 000 Fees Income Salaries Expense 500 (c) Carolyn Wells, Cap. 5, 000 47, 000 8, 000 650 Supplies Expense 8, 000 650 (a) 500 Rent Expense (b) 4, 000 4000 Depr. Exp. —Equip. (c) 183 4, 683 150, 683 Totals CREDIT 5, 000 Accum. Depr. —Equip. Accounts Payable CREDIT 111, 350 Accounts Receivable Prepaid Rent CREDIT 150, 500 5 -61
After all the account balances are transferred to the financial statement sections, total the Debit and Credit columns. ACCOUNT NAME Cash TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT 5, 000 Supplies 1, 500 (a) Prepaid Rent 8, 000 (b) Equipment 500 1, 000 4, 000 11, 000 4, 000 183 5, 000 100, 000 (a) 47, 000 8, 000 650 500 500 4, 000 Rent Expense (b) 4, 000 4000 Depr. Exp. —Equip. (c) 183 150, 500 5, 000 47, 000 8, 000 650 Supplies Expense Totals 3, 500 183 3, 500 5, 000 47, 000 4, 683 CREDIT 11, 000 183 100, 000 Fees Income Utilities Expense 5, 000 3, 500 Carolyn Wells, Cap. Salaries Expense 5, 000 (c) Accounts Payable Carolyn Wells, Draw. 111, 350 11, 000 Accum. Depr. —Equip. CREDIT 111, 350 Accounts Receivable CREDIT 183 4, 683 150, 683 13, 333 47, 000 137, 350 103, 683 5 -62
Subtract the smaller total from the larger total in the Income Statement section to find the Net Income or Net Loss. ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT CREDIT 111, 350 Cash 111, 350 Accounts Receivable 5, 000 Supplies 1, 000 1, 500 (a) 500 4, 000 Prepaid Rent 4, 000 8, 000 (b) 4, 000 11, 000 Equipment 183 (c) 183 Accum. Depr. —Equip. 183 3, 500 Accounts Payable Carolyn Wells, Cap. 100, 000 Carolyn Wells, Draw. 5, 000 Fees Income 47, 000 Salaries Expense 8, 000 650 650 Utilities Expense (a) 500 Supplies Expense 500 4, 000 Rent Expense 4000 (b) 4, 000 Depr. Exp. —Equip. (c) 183 183 Totals 150, 500 4, 683 150, 683 13, 333 47, 000 137, 350103, 683 Net Income 5 -63
If the credit total is more than the debit total, the firm has net income. . . Enter the amount on the Net Income line. (47, 000 – 13, 333 = 33, 667) ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT CREDIT 111, 350 Cash 111, 350 Accounts Receivable 5, 000 Supplies 1, 000 1, 500 (a) 500 4, 000 Prepaid Rent 4, 000 8, 000 (b) 4, 000 11, 000 Equipment 183 (c) 183 Accum. Depr. —Equip. 183 3, 500 Accounts Payable Carolyn Wells, Cap. 100, 000 Carolyn Wells, Draw. 5, 000 Fees Income 47, 000 Salaries Expense 8, 000 650 650 Utilities Expense (a) 500 Supplies Expense 500 4, 000 Rent Expense 4000 (b) 4, 000 Depr. Exp. —Equip. (c) 183 183 Totals 150, 500 4, 683 150, 683 13, 333 47, 000 137, 350103, 683 Net Income 33, 667 5 -64
Total the Income Statement and the Balance Sheet sections. ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT CREDIT 111, 350 Cash 111, 350 Accounts Receivable 5, 000 Supplies 1, 000 1, 500 (a) 500 4, 000 Prepaid Rent 4, 000 8, 000 (b) 4, 000 11, 000 Equipment 183 (c) 183 Accum. Depr. —Equip. 183 3, 500 Accounts Payable Carolyn Wells, Cap. 100, 000 Carolyn Wells, Draw. 5, 000 Fees Income 47, 000 Salaries Expense 8, 000 650 650 Utilities Expense (a) 500 Supplies Expense 500 4, 000 Rent Expense 4000 (b) 4, 000 Depr. Exp. —Equip. (c) 183 183 Totals 150, 500 4, 683 150, 683 13, 333 47, 000 137, 350 103, 683 Net Income 33, 667 47, 000 137, 350 5 -65
GENERAL JOURNAL DATE ACCOUNT DATE 2016 Dec. 31 POST. REF. DESCRIPTION PAGE DEBIT 2016 Adjusting Entries Dec. 31 Supplies Expense Supplies 517 121 500. 00 31 Rent Expense Prepaid Rent 520 137 4000. 00 31 Depr. Expense–Equipment Accum. Depr. –Equipment 523 142 183. 00 Supplies Expense DESCRIPTION Adjusting POST. REF. J 3 3 CREDIT 500. 00 4000. 00 183. 00 ACCOUNT NO. DEBIT 500. 00 CREDIT 517 BALANCE DEBIT CREDIT 500. 00 5 -66
Closing Entries and the Post-Closing Trial Balance
QUESTION: What is the Income Summary account? ANSWER: The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations. 6 -68
Income Summary Account l Classified as a temporary owner’s equity account. l Does not have a normal balance. l Has a zero balance after the closing process and remains with a zero balance until the closing procedure for the next period. 6 -69
1) Journalize and post closing entries. There are four steps in the closing process: 1. Transfer the revenue account balances to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the Income Summary account balance to the owner’s capital account. 4. Transfer the drawing account balance to the owner’s capital account. 6 -70
Wells’ Consulting Services Worksheet Month Ended December 31, 2016 ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT DEBIT CREDIT 111, 350 Cash 5, 000 Accounts Receivable 1, 500 Supplies Prepaid Rent 8, 000 Equipment 11, 000 Accum. Depr. —Equip. 3, 500 Accounts Payable Carolyn Wells, Cap. 100, 000 5, 000 Carolyn Wells, Draw. Fees Income 47, 000 Salaries Expense 8, 000 Utilities Expense 650 (a) 500 Supplies Expense Rent Expense (b) 4, 000 Depr. Exp. —Equip. 150, 50 (c) 183 Totals 0 0 4, 683 Net Income CREDIT 111, 350 5, 000 (a) 500 1, 000 4, 000 (b) 4, 000 11, 000 (c) 183 CREDIT 111, 350 5, 000 1, 000 4, 000 11, 000 183 3, 500 100, 000 5, 000 47, 000 8, 000 650 500 4, 000 183 4, 683 150, 683 13, 333 33, 667 47, 000 Fees Income has a credit balance of $47, 000 103, 68 3 47, 000 137, 350 33, 667 47, 000 137, 350 6 -71
Step 1: Close Revenue Fees Income Balance 47, 000 Income Summary Closing 47, 000 6 -72
Step 1: Close Revenue GENERAL JOURNAL DATE 2016 DESCRIPTION POST. REF. PAGE DEBIT 4 CREDIT Closing Entries Dec. 31 Fees Income 47, 000. 00 Income Summary 47, 000. 00 The words “Closing Entries” are written in the Description column of the general journal 6 -73
Step 2: Close Expenses l The Income Statement section of the worksheet for Wells’ Consulting Services lists five expense accounts. l Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero. l This closing entry transfers total expenses to the Income Summary account. 6 -74
Step 2: Close Expenses l The five expense account balances are reduced to zero. The total, $13, 333 of expenses are transferred to the temporary owner’s equity account, Income Summary. l 6 -75
Income Summary Balance 47, 000 Closing Salaries Expense Balance 8, 000 Closing 8, 000 13, 333 Utilities Expense Balance 650 Supplies Expense Balance 500 Closing 650 Rent Expense Closing 500 Depr. Expense – Equip. Balance 4, 000 Closing 4, 000 183 Closing 183 6 -76
Step 2: Close Expenses GENERAL JOURNAL DATE 2016 Dec. 31 DESCRIPTION POST. REF. DEBIT PAGE 4 CREDIT Closing Entries Income Summary Salaries Expense Utilities Expense Supplies Expense Rent Expense Depreciation Exp. -Equip. 13, 333. 00 8, 000. 00 650. 00 500. 00 4, 000. 00 183. 00 6 -77
The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Dr. Closing 13, 333 Closing 47, 000 Balance 33, 667 Net Income 6 -78
Step 3: Close Net Income to Capital l The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Carolyn Wells, Capital. l The Income Summary account is reduced to zero. l The net income amount, $33, 667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33, 667. 6 -79
Step 3: Close Net Income to Capital Income Summary Balance 33, 667 Closing 33, 667 Carolyn Wells, Capital Balance 100, 000 Closing 33, 667 6 -80
Step 3: Close Net Income to Capital GENERAL JOURNAL DATE DESCRIPTION POST. REF. PAGE DEBIT 4 CREDIT Closing Entries Dec. 31 Income Summary Carolyn Wells, Capital 33, 667. 00 6 -81
Step 4: Close Drawing to Capital • Withdrawals appear in the statement of owner’s equity as a deduction from capital. • The drawing account is closed directly to the capital account. • The drawing account balance is reduced to zero. • The balance of the drawing account, $5, 000, is transferred to the owner’s capital account. 6 -82
Step 4: Close Drawing to Capital Carolyn Wells, Capital Balance 133, 667 Closing 5, 000 Carolyn Wells, Drawing Balance 5, 000 Closing 5, 000 6 -83
Step 4: Close Drawing to Capital GENERAL JOURNAL DATE DESCRIPTION POST. REF. 4 PAGE DEBIT CREDIT Closing Entries Dec. 31 Carolyn Wells, Capital Carolyn Wells, Drawing 5, 000. 00 6 -84
The new balance of the Carolyn Wells, Capital account agrees with the amount listed on the balance sheet. Carolyn Wells, Drawing Dr. Cr. Balance 5, 000 Balance 0 Carolyn Wells, Capital Dr. Closing 5, 000 Cr. Balance 100, 000 Drawing 5, 000 Net Inc. 33, 667 Balance 128, 667 Carolyn Wells, Capital 6 -85
Summary of Closing Entries GENERAL JOURNAL STEPS 1. Close Revenue Account 2. Close Expense Accounts 3. Close Income Summary 4. Close Drawing Account DATE 2016 Dec. 31 31 DESCRIPTION POST. REF. Closing Entries PAGE DEBIT Fees Income 401 Income Summary 309 Salaries Expense 511 Utilities Expense 514 Supplies Expense 517 Rent Expense 520 Depr. Expense-Equip. 523 47, 000. 00 Income Summary 309 Carolyn Wells, Capital 301 33, 667. 00 Carolyn Wells, Capital Carolyn Wells, Draw. 301 302 4 CREDIT 47, 000. 00 13, 333. 00 8, 000. 00 650. 00 500. 00 4, 000. 00 183. 00 33, 667. 00 5, 000. 00 6 -86
2) Prepare a postclosing Trial Balance. QUESTION: What is the postclosing trial balance? ANSWER: A postclosing trial balance is a report that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances. 6 -87
Wells’ Consulting Services Postclosing Trial Balance December 31, 2016 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation–Equipment Accounts Payable Carolyn Wells, Capital Totals DEBIT CREDIT 111, 350. 00 5, 000. 00 1, 000. 00 4, 000. 00 11, 000. 00 132, 350. 00 183. 00 3, 500. 00 128, 667. 00 132, 350. 00 6 -88
Finding and Correcting Errors If the postclosing trial balance does not balance, the accounting records contain errors. Use the audit trail to trace data through the accounting records. 6 -89
Flow of Data Through a Simple Accounting System Source Documents General journal General ledger Worksheet Financial statements 6 -90
Homework assignment • Using Connect – LS 20 Points, Quiz 20 Points, and EX. 60 Points. • Prepare for Chapter 7 “Accounting for Sales, Accounts Receivable, and Cash Receipts. ” Receipts • Prepare chapters 4, 5, and 6 for EXAM # 2 on 10/14, all Homework are due by max. 10/11 at 11: 59 PM. Happiness is having all homework up to date Atef Abuelaish 91
Thank you, and see you, Wednesday at the same time
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