Accounting Bank Reconciliation

LPF
NOTES
Accounting
Bank
Reconciliation
BY MABEL LAGE, CPA, MBA.
LPF Group LTD. CO.

Miami Las Vegas Buenos Aires
LPF NOTES
An imprint of LPF Group Ltd. Co.
Coral Gables, FL 33134
Copyright 2008 by Mabel Lage
All rights reserved.
No part of this work covered by
the copyright hereon may be
reproduced or used in any form
or by any means graphic, electronic,
or mechanical, including photocopying, recording,
Web distribution, or in any other
manner without the written permission
of the publisher.
For permission to use material
from this book, submit a request to
LPF NOTES
P.O. Box 530232
Henderson, NV 89053
Printed in the United States
of America.
98
ISBN: 978-0-9821668-0-2
ISBN-10: 0-9821668-0-X
CONTENTS
CHAPTER 1
Accounting Fundamentals
Assets, Liabilities and Equity
Transactions
Income and Expenses
Double-entry
Transaction Types
Accounts, Debits and Credits
Trial Balance
1
1
2
6
6
8
9
16
CHAPTER 2
Bank Reconciliation and

Closing Periods
Closing Periods
Adjusting Entries
Prepaid Expenses
Accrued Expenses
Accrued Revenues
Unearned Revenues
Depreciation
Bank Reconciliation
Outstanding Checks
Deposit-in-Transit
Closing Entries
Retained Earnings
Post-Closing Trial Balance
41
INDEX
41
42
43
44
46
47
48
51
52
52
55
55
58
85
______CHAPTER 1: Accounting Fundamentals
CHAPTER 1
ACCOUNTING FUNDAMENTALS
The purpose of bookkeeping and accounting is to provide
information regarding the financial affairs of a business.
This information is needed primarily by owners, banks
and the IRS.
Assets, Liabilities and Equity.

As starting point let us define what assets, liabilities and
equity are.
Assets: Economic resources that the business owns but
dont sell to customers, like money in checking and
saving accounts, vehicles, furniture, computers, land,
building, equipments, etc.
Liabilities: Debts the business owes to others. Bills from
vendors, credit cards, sales tax and bank loans are
examples of liabilities.
Equity: Also known as Capital or net worth, equity
represents the initial investment plus profits earned.
If you take an imaginary snap shot of the status of a
business, there is always a relationship among assets,
liabilities and equity that is known as the basic
accounting equation. That is:
Accounting Bank Reconciliation___________
Assets = Liabilities + Equity

Assets appear on the left side of the equation, while
liabilities and equity lie on the right side.
Example
A business is opened having $8,000 in its bank account.
The money in the bank account comes $5,000 from a
loan, which at this moment is a debt for the business, and
$3,000 from an owners contribution. In this example
Assets:
$8,000
Liabilities:
$5,000
Equity:
$3,000
Applying previous figures to the accounting equation, we
have
$8,000 = $5,000 + $3,000
Transactions
A business is a living system, so it is assumed to live on
and on unless expressly stated otherwise. A transaction is
an action taken by someone in the business in order to
maintain it alive. The transactions are taken in specific
moments (time), so the date is an important characteristic
of a transaction.
The following are examples of typical transactions.
1. A bank deposit made on Jan 3.
2. The purchase of equipment on Jan 5.
3. The payment of the rent on Jan 8.
Also each transaction should be recorded in a way the
basic equation continues being true (in balance) after
each recording is made.
Example
Suppose during the month of January, McGuire
Computer Services made the following transactions:
1. (Jan 3) Invested $7,000 to open his service business.
Action: Investment.
2. (Jan 5) Bought supplies (stationeries, pencils, etc.),
$250. Action: Purchasing.
3. (Jan 6) Bought computers from Newhole Computers
on account, $2500. Action: Buying.
4. (Jan 10) Receive $3400 for service performed.
Action: Receiving.
5. (Jan 12) Paid Rent for January, $600. Action:
Payment.
6. (Jan 18) Paid Car Service, $450. Action: Payment.
7. (Jan 25) Paid Salary for part time help $300. Action:
Payment.
8. (Jan 28) Paid $1500 to Newhole Computers on
account. Action: Payment.
9. (Jan 31) Withdrew $800 for personal use. Action:
Withdrawing.
These transactions could be recorded as follows:
Transaction 1, January 3. The owner, John McGuire,
invested $7000 to open his service business. In this
transaction the asset Cash is increased (+), and the capital of
the business is also increased by the same amount (+).
Cash
1
+7000
Assets
=
=
Liabilities
Equity
J McGuire,
Capital
+7000
Transaction 2, January 5. Bought supplies (stationeries,

pencils, etc.), $250. One asset is being substituted by another
the business is receiving (+) the asset Supplies and paying out
(-) the asset Cash. Note that the equity of $7000 remains
unchanged, and the equation is in balance.
Cash
2
7000
-250
6750
Assets
Supplies
+250
250
Liabilities
Equity
J McGuire,
Capital
7000
7000
Transaction 3, January 6. Bought computers from

Newhole Computers on account, $2500. The business is
receiving the asset Equipment (+) but is not paying for it with
the asset Cash. Instead, it will owe the money to Newhole
Computers. Hence, it is liable for this moment to the future,
thus creating the liability Accounts Payable (+).
Cash
3
6750
6750
Assets
Supplies
Equipment
+2500
2500
250
+
250
Liabilities
Accounts
Payable
+2500
2500
+
+
Equity
J McGuire,
Capital
7000
7000
Transaction 4, January 10. Receive $3400 for service

performed. In this transaction, the asset Cash is increased (+),
and also the equity is increased (+).
Cash
4
6750
+3400
10150
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
7000
+3400
10400
Transaction 5, January 10. Paid Rent for January, $600.

The asset Cash is decreased (-), and also the equity is
decreased (-). This transaction is called rent expense.
Cash
5
10150
-600
9550
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
10400
-600
9800
Transaction 6, January 18. Paid Car Service, $450. The

asset Cash is decreased (-), and also the equity is decreased (). This transaction is called payment of automobile expense.
Cash
6
9550
-450
9100
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
9800
-450
9350
Transaction 7, January 25. Paid Salary for part time help

$300. In this transaction, the asset Cash is decreased (-), and
also the equity is decreased (-). This transaction is called
salary expense.
Cash
7
9100
-300
8800
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
9350
-300
9050
Transaction 8, January 25. Paid $1500 to Newhole

Computers on account. In this transaction, the asset Cash is
decreased (-), and also the liability Accounts Payable is
decreased (-).
Cash
8
8800
-1500
7300
Assets
Supplies
250
+
250
Equipment
2500
+
2500
Liabilities
Accounts
Payable
2500
-1500
1000
+
+
Equity
J McGuire,
Capital
9050
9050
Transaction 9, January 31. Withdraw $800 for personal

use. The withdrawal of cash not only reduces the asset Cash () but also the Capital (-). Note that it is not an expense; it is a
reduction of the amount invested.
Cash
9
7300
-800
6500
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
1000
2500
+
2500
Equity
J McGuire,
Capital
9050
-800
8250
Income and Expenses

Note that when J. McGuire receives money from the
services delivered (income). The income increases Cash
and also increases his Capital in the business (see
equation).
When J. McGuire pays the rent (expense), he disburses
money to maintain the business. The expense decreases
Cash and also decreases Equity.
Double-entry
Note that you must enter the same amount twice for each
and every transaction in a way that transactions have
always to be in balance. The ins have to be equal the
outs. This is called double-entry accounting.
A summary of all transactions for the month of January
could be shown as follows.
McGuire Computer Services
Month of January
Cash
1
2
3
4
5
6
7
8
9
7000
-250
6750
6750
+3400
10150
-600
9550
-450
9100
-300
8800
-1500
7300
-800
6500
Assets
Supplies
Equipment
+250
250
250
+2500
2500
250
250
Liabilities
Accounts
Payable
+
+
Equity
J McGuire,
Capital
7000
7000
+2500
2500
2500
2500
2500
2500
250
2500
2500
250
2500
250
2500
2500
-1500
1000
250
2500
1000
7000
+3400
10400
-600
9800
-450
9350
-300
9050
9050
-800
8250
In the following chart (Fig. 1.1) are plotted the values in

Equity column) (Y-axis) vs. transaction dates (X-axis).
Fig. 1.1 Plot of Equity vs. Transaction Dates

Note that some transactions affect the Equity of the
business.
In chart shown below (Fig. 1.2) are plotted the values in
Cash column) (Y-axis) vs. transaction dates (X-axis).
Fig. 1.2 Plot of Cash vs. Transaction Dates
Cash of the business is affected after some transactions

are made, as shown on the previous charts.
Summary
How assets, liabilities and equity are affected on the
previous example.
1
2
3
Asset: Cash
Asset: Cash
Asset: Equipment
4
5
6
7
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Equity
Asset: Supplies
Liabilities: Accounts
Payable
Equity: Income
Equity: Expense
Equity: Expense
Equity :Expense
Liabilities: Accounts
Payable
Equity: Owners draw
Transaction Types
Depending on which parts of the basic equation (assets,
liabilities or equity) are affected when a transaction takes
place, there are several transaction types:
1. Transactions affecting only assets.
Example: Supplies bought with cash

Bought supplies (stationeries, pencils, etc.), $250.
2. Transactions affecting assets and liabilities.

Example: Equipment bought on account.
Bought computers from Newhole Computers on account,

$2500.
Example: Payment of a product previously bought on
account.
Paid $1500 to Newhole Computers on account.

3. Transactions affecting assets and equity.
Example: Income received in cash or on account.
Performed services for a client and receive cash of $3400.
Example: An expense paid in cash.
Paid Salary for part time help, $300.

4. Transactions affecting liabilities and equity.
Example: Expenses paid on account.
Paid Cell phone, $120, with a credit card.
5. Transactions affecting all, assets, liabilities and
equity.
Example: Purchase of equipment on account with
down payment.
Bought a copier machine, $800, paying cash $200,
and $600, on account.
Accounts, Debits and Credits

As it can be seen from the example of McGuire
Computer Services, preparing a new balance of the
equation
after each transaction would be awkward . So the concept
of accounts, debits and credits surged to help us
10
recording the information in a more friendly and safety

way.
Accounts help us organize information by keeping
similar transactions together. For example you probably
receive several different bills for problems related with
your cars. But when you think of the big picture all the
bills are related to automobile expenses. So when you
pay these bills you record all the transactions in the
Automobile Expense Account.
In McGuire Computer Services we have introduced the
following accounts.
Account Name
Category
Cash
Asset
Equipments
Asset
Supplies
Asset
Accounts Payable
Liabilities
J. McGuire Capital
Equity
Owners Withdrawal
Equity
Service Revenue
Income (Equity)*
Rent Expense
Expense (Equity)*
Salaries Expense
Expense (Equity)*
Automobile Expense
Expense (Equity)*
* As it will be seen later, Income and Expense Accounts are

temporary accounts that disclose the details of the Equity changes
and simplify handling Equity accounts. As there are a lot of
Income and Expenses entries each year, taking care of these
transactions in only one account (Equity) would be very
troublesome and untraceable. Income and Expenses are closed out
at the end of the year and transferred to an Equity account.
11
Besides, in order to record each transaction we also need

a convention to help us with the increments and
decrements of each account.
This convention has been established using the terms
Debits and Credits to increase and decrease each of the
terms of the equation. This uses the simplest form of the
account known as the T account.
Account Name
(Debit) Dr Cr (Credit)
A Debit is an:
Increase in Assets Accounts.
Decrease in Liabilities or Equity

Accounts.
Increase in Expense Accounts.
A Credit is an:
Decrease in Assets Accounts.
Increase in Liabilities or Equity

Accounts.
Increase in Income Accounts.
The following tables summarize the rule:

Assets and
Dr
+
(Increases)
Expenses
Cr
(Decreases)
12
Liabilities, Equity and Income

Dr Cr
- +
(Decreases) (Increases)
This convention used in conjunction with the basic

equation
makes true the following identity:
Debits = Credits
This last equation applies to every transaction.
It is a useful error-checking device because if you try to
record a transaction in such a way that the debits do not
equal the credits, you know that something is wrong.
It is useful now, in the computer age, imagine its
effectiveness when the work had to be done with pencil
and paper.
Let us reexamine the transactions that occurred in
McGuire Computer Services during the first month of
operation.
1. (Jan 3) Invested $7,000 to open his service business.
2. (Jan 5) Bought supplies (stationeries, pencils etc.) for
$250.
3. (Jan 6) Bought computers from Newhole Computers
on account, $2500.
4. (Jan 10) Received $3400 in service revenues.
13
5. (Jan 12) Paid Rent for January, $600.

6. (Jan 18) Paid Car Service, $450.
7. (Jan 25) Paid Salary for part time help $300.
8. (Jan 28) Paid $1500 to Newhole Computers on
account.
9. (Jan 31) Withdrew $800 for personal use.
Now we use accounts to record the transactions.
Transaction 1, January 3. The owner, John McGuire,
invested $7000 to open his service business.
Cash
Bal
Dr
+
7000
7000
Capital
Cr
-
Dr
Bal
Cr
+
7000
7000
Transaction 2, January 5. Bought supplies (stationeries,

pencils, etc.) for $250.
Cash
Bal
Dr
+
7000
6750
Cr
250
Supplies
Bal
Dr
+
250
250
Cr
-
Transaction 3, January 6. Bought computers from

Newhole Computers on account, $2500.
Equipment
Bal
Dr
+
2500
2500
Accounts Payable
Cr
-
Dr
Bal
Cr
+
2500
2500
14
Transaction 4, January 10. Received $3400 in service

revenues. The account Service Revenues, an Equity account,
is affected.
Cash
4
Bal
Dr
+
7000
3400
10400
10150
Service Revenues
Cr
250
Dr
Bal
Cr
+
3400
3400
250
Transaction 5, January 10. Paid Rent for January, $600.

Cash
Bal
Dr
+
7000
3400
10400
9550
Cr
250
600
850
Rent Expense
Bal
Dr
+
600
600
Cr
-
Transaction 6, January 18. Paid Car Service, $450.

Cash
Dr
+
7000
3400
Bal
10400
9100
Cr
250
600
450
1300
Automobile Expense
Bal
Dr
+
450
450
Cr
-
Transaction 7, January 25. Paid salary for part time help,

$300.

Cash
Dr
+
7000
3400
Bal
10400
8800
Cr
250
600
450
300
1600
15
Salaries Expense
Bal
Dr
+
300
300
Cr
-
Transaction 8, January 25. Paid $1500 to Newhole

Computers on account.
Cash
Dr
+
7000
3400
Bal
10400
7300
Cr
250
600
450
300
1500
3100
Accounts Payable
Bal
Dr
1500
Cr
+
2500
1000
Transaction 9, January 31. Withdrew $800 for personal

use.
Cash
Dr
+
7000
3400
Bal
10400
6500
Cr
250
600
450
300
1500
800
3900
Owners Withdraw
Bal
Dr
+
800
800
Cr
-
16
Note that there are equal debit and credit entries for
every transaction. Where only two accounts are affected,
the debit and credits amounts are equal. If more than two
accounts are affected, the total of the debit entries must
equal the total of the credit entries.
Trial Balance
A list of all accounts with their balances listed in a debit
or credit column is called a Trial Balance. It is used to
prove that debits do indeed equal credits. If they do not,
your trial did not work and you have some investigation
and adjustments of accounts to do.
The trial balance of McGuire Computer Services as of
January 31, 2010 can be seen on the following table:
Account Title
McGuire Computer Services

Trial Balance
January 31, 2010
Balance
Debit
Credit
Cash
Equipment
Supplies
Accounts Payable
J. McGuire, Capital
Owners Withdrawal
Service Revenue
Automobile Expense
Rent Expense
Salary Expense
Totals
6,500
2,500
250
1,000
7,000
800
3,400
450
600
300
11,400
11,400
17
Example
Let us now examine another example. Jane Peterson
started her practice as a design consultant on June 1 of
the current year. She named the business Jane Peterson,
Designer. During the first month of operation, the
business completed the following transactions:
1. (June 1) Peterson transferred $30,000 cash from her
personal bank account to a business account titled Jane
Peterson, Designer.
2. (June 4) Purchased supplies (5 printer cartridges), $250
cash.
3. (June 4) Purchased furniture, $2,500, on account.
4. (June 6) Performed services for a legal firm and received
$4,500 cash.
5. (June 7) Paid $22,000 cash to acquire land for future
office site.
6. (June 10) Performed services for a hotel and received its
promise to pay $900 within one week.
7. (June 14) Paid for the furniture purchased June 4 on
account.
8. (June 17) Received cash on account, $500.
9. (June 20) Prepared a design for a school on account,
$1,000.
10. (June 28) Received $1,700 cash for designing consulting
with Einstein Bagels.
11. (June 30) Paid secretarys salary, $1,400.
12. (June 30) Took supply inventory (3 printer cartridges),
$150.
13. (June 30) Paid office rent, $550.
14. (June 30) Withdrew $2,300 for personal use.
18
Now we record the transactions into accounts.

Transaction 1, June 1. Peterson transferred $30,000 cash
from her personal bank account to a business account
titled Jane Peterson, Designer.
Cash
Bal
Capital
30000
30000
30000
30000
Bal
Transaction 2, June 4. Purchased supplies (5 cartridges),

$250 cash. Supplies (printer cartridges) is an asset account.
Cash
Bal
30000
29750
250
Supplies (cartridges)
Bal
250
250
Transaction 3, June 4. Purchased furniture, $2,500, on

account.
Furniture
Bal
2500
2500
Accounts Payable
Bal
2500
2500
Transaction 4, June 6. Performed services for legal firm

and received $4,500 cash.
Cash
4
Bal
30000
4500
34500
34250
250
250
Service Revenues
Bal
4500
4500
19
Transaction 5, June 7. Paid $22,000 cash to acquire land

for future office site. The account Land, an asset, is affected.
Cash
Bal
30000
4500
34500
12250
250
22000
22250
Land
Bal
22000
22000
Transaction 6, June 10. Performed services for a hotel and

received its promise to pay $900 within one week. Accounts
Receivable, an asset account, is affected.
Accounts Receivable
Bal
Service Revenues
4500
900
5400
900
900
Bal
Transaction 7, June 14. Paid $2500 for the furniture

purchased June 4 on account.
Cash
30000
4500
Bal
34500
9750
250
22000
2500
24750
Accounts Payable
7
Bal
2500
0
2500
Transaction 8, June 17. Received cash from the hotel on

account, $500.
Cash
8
Bal
30000
4500
500
35000
10250
250
22000
2500
24750
Accounts Receivable
Bal
900
400
500
20
Transaction 9, June 20. Prepared a design for a school on

account, $1,000.
Accounts Receivable
9
Bal
900
1000
1900
1400
Service Revenues
500
4500
900
1000
6400
500
Bal
Transaction 10, June 28. Received $1700 cash for

consulting with Einstein Bagels.
Cash
10
Bal
30000
4500
500
1700
36700
11950
Service Revenue
250
22000
2500
4500
900
1000
1700
8100
Bal
24750
10
Transaction 11, June 30. Paid secretarys salary, $1400.

Cash
Bal
30000
4500
500
1700
36700
10550
250
22000
2500
1400
26150
Salaries Expense
11
Bal
1400
1400
11
Transaction 12. June 30. Took supply inventory (3 printer

cartridges), $150. Two cartridges are gone. This is recorded
as an expense. An adjusting entry is made to reduce inventory
balance.
12
Bal
250
150
21
Supplies Expense
100
Bal
100
100
Note: Adjusting entries will be studied in the following

chapter.
Transaction 13. June 30. Paid office rent, $550.
Cash
30000
4500
500
1700
Bal
36700
10000
250
22000
2500
1400
550
26700
Rent Expense
13
Bal
550
550
13
Transaction 14. June 30. Withdrew $2,300 for personal

use.
Cash
30000
4500
500
1700
Bal
36700
7700
250
22000
2500
1400
550
2300
29000
Owners Withdrawal
14
Bal
2300
2300
14
The trial balance of Jane Peterson, Designer as of June

30, 2010 can be seen on the following table:
22

Jane Peterson, Designer
Trial Balance
June 30, 2010
Balance
Account Title
Debit
Credit
Cash
7,700
Accounts Receivable
1,400
Furniture
2,500
150
Accounts Payable
J. Peterson, Capital
Owners Withdrawal
30,000
2,300
Service Revenue
8,100
Rent Expense
550
Supplies (cartridges) Expense
100
Salary Expense
Totals
1,400
38,100
38,100
Solved Problems
1.1 Fill the blanks:
1. Money owed to an outsider is a(n) ________.
2. The accounting equation is ____________ = liabilities +
__________.
3. To purchase on account is to create a _______.
4. The difference between assets and liabilities is
____________.
5. An investment in the business increases _______ and
__________.
23
6. __________ is the interest of the owners in a business.

7. Income increases assets and also _________.
8. A withdrawal of cash reduces ___________ and equity.
9. Items owned by a business are known as ______.
10. The left side of the account is known as the ________
side, while the right side is the ______ side.
11. Increases in expense accounts are __________.
12. Increases in asset accounts are _________.
13. Increases in liabilities accounts are __________.
14. Increases in revenue accounts are _________.
15. The list showing the balance of each account at the end of
the period is known as the _________.
Answers: 1 liability; 2 assets, equity; 3 liability; 4 equity; 5 assets,
equity; 6 Equity; 7 equity; 8 assets; 9 assets; 10 debit, credit; 11
debits; 12 debits; 13 credits; 14 credits; 15 trial balance.
1.2 Place a check mark in the appropriate column.

Debit
A
B
C
D
E
F
G
Credit
Cash is increased
Rent expense is increased
Money withdrawal
Fees earned is increased
Capital is increased
Equipment is increased
Cash is decreased
Answers: A Debit; B Debit; C Debit; D Credit; E Credit; F Debit; G

Credit.
24
1.3 For each transaction below, indicate the account to be

debited and the account to be credited by placing the letter
which corresponding the account.
Account Title
A
B
C
Cash
Accounts Receivable
Equipment
D
E
Supplies
Accounts Payable
F
G
H
Capital
Owners Withdrawal
Service Revenue
I
J
Rent Expense
Salary Expense
Supplies Expense
Transaction
1
Paid rent for month
Bought equipment on account
Received cash for services
Paid salaries
Invested cash in the business
Bought supplies on account
Paid balance on equipment
Received service revenue on account

Supplies inventory showed onefourth used during the month
Withdrew cash for personal use
9
10
Debit
Credit
25
Solution 1.3
1
2
3
4
5
6
7
8
9
10
Transaction
Paid rent for month
Bought equipment on account
Received cash for services
Paid salaries
Invested cash in the business
Bought supplies on account
Paid balance on equipment
Received service revenue on account
Supplies inventory showed onefourth used during the month
Withdrew cash for personal use
Debit
I
C
A
J
A
D
E
B
K
Credit
A
E
H
A
F
E
A
H
D
1.4 The summary of financial data of the Corpus Christy Band

Co. for November is presented below in transaction form.
1. Began operations by depositing $19,000 in a business
bank account.
2. Purchased musical equipment for $8,000, paying $3,500
in cash with the balance on account.
3. Purchased supplies for cash, $600
4. Cash income received for musical engagement, $4,000.
5. Paid salaries for the month, $1,600.
6. Paid general expenses, $700.
7. Paid $1,500 on account (see transaction 2).
8. Owner withdrew $2000 for personal use.
Record the transactions and running balances below.
Cash
1
2
3
4
Assets
Supplies
Equipment
=
=
=
=
=
Liabilities
Accounts
Payable
+
Equity
+ Corpus Christy
Band, Capital
26
Solution 1.4
Cash
1
2
3
4
5
6
7
8
19000
-3500
15500
-600
14900
+4000
18900
-1600
17300
-700
16600
-1500
15100
-2000
13100
Assets
Supplies
Equipment
+8000
8000
=
=
Liabilities
Accounts
Payable
+4500
4500
8000
+
Equity
+ Corpus Christy
Band, Capital
19000
+
19000
4500
19000
+4000
23000
-1600
21400
-700
20700
+600
600
600
8000
4500
600
8000
4500
600
8000
600
8000
4500
-1500
3000
600
8000
3000
20700
-2000
18700
1.5 William Bronson opened his accounting firm, which he

operates as proprietorship. The name of the business is
William Bronson, CPA. The entity experienced the following
events during the organizing phase of the business and its first
month of operation.
1. (Aug 3) Deposited $40,000 cash in a new business cash
account titled William Bronson, CPA
2. (Aug 4) Paid $400 cash for letterhead stationary for the
new office.
3. (Aug 6) Purchased office furniture. Bronson paid $6,000
cash.
4. (Aug 17) Finished tax hearing on behalf of a client and
submitted a bill for accounting services, $5,500 receiving
completed cash.
5. (Aug 25) Paid office rent, $950.
27
6. (Aug 31) Withdrew $2,500 cash from the business for

personal use.
a) Record the transactions in the affected T accounts.
b) Make the trial balance of the business on August 31.
Transaction 1, Aug 3.
Cash
Bal
W. Bronson Capital
Bal
Cash
Bal
Supplies
Bal
Cash
Furniture
Bal
Bal

Cash
Service Revenue
Bal
Bal
28

Cash
Rent Expense
Bal
Bal

Cash
Owners Withdrawal
Bal
Bal
b) Trial Balance
William Bronson, CPA
Trial Balance
August 31, 2010
Account Title
Cash
Furniture
Supplies
F. Turner, Capital
Owners Withdrawal
Service Revenue
Rent Expense
Totals
Debit
Balance
Credit
Solution 1.5
Cash
Bal
40000
40000
W. Bronson Capital
Bal
40000
40000
29
Cash
Bal
40000
39600
400
Supplies
Bal
400
400
Cash
40000
Bal
40000
33600
400
6000
6400
Furniture
Bal
6000
6000

Cash
Bal
40000
5500
45500
39100
400
6000
6400
Service Revenue
5500
5500
Bal

Cash
40000
5500
Bal
45500
38150
400
6000
950
7350
Rent Expense
Bal
950
950

Cash
40000
5500
Bal
45500
35650
400
6000
950
2500
9850
Owners Withdrawal
Bal
2500
2500
30

William Bronson, CPA
Trial Balance
August 31, 2010
Account Title
Cash
Furniture
Supplies
F. Turner, Capital
Owners Withdrawal
Service Revenue
Rent Expense
Totals
Balance
Debit
35,650
6,000
400
2,500
950
45,500
Credit
40,000
5,500
45,500
1.6 a) Post the following entries for the Sunlight Cleaning

Company to the affected T accounts.
b) Make the trial balance of the Sunlight Cleaning Company
as of March 31.
March 3 Invested $12,000 cash in the business.

March 5 Paid $2,500 for office furniture.
March 10 Bought equipment costing $8,000, on account.
March 25 Received $3,500 as cleaning income.
March 31 Paid one-fourth of the amount owed on the
equipment.
a) Posting entries
March 3
Bal
Bal
March 5
Bal
31
March 10
Bal
Bal
March 25
Bal
Bal
March 31
Bal
Bal
c) Trial balance.
Account Title
Totals
Sunlight Cleaning Company

Trial Balance
March 31, 2010
Balance
Debit
Credit
32
Solution 1.6
a) Posting entries
March 3
Cash
Bal
12000
12000
Owners Capital
12000
12000
Bal
March 5
Cash
Bal
12000
12000
9500
2500
2500
Furniture
Bal
2500
2500
March 10
Equipment
Bal
8000
8000
Accounts Payable
8000
8000
Bal
March 25
Cash
Bal
12000
3500
15500
13000
2500
Service Revenue
3500
3500
Bal
2500
March 31
Cash
Bal
12000
3500
15500
11000
2500
2000
4500
Accounts Payable
Bal
2000
8000
6000
33
d) Trial Balance
Sunlight Cleaning Company
Trial Balance
March 31, 2010
Balance
Account Title
Debit
Credit
Cash
11,000
Furniture
2,500
Equipment
8,000
Accounts Payable
6,000
Owners Capital
12,000
Service Revenue
3,500
Totals
21,500
21,500
1.7 The trial balance of Frank Turner, Home Remodeling, as

of March 31, is the following:
Frank Turner, Home Remodeling
Trial Balance
March 31, 2010
Balance
Account Title
Debit
Credit
Cash
3,100
Accounts Receivable
8,500
Supplies
600
Accounts Payable
Vehicles (Truck)
15,700
Accounts Payable
4,000
F. Turner, Capital
23,900
Totals
27,900
27,900
During April, Turner completed the following transactions:

1. (Apr 4) Turner collected $3,600 from a client on account.
2. (Apr 8) Performed home remodeling services for a client
on account, $6,900.
3. (Apr 10) Paid gas for the truck, $85 cash.
34
4.
5.
6.
7.
(Apr 13) Paid on account, $1,200.

(Apr 18) Purchased supplies on account, $200.
(Apr 20) Withdrew $1,500 for personal use.
(Apr 22) Received cash of $6,500 for remodeling work
just completed.
8. (Apr 25) Paid gas for the truck, $90 cash.
9. (Apr 30) Paid office rent, $750.
10. (Apr 30) Paid employee salary, $1,700.
a) Record the transactions in the affected T Accounts.

b) Make the trial balance of the business as of April 30.
a) Transactions to accounts
Apr 4 Turner collected $3,600 from a client on account.
Bal
Bal
Apr 8 Performed home remodeling services for a client on

account, $6,900.
Bal
Bal
Apr 10 Paid gas for the truck, $85 cash.
Bal
Bal
35
Apr 13 Paid on account, $1,200.
Bal
Bal
Apr 18 Purchased supplies on account, $200.
Bal
Bal
Apr 20 Withdrew $1,500 for personal use.
Bal
Bal
Apr 22 Received cash of $6,500 for remodeling work just

completed
Bal
Bal
36
Bal
Bal
Apr 30 Paid office rent, $750.
Bal
Bal
Apr 30 Paid employee salary, $1,700.
Bal
b) Trial balance.
Trial Balance
April 30, 2010
37
Balance
Account Title
Debit
Credit
Totals
Solution 1.7
Now we record the transactions into accounts, taking the
initial balance of each account from the previous month trial
balance. So, we have
Apr 4 Turner collected $3,600 from a client on account.
Cash
Bal
3100
3600
6700
Accounts Receivable
Bal
8500
4900
3600
Apr 8 Performed home remodeling services for a client on

account, $6,900.
Accounts Receivable
Bal
8500
6900
15400
11800
3600
3600
Service Revenues
Bal
6900
6900
38

Cash
Bal
3100
3600
6700
6615
85
Automobile Expense
85
85
Bal
85
Apr 13 Paid on account, $1,200.

Cash
Bal
3100
3600
3700
2515
85
1200
1285
Accounts Payable
Bal
1200
4000
2800
Apr 18 Purchased supplies on account, $200.

Supplies
Bal
600
200
800
Accounts Payable
1200
1200
Bal
4000
200
4200
3000
Apr 20 Withdrew $1,500 for personal use.

Cash
3100
3600
Bal
6700
3915
85
1200
1500
2785
Owners Withdrawal
Bal
1500
1500
39
Apr 22 Received cash of $6,500 for remodeling work just

completed.
Cash
Bal
3100
3600
6500
13200
10415
85
1200
1500
2785
Service Revenue
6900
6500
13400
Bal

Cash
3100
3600
6500
Bal
13200
10325
85
1200
1500
90
2875
Automobile Expense
Bal
85
90
175
Apr 30 Paid office rent, $750.

Cash
3100
3600
6500
Bal
13200
9575
85
1200
1500
90
750
3625
Rent Expense
Bal
750
750
40
Apr 30 Paid employee salary, $1,700.

Cash
3100
3600
6500
Bal
13200
7875
85
1200
1500
90
750
1700
5325
Salary Expense
Bal
1700
1700
The trial balance of Frank Turner, Home Remodeling as of

April 30, 2010 can be seen on the following table:
Trial Balance
April 30, 2010
Balance
Account Title
Cash
Accounts Receivable
Supplies
Vehicles
Accounts Payable
F. Turner, Capital
Owners Withdrawal
Service Revenues
Automobile Expense
Rent Expense
Salaries Expense
Totals
Debit
7,875
11,800
800
15,700
1,500
175
750
1,700
40,300
Credit
3,000
23,900
13,400
40,300
Chapter 2: Bank Reconciliation and Closing Periods
41
CHAPTER 2
BANK RECONCILIATION AND
CLOSING PERIODS
Closing Periods
Regularly banks send monthly statements to entities that
have checking accounts with them. In these statements
are reflected all the ins and outs of the business money.
Periodical expenses (rent, telephone, utilities, etc.) have
also to be paid in monthly basis. So it is a common
practice to take a monthly period as a proper time to
check the business status. Prior to checking the business
performance it is necessary to adjust certain transactions
and check the status reported by the bank with the one
reported by our computer system.
On the other hand, at the end of the year the business has
to distribute its profits among partners or stockholders
and also but no less important, to report the IRS the net
profit or loss of the year.
For all the above, primarily, it has become a universal
practice to take month and year as the typical closing
accounting periods.
Income and expense account balances have also to be
closed-out to zero to start the new year with zero
balances on each group of accounts.
In this chapter, the main closing processes will be
presented.
42
Adjusting Entries
It is easier to make period-end entries for some items
instead of doing it every day or every week.
Example
Lets go back to the printer cartridge example on Chapter
1:
Jane Peterson, Designer purchased supplies (5 printer
cartridges) on June 4, $250. When she buys the
cartridges, they go into the office supply inventory as an
asset.
To record this transaction you credit Cash for $250 and
debit Supplies (cartridges) for $250.
Cash
250
Bal
250
250
At the end of the month, an inventory is taken to

determine how many cartridges are left, three printer
cartridges, $150. Two cartridges, $100, were retrieved
from the office supply cabinet. What is used during the
month is recorded as an expense. An adjusting entry is
made to reduce the inventory balance.
You would make an adjusting entry, at the end of the
month as follows:
Bal
Supplies -cartridges
250 100
150
Bal
Supplies Expense
100
100
43
Note that an asset that has expired is an expense. The

asset account Supplies is going to be the expense
account Supplies Expense.
Several decades ago, all transactions were entered in
chronological order in a book called General Journal. In
our time just adjusting entries are posted through the
General Journal. This entry is made as follows:
Supplies Expense
Supplies (Asset)
Debit
100
Credit
100
Adjusting entries fall into five categories:
Prepaid expenses
Accrued expenses
Accrued revenues
Unearned revenues
Depreciation
In a prepaid adjustment, the cash payment occurs before

an expense is recorded while in an accrual adjustment, an
expense is recorded before the cash payment.
Prepaid Expense
Prepaid expenses are advance payment of expenses. The
printer cartridges that Jane Peterson, Designer bought
to have in its office supply cabinet is an example of
prepaid expense. Prepaid rent and prepaid insurance are
also examples.
Example
Suppose that Neptune Enterprises prepays three-month
office rent on September 1, 2010. If the lease specifies a
44
monthly rental of $700, the entry to record the payment

is
Cash
2100
Bal
Prepaid Rent ($700 x 3)

2100
2100
On Sep. 30, Prepaid Rent, an asset account, should be

decreased for the amount that has been used up. The
used-up portion is one-third of the prepayment. Recall
that an asset that has expired is an expense. The
adjusting entry transfers $2,100/3 months = $700 from
the Prepaid Rent to Rent Expense.
The adjusting entry is
Bal
Prepaid Rent
2100 700
1400
Bal
Rent Expense
700
700
The General Journal entry is

Rent Expense
Prepaid Rent (Asset)
Debit
700
Credit
Remember
Prepaid expenses are assets accounts.
Accrued Expenses
The term accrued expense refers to an expense the
business has incurred but not yet paid. An accrued
expense always creates a liability.
700
45
Example
Consider an employees salary. Neptune Enterprises
salary expense grows as the employee works.
Suppose that Neptune Enterprises pays its employee a
monthly salary of $1600, half on the 15th and half on the
last day of the month. If either payday falls on a
weekend, Neptune pays the following Monday.
In July, Neptune paid the first half-month salary on
Thursday, July 15.
Cash
800
Bal
Salary Expense
800
800
On Saturday July 31, only one salary payment has been

made and the balance of salary expense is $800. The
second payment of $800 will occur in August, so
Neptune Enterprises must accrue salary expense for the
second half of July.
On July 31 the adjusting entry is:
Bal
Salary Payable
800
800
Bal
Salary Expense
800
800
1600

Salary Expense
Salary Payable (Liability)
Debit
800
Credit
800
46
Salary Expense account holds a full month salary, and

Salary Payable account shows the liability owed on July
31.
On Monday, August 2 when the salary payment is made
to the employee, the affected accounts are:
Cash
800
Bal
Salary Payable
800 800
0
Accrued Revenues
Sometimes, business earns revenue before it receives the
cash. This is called accrued revenue, which is revenue
that has been earned but not yet collected in cash.
Example
Neptune Enterprises is hired on August 15 to perform
computer services for Toms Apparels. Under the
agreement, Neptune Enterprises will earn $900 monthly
for three months. During August, Neptune will earn half
month fee, $900/2 = $450, for work from August 16
through August 31.
On August 31 the adjusting entry is:
Aug 31
Bal
Accounts Receivable
450
450
Aug 31
Bal
Service Revenue
450
450

Accounts Receivable
Service Revenue
Debit
450
Credit
450
47
On September 15, Neptune Enterprises receives a check

payment from Toms Apparels for $900. Three accounts
are affected when the entry is posted:
Sep 15
Cash
900
Sep 15
Bal
Sep 15
Bal
Accounts Receivable
450 450
0
Service Revenue
450
450
900
Note that on September 30 it is needed an adjusting entry

similar to the one on August 31.
In October the entries will be equal to the September
entries, but in November only the entry on November 15
has to be made.
Unearned Revenues
When a client pays you in advance for the work you will
do for him, you owe the client services or products that
you have not yet delivered. A liability called unearned
revenue is created.
Example
On April 20 Neptune Enterprises signs a contract for one
month to perform computer services for Moonlight
Paradise. An advance payment, $600, its received.
The transaction is posted as follows:
Apr 20
Cash
600
Apr 20
Bal
Unearned Revenue
600
600
48
Remember that the Unearned Revenue account is a

liability.
On April 30 one-third of the work has been made. The
adjusting entry is:
Apr 30
Bal
Unearned Revenue
200 600
400
Apr 30
Bal
Service Revenue
200
200

Debit
200
Unearned Revenue
Service Revenue
Credit
200
On May 20, when the work has been completed, the

adjusting entry is:
May 20
Bal
Unearned Revenue
400 400
0
May 20
Bal
Service Revenue
200
400
600

Unearned Revenue
Service Revenue
Debit
400
Credit
400
Depreciation
All of us know that a computer, for example, will last
about five years before it has to be replaced. It means
that a computer loses all of its value in five years, that is,
49
at the end of a five year period the value of the computer

is $0. This lost of value with aging is called depreciation.
Depreciation is a concept used for long term assets, like
buildings, equipments, furniture, automobiles, etc.
Example
On July 1, 2010, Neptune Enterprises buys a computer
costing $1800. This computer will last five years and will
be depreciated using the straight-line method, that is, it
will lose $1800/5 = $360 per year, or $360/12 = $30 per
month, of its original cost.
For keeping the original cost of the computer and also
maintaining a running total of the depreciation, a new
account called Accumulated Depreciation is created. This
account is a contra asset (which is the opposite balance
of its asset), and it summarizes and accumulates the
amount of depreciation over the computers total useful
life.
On December 31, 2010 the computer will lose $30 x 6
months = $180. The adjusting entry is
Dec 31
Bal
Accum. Depreciation
180
180
Dec 31
Bal
Depreciation Expense
180
180
Note that the Depreciation Expense account is also

created.
Accum. Depreciation (Asset)
Debit
180
Credit
180
50
The Accumulated Depreciation account will be shown on

the asset part of the balance sheet as follows:
Equipment
Less: Accumulated Depreciation
Net Equipment
1,800
180
1,620
The IRS uses the Modified Accelerated Cost Recovery

System (MACRS) for depreciating assets. This system
establishes how long the assets will live. For example, autos,
trucks and computers will be depreciated in five years.
A Depreciation table is provided that takes more depreciation
in the first years than in the later years, differing from the
straight-line depreciation, in which the same amount is taken
every year.
Remember
Adjusting entries are made at the end of a period
in order that accounts will reflect the correct
balance in the financial statements.
An Asset that has expired is an Expense.
Supplies used
Supplies Expense
during a period
Prepaid Rent at the
Rent Expense
end of a period
An Expense not yet paid is a Liability.

Salary Expense not
Salary Payable
yet paid
51
Depreciation is the lost of value of an Asset with

aging.
Accumulated Depreciation is a Contra Asset
account that holds the amount of depreciation of
the Asset.
Bank Reconciliation
Before making the main financial statements, you have to
be assured that all transactions already entered have been
posted without mistakes.
However, mistakes are made. For finding these mistakes,
you need to have something from which you compare
your posted transactions.
This checking process called bank reconciliation is
mainly applied to any of your banking accounts, or to
your credit card accounts.
In the coming sections the reconciliation process will be
applied to the operating account. Most transactions
involving are shown in the operating account statement.
Bank account statements show the cash balance from the
beginning of a month, all the deposits and payments
recorded during the month, daily balances, and the
ending balance.
Because you deposit, pay and withdraw money from a
bank, you can compare or reconcile your records to
52
theirs. Once you have done this, you can be assured that
your current check register balance is correct.
The first thing to do is the account reconciliation of the
checking account. This is a process by which you
compare the business cash, shown in your computer
accounting system, with the bank cash balance as of a
given monthly period to detect any discrepancies.
Note: You dont have to wait until the end of the month to
reconcile your accounts. You can open your bank account
statement through the Internet at any moment and print a copy
of it.
At the end of the month, when you receive a mail
statement from your bank of credit card supplier, you have
only to search for the ending balance and check again your
figures with the statement.
Outstanding Checks
When you check your bank statement at the end of the
month, or check your bank account through the Internet
every day to find out what your cash balance is, you have
to take account of what is called outstanding checks. You
may have written checks or have made Internet payments
that the bank has not yet received. What happens when
those checks or payments hit the bank? You must have
enough deposits to cover them.
Deposit-in-Transit
When you make deposits on the last day of the month,
the bank records your deposits on the following month
bank statement. However, you record those deposits in
your computer accounting system in the current month,
but the bank doesnt record them in the same month, the
bank records those deposits in the following month.
Those deposits have been called deposits-in-transit.
53
Example
During July 2010, Sunrise Auto Repairs made the
following bank deposits and payments:
Deposits
Date
7/8/10
7/15/10
7/23/10
7/31/10
Total Deposits
Description
Bank Deposit
Bank Deposit
Bank Deposit
Bank Deposit
Amount
780
850
650
320
2,600
Payments
Check No.
1025
1026
1027
1028
INT710-31
Date
7/5/10
7/16/10
7/26/10
7/26/10
7/30/10
Total Paymt.
Description
Supplies
Supplies
Mechanic Work
Supplies
Cable (Internet
Payment)
Amount
40
150
425
310
240
1,165
Sunrise Auto Repairs received the bank statement from

Hamilton Industrial Bank that records the following
transactions during July 2010:
Hamilton Industrial Bank
Bank Account ending 0987
Sunrise Auto Repairs
Beginning Balance
Deposits
Withdrawals
Ending Balance
July 31, 2010

565
2,280
190
2,655
54

Deposits
Date
7/8/10
7/15/10
7/23/10
Total Deposits
Description
Deposit
Deposit
Deposit
Amount
780
850
650
2,280
Withdrawals
Check No.
1025
1026
Total Paymt.
Date
7/5/10
7/16/10
Amount
40
150
190
The bank account statement of Sunrise Auto Repairs

reflects an amount of $2,655 on July 31.
However, two payments have been made on July 26 for
$735 and an Internet payment on July 30 for $240. These
payments are not recorded yet on the bank balance.
These are outstanding checks.
On the other hand, a deposit of $320 has been made on
July 31. The bank does not record this deposit until
August 1. This is a deposit-in-transit.
The actual operating cash balance has to be calculated as
follows:
1. For the deposits-in-transit, you must add the deposit
amount to the bank statement balance for reconciling
your books with the bank statement.
2.
In the case of check payments, you may have written
the checks during the current month but they are not
cashed until the following month or later. Therefore,
you must subtract the total of those checks in order to
reconcile your computer system with the bank
statement.
The account reconciliation results can be seen on the
following table:

Bank Balance
Deposits-in-Transit
Outstanding Checks
Check 1027
Check 1028
Internet Payments
Total Outstanding Checks
Actual Operating Cash Balance
55
2,655
+320
425
310
240
-975
2,000
On the account reconciliation for the month of August it

would check both, outstanding checks and deposits-intransit, of as having already been counted in the prior
month of July.
Closing Entries
The purpose of closing entries is that the new fiscal year
starts with zero balances in the revenue and expense
accounts, and owners contributions and withdrawals
accounts start the new fiscal year also with zero balances.
At the end of a fiscal year, for example, December 31,
after preparing the Income Statement, Balance Sheet and
Owners Equity Statement, a summary account, known
as Income Summary, is created. All the revenue accounts
are closed-out, and the total amount is credited to the
Income Summary account. Each expense account is
credited to produce a zero balance, and the total amount
for the closed-out accounts is debited to the Income
Summary account. Then the Income Summary account
balance gives the net income or loss for the year.
Retained Earnings
The Income Summary account will be closed-out the
balance to zero. It needs a new equity account, Retained
Earnings account, where to transfer the net income for
the year. On the other hand, the other equity accounts,
56
Owners Draw and Owners Contribution, will be also

closed-out the balances to zero, and their balances will be
transfer to the Retained Earnings account.
Note: Traditionally, the Retained Earnings account is used for corporations,
and the Capita account is used for sole proprietorship for of business.
However, computer accounting programs use the Retained Earnings account
for both, sole proprietorship and corporations. In this text, which is computer
oriented, the Retained Earnings account will be used.
The steps followed for closing entries at the end of the

fiscal year can be seen in Fig. 2.1.
Fig. 2.1 Steps for Closing Entries at the end of the

Year
57
Example
The trial balance of Malcolm Printing as of December
31, 2010 is:
Malcom Printing
Trial Balance
December 31, 2010
Balance
Debit
Credit
8,300
2,300
200
400
9,000
2200
1,700
9,100
4,200
2,400
600
20,200
20,200
Account Title
Cash
Equipment
Supplies
Accounts Payable
Malcolm Smith, Capital
Owners Withdrawal
Owners Contribution
Fees Revenues
Rent Expense
Salaries Expense
Supplies Expense
Totals
The closing entries on December 31 are the followings:

1. Closing income accounts.
Clos
Bal
Fees Revenue
9100 9100
0
Clos
Bal
Income Summary
9100
9100
2. Closing expense accounts.

Clos
Bal
Rent Expense
4200 4200
0
Clos
Bal
Income Summary
4200 9100
4900
58
Clos
Bal
Clos
Bal

Salaries Expense
2400 2400
0
Clos
Supplies Expense
600 600
0
Clos
Bal
Bal
Income Summary
2400 4900
2500
Income Summary
600 2500
1900
3. Closing the Income Summary account.

Clos
Bal
Income Summary
1900 1900
0
Clos
Bal
Retained Earnings
1900
1900
4. Closing Equity accounts.

Clos
Bal
Owners Contribution
1700 1700
0
Clos
Bal
Clos
Bal
Owners Withdrawal
2200 2200
0
Clos
Bal
Retained Earnings
1900
1700
3600
Retained Earnings
2200 3600
1400

After making closing entries, you must make another
trial balance, known as post-closing trial balance, to be
sure that the accounts are in balance.

______CHAPTER XX: Accounting Fundamentals
Malcom Printing
December 31, 2010
59
YY
Balance
Account Title
Cash
Equipment
Supplies
Accounts Payable
Malcolm Smith, Capital
Retained Earnings
Totals
Debit
8,300
2,300
200
10,800
Credit
400
9,000
1,400
10,800
Solved Problems
2.1 Fill the blanks:
1. A process by which to compare a business cash or credit
card balance with the bank cash or credit card account
statement is called ________________________.
2. Checks that are sent to vendors but not cleared on the
bank statement are called ________________________.
3. _______________________ are deposits made at the end
of the month that do not appear on the bank statement.
4. An expense paid in advance is known as a ___________
____________.
5. An adjusting entry that records the expired amount of
prepaid rent would create the ______________________
account.
6. An accrued salary expense creates a _______________
called salary payable account.
7.
When a client pays in advance for a service not yet

performed, a liability called _________________ is
created.
60
8. The income and expense accounts are closed-out at the

end of the fiscal year to the _____________________
account.
9. At the end of the year all income, expenses and owners
contributions and withdrawals, are closed into the ____
_____________________ account.
10. After closing entries, the trial balance showing only asset,
liability and equity accounts is called _______________
trial balance.
Answers: 1 account reconciliation; 2 outstanding checks; 3 depositsin-transit; 4 prepaid expense; 5 rent expense; 6 liability; 7 unearned
revenue; 8 Income Summary; 9 Retained Earnings; 10 post-closing.
2.2 Complete the following cross word puzzle

Across
1. Account to keep a running total of the depreciation.
2. Entries made at the end of a fiscal year to start the new
year with zero balance in some account.
3. Trial balance made after closing entries.
4. Process to compare cash balance with bank statement.
Down:
5. Entry made at the end of a period to adjust expense or
income already recorded.
6. Bank deposit made at the end of a month and not recorded
on the bank statement.
7. Expense paid in advance
8. Check payment not recorded on the bank statement.

5
7
6
61
3
4
Solution
5 a
d
j
6
1 a c c u m l a t e d
s
e
t
p
i
2 c l o
n
s
g
i
t
3 p o s t i
n
4 a c c o u n t t
r
a
n
s
i
t
7
8
p
o
r
u
- d e p r e c i a t i o n
p
s
a
t
s i n g
i
a
d
n
d
i
c l o s i n g
n
g
r e c o n c i l i a t i o n
62
2.3 An insurance policy covering one year was purchased on

October 1 for $480. The amount was debited to the asset
account called Prepaid Insurance. Show the adjusting entry for
the three-month period ending December 31: a) Using Taccounts; b) Using General Journal entry.
Insurance expense for a month
period
Insurance expense for a threemonth period (Oct. Dec.)
=
per
month
=
a) T-accounts
Insurance Expense
Prepaid Insurance
Dec 31
Dec 31
Bal
Bal
b) General Journal
Debit
Insurance Expense
Prepaid Insurance (Asset)
Credit
Solution 2.3
Insurance expense for a month
period
Insurance expense for a threemonth period (Oct. Dec.)
= 480 / 12
= 40 x 3
= 40 per
month
= 120
a) T-accounts
Dec 31
Bal
Insurance Expense
120
120
Dec 31
Bal
Prepaid Insurance
480 120
360
63
b) General Journal
Debit
120
Insurance Expense
Prepaid Insurance (Asset)
Credit
120
2.4 Supplies purchased of $1,200 on March 10 were debited to

the asset account Supplies. A count of the supplies on March
31 showed $800 on hand. Make the adjustment entry on
March 31: a) Using T-accounts; b) Using a General Journal
entry.
Amount of supplies used
during the month of March
a) T-accounts
Supplies Expense
Supplies
Mar 31
Mar 31
Bal
Bal
b) General Journal
Supplies Expense
Supplies (Asset)
Debit
Credit
Solution 2.4
Amount of supplies used
during the month of March
= 1200 - 800
= 400
64
a) T-accounts
Mar 31
Bal
Supplies Expense
400
400
Supplies
1200 400
800
Mar 31
Bal
b) General Journal
Debit
400
Supplies Expense
Supplies (Asset)
Credit
400
2.5 A business pays weekly salaries (5-day week) of $3,000

on Friday. Show the adjusting entry at the end of the period
ending on Wednesday using the General Journal.
Amount of salary payable

per day
Liability of salary on
Wednesday
Salary Expense
Debit
Credit
Solution 2.5
Amount of salary payable
per day
Wednesday
= 3000/5 days
= 600 x 3 days
= 600 per
day
= 1800
65
Debit
1800
Salary Expense
Credit
1800
2.6 Salaries paid to employees are $2,100 bi-weekly (5-day

week). The payroll period ends on Friday. Show the necessary
adjusting entry on September 30 when the next payment will
be on Friday, October 5. Use a General Journal entry.
Salary payable per day
Amount of salary payment

on October 5 corresponding
to October month
September 30
=
per day
=
The adjusting entry on September 30 is
Salary Expense
Debit
Credit
Solution 2.6
Salary payable per day
= 2100/14 days
Amount of salary payment

on October 5 corresponding
to October month
September 30
= 5 (days) x 150
= 150
per day
= 750
= 2100 - 750
= 1350
66
The adjusting entry on September 30 is
Debit
1350
Salary Expense
Credit
1350
2.7 The amount of the inventory of printer toners on

December 31 is $300. The printer toners used during the year
are $400. Make the adjusting entry necessary on December 31
using a General Journal entry.
Supplies (Printer toners) Expense

Supplies (Printer toners) (Asset)
Debit
Credit
Solution 2.7
Supplies (Printer toners) Expense

Supplies (Printer toners) (Asset)
Debit Credit
400
400
2.8 Machinery costing $24,000, purchased on May 1, is being

depreciated at 10 percent per year. Show the adjusting entry
for December 31 using a General Journal entry.
Depreciation per year
Depreciation per month
Depreciation expense for 8

months (May December)
=
per
year
=
per
month
=
67
The adjusting entry on December 31 is
Accumulated Depreciation (Asset)
Debit
Credit
Solution 2.8
= 10% x 12000
= 1200 / 12
Depreciation expense for 8

months (May December)
= 100 x 8
= 1200
per year
= 100 per
month
= 800
The adjusting entry on December 31 is
Debit Credit
800
800
2.9 A truck costing $72,000 is being depreciated by the

straight-line method over 5 years. The truck was purchased on
February 28 and put in use on March 1. Show the adjusting
entry on December 31: a) Using T-accounts; b) Using a
General Journal entry.
Depreciation expense for

10 months (March
December)
=
per
year
=
per
month
=
68
a) Adjusting entry using T-accounts

Accumulated Depreciation
Dec 31
Dec 31
Bal
Bal
b) The adjusting entry through the General Journal on

December 31 is
Debit
Credit
Solution 2.9
= 72000 / 5
= 14400 / 12
Depreciation expense for

10 months (March
December)
= 1200 x 10
= 14400
per year
= 1200 per
month
= 12000
a) Adjusting entry using T-accounts

Dec 31
Bal
12000
12000
Dec 31
Bal
12000
12000
b) The adjusting entry through the General Journal on

December 31 is
Debit Credit
12000
12000
69
2.10 A four-month project for develop an advertising DVD is

paid in advance of $8,000 on November 1. The project is due
at the end of February. Make the necessary entries using Taccounts on November 1, December 31, and February 28.
Monthly project revenue
=
per
month
November 1
Cash
Nov 1
Unearned Revenue (liability)

Nov 1
Bal
December 31
Project revenue after two months
(November December)
Dec 31
Bal
Project Revenue
4000
4000
Dec 31
Bal

4000 8000
4000
February 28
Project revenue two months later
(January February)
Project Revenue
Bal

Feb 28
Feb 28
Bal
70
Solution 2.10
= 8000 / 4
months
= 2000
per month
November 1
Nov 1
Cash
8000
Nov 1
Bal

8000
8000
December 31
(November December)
Dec 31
Bal
Project Revenue
4000
4000
Dec 31
Bal
= 2000 x 2
= 4000

4000 8000
4000
February 28
(January February)
Feb 28
Bal
Project Revenue
4000
4000
8000
Feb 28
Bal
= 2000 x 2
= 4000

4000 4000
0
2.11 Do the problem 2.10 when the payment in full is made

the day the project is finished o February 28 instead of paying
in advance.
71
November 1
No transaction is made
December 31
(November December)
Project Revenue
=
Accounts Receivable
Dec 31
Dec 31
Bal
Bal
February 28
(January February)
Cash
Feb 28
=
Accounts Receivable
Feb 28
Bal
Project Revenue
Feb 28
Bal
Solution 2.11
November 1
No transaction is made
= 8000 / 4
months
= 2000
per month
72
December 31
(November December)
Dec 31
Bal
Project Revenue
4000
4000
= 2000 x 2
= 4000
Accounts Receivable
4000
4000
Dec 31
Bal
February 28
(January February)
Feb 28
Cash
8000
= 2000 x 2
Feb 28
Bal
Feb 28
Bal
= 4000
Accounts Receivable
4000 4000
0
Project Revenue
4000
4000
8000
2.12 During April 2010, Aaron Window Repairs made
the following bank deposits and check payments:

Deposits
Date
4/3/10
4/16/10
4/21/10
4/25/10
4/30/10
Total Deposits
Description
Bank Deposit
Bank Deposit
Bank Deposit
Transfer from
Personal account
Bank Deposit
Amount
150
375
240
500
215
1,480
73
Check Payments
Check No.
621
622
623
624
625
626
Total Paymt.
Date
4/5/10
4/11/10
4/13/10
4/21/10
4/28/10
4/30/10
Description
Rent
Supplies
Printer Cartridge
Truck Repair
Cell Phone
Employee Wages
Amount
400
275
50
580
170
600
2,075
The bank statement from High City Bank records the

following transactions for Aaron Window Repair during
April 2010:
Beginning Balance
Deposits
Withdrawals
Ending Balance
2,580
1,265
1,305
2,540
Deposits
Date
4/3/10
4/17/10
4/22/10
4/25/10
Total Deposits
Description
Deposit
Deposit
Deposit
Deposit
Amount
150
375
240
500
1,265
Withdrawals
Check No.
621
622
623
Date
4/12/10
4/16/10
4/15/10
Amount
400
275
50
74
624
Total Withdr.
4/27/10
580
1,305
Calculate the actual operating cash balance.

Actual operating cash balance
Bank Balance
Deposits-in-Transit
Outstanding Checks
Check
Check
Solution 2.12
Actual operating cash balance
Bank Balance
2,540
Deposits-in-Transit
+215
Outstanding Checks
Check 625
170
Check 626
600

-770
1,985
2.13 A list of the accounts of Harley Consulting on December

31 is presented below.
Cash
Equipment
Supplies
Accounts Receivable
Prepaid Insurance
Accounts Payable
Harley, Capital
Owners Withdrawal
Owners Contribution
Fees Revenues
Utilities Expense
Salaries Expense
5,105
5,000
925
1,690
1,865
2,325
845
16,280
75
635
14,000
19,400
The year-end adjustments necessary to bring the accounts up

to date are as follows:
1. Fees earned on cash but not yet posted $3,275.
2. Utilities owed but not paid $230.
3. Salaries owed but not paid $840.
4. Depreciation for the year $700.
5. Inventory of supplies at the end of the year $475.
6. Insurance expense for the year $1,250.
a) Prepare the adjusting entries using T-accounts.
b) Make the trial balance before closing the year.
a) Adjusting Entries
1.
Cash
Fees Revenue
Dec 31
Dec 31
Bal
Bal
76
2.
Utilities Expense
Accounts Payable
Dec 31
Dec 31
Bal
Bal
3.
Salaries Expense
Salaries Payable
Dec 31
Dec 31
Bal
Bal
4.
Dec 31
Dec 31
Bal
Bal
5.
Dec 31
Supplies
450
Bal
6.
Supplies Expense
Dec 31
Bal
Insurance Expense
Prepaid Insurance
Dec 31
Dec 31
Bal
Bal
b) Trial balance
77
Harley Consulting
Trial Balance
December 31, 2010
Balance
Debit
Credit
Account Title
Cash
Equipment
Supplies
Prepaid Insurance
Accounts Receivable
Accounts Payable
Salaries Payable
Harley, Capital
Owners Withdrawal
Fees Revenues
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Totals
Solution 2.13
a) Adjusting Entries
1.
Dec 31
Bal
Cash
5105
3275
8380
Dec 31
Bal
Fees Revenue
19400
3275
22675
78
2.
Dec 31
Bal
3.
Dec 31
Bal
4.
Dec 31
Bal
5.
Dec 31
Bal
6.
Dec 31
Bal
Utilities Expense
845
230
1075
Salaries Expense
16280
840
17120
Dec 31
Bal
Dec 31
Bal
700
700
Dec 31
Supplies
925 450
475
Dec 31
Insurance Expense
475
475
Dec 31
b) Trial balance
Bal
Bal
Bal
Accounts Payable
635
230
865
Salaries Payable
840
840
700
700
Supplies Expense
450
450
Prepaid Insurance
1865 475
1390
79
Harley Consulting
Trial Balance
December 31, 2010
Account Title
Cash
Equipment
Supplies
Prepaid Insurance
Accounts Receivable
Accounts Payable
Salaries Payable
Harley, Capital
Owners Withdrawal
Fees Revenues
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Totals
Balance
Debit
Credit
8,380
5,000
700
475
1,390
1,690
865
840
14,000
2,325
22,675
700
475
17,120
450
1,075
39,080
39,080
2.14 Based on the trial balance of Harley Consulting as

of December 31 before closing (problem 2.13), prepare
General Journal entries to close-out:
a) Revenue accounts; b) Expense accounts; c) Income
Summary account; d) Owners withdrawal account.
e) Make the Post-closing trial balance.
a)
Fees Revenues
Income Summary
Debit
Credit
80
b)
Debit
Income Summary
Insurance Expense
Credit
Salaries Expense
Supplies Expense
Utilities Expense
Balance of Income Summary
account
c)
Income Summary
Retained Earnings
Debit
Credit
Debit
Credit
d)
Retained Earnings
Owners Withdrawal
Balance of Retained
Earnings account
e) Post-closing trial balance
81
Harley Consulting
December 31, 2010
Balance
Account Title
Cash
Accounts Receivable
Equipment
Supplies
Prepaid Insurance
Accounts Payable
Salaries Payable
Harley, Capital
Retained Earnings
Totals
Debit
Credit
Solution 2.14
a)
Fees Revenues
Income Summary
b)
Income Summary
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Balance of Income Summary
account
Debit Credit
22675
22675
Debit Credit
19820
700
475
17120
450
1075
= 22675 - 19820
= 2855
82
c)
Income Summary
Retained Earnings
Debit Credit
2855
2855
d)
Retained Earnings
Owners Withdrawal
Balance of Retained
Earnings account
Debit Credit
2325
2325
= 2855 - 2325
= 530
e) Post-closing trial balance

Harley Consulting
December 31, 2010
Balance
Account Title
Cash
Accounts Receivable
Equipment
Supplies
Prepaid Insurance
Accounts Payable
Salaries Payable
Harley, Capital
Retained Earnings
Totals
Debit
8,380
1,690
5,000
475
1,390
16,935
Credit
700
865
840
14,000
530
16,935
Notes
83
84
Notes
______INDEX
85
INDEX
Account
Depreciation
48-50
Account reconciliation
51-55
Double-entry accounting
Accounting, Double-entry
Accounting equation
Equipment
2, 50
Accounts payable
5, 15
Equity
Accounts receivable
19
Expense account
10
Accrued expenses
43, 44
Expenses
Accrued revenue
43, 46
Accumulated depreciation
49, 50, 51
General Journal
43
Adjusting entries
42-51
Assets
Income
Automobile expenses
10
Income summary account
55
Investment
Liabilities
Bank deposit
Bank statement
51, 53
Buying
3
Outstanding checks
52, 54
Capital
3, 6
Owner's contribution
56
Cash
Owner's withdrawal
56
Cash withdrawal
Check, Outstanding
52, 54
Payment
2, 3
Check payment
54
Post-closing trial balance
58
Closed-out account
55
Prepaid insurance
43
Closing entries
55
Prepaid rent
43
Closing periods
41
Purchase
Contra-asset
49, 51
Credits
9-12
Receiving
Reconciliation, Account
51-55
Debits
9-12
Rent
Deposits-in-transit
52, 54
Rent expense
4, 44
86
Accounting Bank Reconciliation________
Retained earnings
55
Transactions
Revenue
Transaction types
8-9
Trial balance
16-17
Trial balance, Post-closing
58-59
Unearned revenues
43, 4748
Withdrawal, Owner's
56
Withdrawing
Salary
44
Salary expense
5, 44-46
Salary payable
45
Supplies
3, 4
T-accounts
11

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Bank Reconciliation and

______CHAPTER 1: Accounting Fundamentals

Assets, Liabilities and Equity.