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The Accounting Cycle

Chapter # 2
Resource person: Furqan-ul-haq Siddiqui
References:
Accounting the Basis for Business Decision
. By: Meigs, Williams, Haka, Betner (9
th
/11
th
edition)
Internet
The Role of Accounting Records
OMany businesses have several hundred or even
thousand business transactions each day.
Is it possible for business to prepare balance
sheet after every transaction.?
o Yes / No
OAccounting transactions are recorded in the
accounting books and at the end of year
accounting period, a balance sheet is prepared
from these transactions.
2
Illustration 3-1
Transaction Identification Process
Recording Process
Steps 1, 2, and 3 of Accounting Cycle
The General Journal
O Transactions are initially recorded in chronological order
in a journal before being transferred to the accounts.
O The general journal is an accounting log book that
contains a complete listing of a company's accounting
transactions documented in chronological order, and using
the double-entry method of bookkeeping.
O Entries are recorded by debiting one or more accounts
and crediting another one or more accounts with the
same total amount. The total amount debited and the total
amount credited should always be equal, thereby ensuring
the accounting equation is maintained.



Journalizing
OEntering transaction data in the journal is known
as journalizing.
OSeparate journal entries are made for each
transaction.
OA complete entry consists of:
a. the date of the transaction,
b. the accounts and amounts to be debited and
credited, and
c. a brief explanation of the transaction.
7
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
Debit & Credit
In accounting, "debit" and "credit" have the
following meanings:
Debit -"Enter in the left column of"
Credit- "Enter in the right column of
OThat's all. Debit refers to the left column;
credit refers to the right column.
O The term debit comes from the Latin debitum which means "that which is
owing" (the past participle of debitere "to owe"). Debit is abbreviated to Dr (for
debtor who owes money to the company). The term credit comes from the
Latin credere/credit meaning "to trust or believe"/"he trusts or believes" via
the French credit and the Italian credito

8
Each transaction consists of debits and credits
OFor Every Transaction:
The Value of Debits = The Value of Credits
The basic accounting equation is as follows:
Assets = Equity + Liabilities (A = E + L)

9
Expanded Accounting Equation
11
12
13
14
15
16
17
The entire group of accounts is kept together in an
accounting record called a ledger.
An account is an individual record showing
increases and decreases in a single balance sheet item
e.g. Asset, Liability, or Shareholders Equity item
Three parts:
1) The title of the account
2) A left or debit side
3) A right or credit side
Steps 1, 2, and 3 of Accounting Cycle
The Use of Accounts
Increases are
recorded on one
side of the T-
account, and
decreases are
recorded on the
other side.
Left
or
Debit
Side
Right
or
Credit
Side
Title of Account
20
Posting Journal Entries to the Ledger
Accounts
Posting involves copying information from
the journal to the ledger accounts.
21
22
23
Account Name
Debit / Dr. Credit / Cr.
Debits and Credits
If Debit entries are greater than Credit entries, the account will
have a debit balance.
$10,000 Transaction #2 $3,000
$15,000
8,000 Transaction #3
Balance
Transaction #1
Account Name
Debit / Dr. Credit / Cr.
Debits and Credits
If Credit entries are greater than Debit entries, the account will
have a credit balance.
$10,000 Transaction #2 $3,000
$1,000
8,000 Transaction #3
Balance
Transaction #1
General Ledger
Cash
Date Debit Credit Balance
2003
May 1 8,000 8,000
2 2,500 5,500
This ledger format is referred to as a
running balance (as opposed to simple
T accounts).
Ledger Accounts After Posting
27
28
Net income is not an asset its an increase in
owners equity from profits of the business.
A = L + OE
Increase Decrease Increase
Either (or both) of these
effects occur as net income
is earned . . .
. . . but this is
what net income
really means.
What is Net Income?
A = L + OE
Retained Earnings
Capital
Stock
Retained
Earnings
The balance in the Retained Earnings account represents the
total net income of the corporation over the entire lifetime of the
business, less all amounts which have been distributed to the
stockholders as dividends.
Net Income = Revenue - Expenses

The price for goods
sold
and services rendered
during a given
accounting period.
Increases
owners equity.
The costs of goods
and services used up
in the process of
earning revenue.
Decreases
owners equity.
The Realization Principle:
When To Record Revenue
Realization Principle
Revenue should be
recognized at the time
goods are sold and
services are rendered.
On July 25 a radio station contracts with a car
dealership to air a series of one-minute
advertisements during August. If all of the agreed-
upon ads are aired in August, but payment for the
ads is not received until September, in which
month should the station recognize the advertising
revenue?
The month in which it rendered the services that
earned the advertising revenue.
In other words, revenue is recognized when it is
earned, without regard to when a contract is signed
or when cash payment for providing goods or
services is received. 33
The Matching Principle:
When To Record Expenses
Matching Principle
Expenses should be
recorded in the
period in which they
are used up.
The salaries earned by a companys marketing
team for serving customers in July are not paid
until early August. In which month should these
salaries be regarded as expensesJuly or August?

The answer is July, because July is the month in
which the marketing teams services helped to
produce revenue.
In deciding when to report an expense in the income
statement, the critical question is, In what period
does the cash expenditure help to produce
revenue? not, When does the payment of cash
occur?
35
Expenditures Benefiting More than
One Accounting Period
Many expenditures made by a business benefit two
or more accounting periods.
If a company prepares monthly income statements,
then allocates only proportion of expense which is
actually incurred for that month.
If the 12-month Insurance policy costs $2,400, the
insurance expense for each month amounts to $200
($2,400 cost/12 months).
36
The Accrual & Cash Basis of Accounting
The method of recognizing revenue in the accounting
records when it is earned and recognizing expenses
when the related goods or services are used is called the
accrual basis of accounting.
The purpose of accrual accounting is to measure the
profitability of the economic activities conducted during
the accounting period.
In cash basis of accounting, revenue is recognized
when cash is collected from the customer, rather than
when the company sells goods or renders services and
same with expenses.
37
Expanded Accounting Equation
GENERAL JOURNAL
J1
Date Account Titles and Explanation Ref. Debit Credit
2002
July 1 Cash 20,000
K. Browne, Capital 20,000
(Invested cash in the
business)
If an entry involves only two accounts, one debit and one
credit, it is considered a simple entry.
SIMPLE AND COMPOUND JOURNAL ENTRIES
When three or more accounts are required
in one journal entry, the entry is referred to
as a compound entry.
COMPOUND JOURNAL ENTRY
2
1
3
GENERAL JOURNAL
J1
Date Account Titles and Explanation Ref. Debit Credit
2002
July 1 Delivery Equipment 14,000
Cash 8,000
Accounts Payable 6,000
(Purchased truck for cash
with balance on account)
GENERAL JOURNAL
J1
Date Account Titles and Explanation Ref. Debit Credit
2002
July 1 Cash 8,000
Delivery Equipment 14,000
Accounts Payable 6,000
(Purchased truck for cash
with balance on account)
COMPOUND JOURNAL ENTRY
This is the wrong format; all debits must be listed
before the credits are listed.
Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
Make end-of-
accounting period
adjustments.
Prepare adjusted
trial balance.
Prepare
financial
statements.
Prepare after closing
trial balance.
Journalize and
post closing
entries.
The Accounting Cycle
The Trial Balance
Before using the account balances to prepare a balance
sheet, it is desirable to prove that the total of accounts
with debit balances is in fact equal to the total of
accounts with credit balances.
This proof of the equality of debit and credit balances is
called a trial balance.
A trial balance is a two-column schedule listing the
names and balances of all the accounts in the order in
which they appear in the ledger ;
the debit balances are listed in the left-hand column and
the credit balances in the right-hand column.
The totals of the two columns should agree.
43
that the trial balance contains both balance sheet and income
statement accounts.
Suppose that the debit and credit totals of the trial balance
do not agree. This situation indicates that one or more errors
have been made.
Typical of such errors are;
1. the posting of a debit as a credit, or vice versa;
2. arithmetic mistakes in determining account balances;
3. clerical errors in copying account balances into the trial
balance;
4. listing a debit balance in the credit column of the trial
balance, or vice versa; and
5. errors in addition of the trial balance.
44
Adjusting Entries
Adjusting entries are journal entries usually made
at the end of an accounting period to allocate income
and expenditure to the period in which they actually
occurred.
Adjusting Entries bring certain account balances up
to date at the end of the accounting period.
They are sometimes called Balance Day adjustments
because they are made on balance day.
Adjusting Entries are necessary when accrual
basis accounting is used.


45
Reason for Adjustments
It can be inefficient and costly to account for certain types
of transactions on a daily basis.

An example of the inefficiency of recording certain
transactions follows:
O Each time an employee removes a pen from the supplies closet,
a journal entry debiting Supplies Expense and crediting
Supplies for $1.25 (estimated cost of pen) should be recorded.
However, it would be very costly and inefficient to try to keep
up with each little transaction like this. So instead, we wait
until the end of the accounting period and determine the total
amount of supplies used. Then we make one adjusting entry to
account for all the supplies used during the period.
Generally a month, a quarter, or a year.
Fiscal year vs. calendar year
Also known as the Periodicity Assumption
Accountants divide the economic life of a business
into artificial time periods (Time Period
Assumption).
Jan. Feb. Mar. Apr. Dec.
. . . . .
Timing Issues
GAAP relationships in revenue and expense recognition
Adjusting entries are required each time financial statements
are prepared.
Adjusting entries can be classified as
Prepayments (prepaid expenses or unearned revenues),
accruals (accrued revenues or accrued expenses), or
estimates (Depriciation).

Prepayments
1. Prepaid Expenses Expenses paid in cash and recorded
as assets before they are used or consumed.
2. Unearned Revenues Revenues received in cash and
recorded as liabilities before they are earned.

Accruals
1. Accrued Revenues Revenues earned but not
yet received in cash or recorded.
2. Accrued Expenses Expenses incurred but not
yet paid in cash or recorded.

Estimates

1. Depreciation Allocation of the cost of capital
assets to expense over their useful lives.


ADJUSTED TRIAL BALANCE
An Adjusted Trial Balance is prepared after all
adjusting entries have been journalized and posted.
It shows the balances of all accounts at the end of
the accounting period and the effects of all financial
events that have occurred during the period.
It proves the equality of the total debit and credit
balances in the ledger after all adjustments have
been made.
Financial statements can be prepared directly from
the adjusted trial balance.
Debit Credit Debit Credit
Cash 15,200 $ 15,200 $
Accounts Receivable 200
Advertising Supplies 2,500 1,000
Prepaid Insurance 600 550
Office Equipment 5,000 5,000
Accumulated Amort'n. 83 $
Notes Payable 5,000 $ 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 800
Salaries Payable 1,200
Interest Payable 25
C.R. Byrd, Capital 10,000 10,000
C.R. Byrd, Drawings 500 500
Service Revenue 10,000 10,600
Adv. Supplies Expense 1,500
Amortization Expense 83
Insurance Expense 50
Salaries Expense 4,000 5,200
Rent Expense 900 900
Interest Expense 25
28,700 $ 28,700 $ 30,208 $ 30,208 $
Pioneer Advertising Agency
Trial Balance
October 31, 2002
Before Adjustment After Adjustment
Trial Balance And Adjusted Trial Balance Compared
Preparing Financial Statements
Financial statements can be prepared directly from an
adjusted trial balance.
1. The income statement is prepared from the revenue
and expense accounts.
2. The statement of owners equity is derived from the
owners capital and drawings accounts and the net
income (or net loss) shown in the income
statement.
3. The balance sheet is then prepared from the asset
and liability accounts and the ending owners
capital balance as reported in the statement of
owners equity.
Preparation of the income statement and the statement of
owners equity from the adjusted trial balance
Revenues
Service Revenue 10,600 $
Expenses
Adv. Supplies Expense 1,500 $
Amortization Expense 83
Insurance Expense 50
Salaries Expense 5,200
Rent Expense 900
Interest Expense 25
Total Expenses 7,758
Net Income 2,842 $
Pioneer Advertising Agency
Income Statement
For the Month Ended October 31, 2002
C.R. Byrd, Capital, October 1 - $
Add: Investments 10,000
Net income 2,842
12,842
Less: Drawings 500
C.R. Byrd, Capital, October 31 12,342 $
Statement of Owner's Equity
For the Month Ended October 31, 2002
Pioneer Advertising Agency
Debit Credit
Cash 15,200 $
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000
Accumulated Amort'n. 83 $
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 25
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawings 500
Service Revenue 10,600
Adv. Supplies Expense 1,500
Amortization Expense 83
Insurance Expense 50
Salaries Expense 5,200
Rent Expense 900
Interest Expense 25
30,208 $ 30,208 $
Pioneer Advertising Agency
Adjusted Trial Balance
October 31, 2002
Debit Credit
Cash 15,200 $
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000
Accumulated Amort'n. 83 $
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 25
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawings 500
Service Revenue 10,600
Adv. Supplies Expense 1,500
Amortization Expense 83
Insurance Expense 50
Salaries Expense 5,200
Rent Expense 900
Interest Expense 25
30,208 $ 30,208 $
Pioneer Advertising Agency
Adjusted Trial Balance
October 31, 2002
Cash 15,200 $
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000 $
Less: Accumulated Amortization 83 4,917
Total Assets 21,867 $
Liabilities and Owner's Equity
Liabilities
Notes Payable 5,000 $
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 25
Total Liabilities 9,525 $
Owner's Equity
C.R. Byrd, Capital 12,342
Total Liabilities and Owner's Equity 21,867 $
October 31, 2002
Assets
Pioneer Advertising Agency
Balance Sheet
Preparation of the balance sheet from the adjusted
trial balance
From
Statement
of Owners
Equity
56
The Accounting Worksheet
Used to help move data from the trial balance to the
financial statements
An internal document not financial statement
multiple-column form used for the adjustment
process and preparing financial statements
working tool for the accountant
not a permanent accounting record
Eases preparation of adjusting entries and financial
statements

A work sheet is not a permanent
accounting record
When it is used:
Efinancial statements are prepared from the
work sheet
Eadjustments are journalized and posted from
the work sheet after financial statements, so
management can receive the financial
statements more quickly
Remember
To Prepare A Work Sheet
1. Prepare the trial balance
2. Enter adjustments in the adjustments columns
3. Enter adjusted balances in adjusted trial balance
columns
4. Extend adjusted trial balance amounts to the
appropriate financial statement columns
5. 5 Total the statement columns, compute net income
(loss), and complete the work sheet
Now, lets see how this works!
Example of a Work Sheet
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable 6,200
Salaries payable -
Unearned revenue 3,000
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 5,800
Rental revenue 300
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300
Adjusted
Trial Balance Adjustments
Unadjusted
Trial Balance
FastForward
Work Sheet
For Month Ended December 31, 2004
First, enter
the
unadjusted
trial balance
amounts to
the
worksheet!
Here are our adjusting entries for
December.
a) Insurance expense 100
Prepaid insurance 100
b) Supplies expense 1050
Supplies 1050
c) Depreciation expense 375
Accum. Depr. Equip. 375
Here Are More Adjusting Entries
for December.
d) Unearned revenue 250
Consulting Revenue 250
e) Salaries Expense 210
Salaries Payable 210
f) Accounts Receivable 1,800
Consulting Revenue 1,800



Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200
Salaries payable - e 210
Unearned revenue 3,000 d 250
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals 45,300 45,300 3,785 3,785
Adjusted
Trial Balance Adjustments
Unadjusted
Trial Balance
Next, enter the
adjustments!
FastForward
Work Sheet
For Month Ended December 31, 2004
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
C. Taylor, Capital 30,000 - 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals 45,300 45,300 3,785 3,785 47,685 47,685
Adjusted
Trial Balance Adjustments
Unadjusted
Trial Balance
Prepare the
adjusted trial
balance!
FastForward
Work Sheet
For Month Ended December 31, 2004
FastForward
Work Sheet
For Month Ended December 31, 2004
Then, extend the adjusted trial balance
amounts to the financial statements!
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Balance Sheet &
Statement of Equity Statement
Adjusted
Trial Balance
Income
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable 1,800 1,800
Supplies 8,670 8,670
Prepaid insurance 2,300 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. 375 375
Accounts payable 6,200 6,200
Salaries payable 210 210
Unearned revenue 2,750 2,750
C. Taylor, Capital 30,000 30,000
C. Taylor, Withdrawals 600 600
Consulting revenue 7,850 7,850
Rental revenue 300 300
Depr. expense 375 375
Salaries expense 1,610 1,610
Insurance expense 100 100
Rent expense 1,000 1,000
Supplies expense 1,050 1,050
Utilities expense 230 230
Totals 47,685 47,685 4,365 8,150 43,320 39,535
Net income 3,785 3,785
8,150 8,150 43,320 43,320
Balance Sheet &
Statement of Equity Statement
Adjusted
Trial Balance
Income
FastForward
Work Sheet
For Month Ended December 31, 2004
Total statement columns, compute income or loss, and
balance columns.
FastForward
Income Statement
For the Month Ended December 31, 2004
Revenues:
Consulting revenue 7,850 $
Rental revenue 300
Total revenues 8,150
Operating expenses:
Depr. expense - Equip. 375 $
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365
Net income 3,785 $
OPrepare the Income
Statement.
Prepare the Financial
Statements
A work sheet
does not
substitute for
financial
statements.
OPrepare the Statement of
Changes in Owners Equity.
FastForward
Income Statement
For the Month Ended December 31, 2004
Revenues:
Consulting revenue 7,850 $
Rental revenue 300
Total revenues 8,150
Operating expenses:
Depr. expense - Equip. 375 $
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365
Net income 3,785 $
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2004
C. Taylor, Capital 12/1/04 $ -0-
Add: Net income 3,785 $
Investment by owner 30,000 33,785
Total 33,785
Less: Withdrawal by owner 600
C. Taylor, Capital 12/31/04 33,185 $


FastForward
Balance Sheet
December 31, 2004
Assets
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000 $
Less: accum. depr. (375) 25,625
Total assets 42,345 $
Liabilities
Accounts payable 6,200 $
Salaries payable 210
Unearned consulting revenues 2,750
Total liabilities 9,160 $
Owner's Equity
C.Taylor, Capital 33,185
Total liabilities and equity 42,345 $
OPrepare the
Balance Sheet.
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2004
C. Taylor, Capital 12/1/04 $ -0-
Add: Net income 3,785 $
Investment by owner 30,000 33,785
Total 33,785
Less: Withdrawal by owner 600
C. Taylor, Capital 12/31/04 33,185 $


70
Closing Entries
Lets, we are reporting sales and expenses for
January, for example, February sales and expenses
should start with a zero balance to properly report
sales, expenses, and net income only for the month of
February.
Revenue, expense, and capital withdrawal (dividend)
accounts are temporary accounts that are reset at the
end of the accounting period so that they will have
zero balances at the start of the next period.
OClosing entries are the journal entries used to
transfer the balances of these temporary accounts to
permanent accounts.

Temporary vs. Permanent Accounts
TEMPORARY (NOMINAL) PERMANENT (REAL)
These accounts are closed These accounts are not
closed


All revenue accounts All asset accounts

All expense accounts All liability accounts


Owners drawing Owners capital account
Now, lets talk about closing entries and income summary!
CLOSING ENTRIES
Closing entries
E Transfer net income (loss) and owners drawings to
owners capital
E Journalizing and posting is a required step in the
accounting cycle
Income Summary
E A temporary account
E Used in closing revenue and expense accounts
E Minimizes the details in the permanent owners capital
account
Resets revenue,
expense and
withdrawal account
balances to zero at the
end of the period.
Helps summarize a
periods revenues and
expenses in the
Income Summary
account.
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
Closing Process
Temporary
Accounts
Revenues
Income
Summary
E
x
p
e
n
s
e
s

W
i
t
h
d
r
a
w
a
l
s

Permanent
Accounts
Assets
L
i
a
b
i
l
i
t
i
e
s

O
w
n
e
r

s

C
a
p
i
t
a
l

The closing process
applies only to
temporary accounts.
Temporary and Permanent
Accounts
Lets see how the
closing process
works!
Recording Closing Entries
OClose Revenue accounts
to Income Summary.

OClose Expense accounts
to Income Summary.

OClose Income Summary
account to Owners
Capital.

OClose Withdrawals to
Owners Capital.
Balances before closing.
Income Summary
Owner's Capital
30,000
30,000
Revenue Accounts
25,000
25,000
Withdrawals Account
5,000
5,000
Expense Accounts
10,000
10,000
Closing Process
Income Summary
25,000
25,000
OClose Revenue
accounts to Income
Summary.
Owner's Capital
30,000
30,000
Revenue Accounts
25,000 25,000
-
Withdrawals Account
5,000
5,000
Expense Accounts
10,000
10,000
Closing Process
Income Summary
10,000 25,000
15,000
Owner's Capital
30,000
30,000
Revenue Accounts
25,000 25,000
-
Withdrawals Account
5,000
5,000
OClose Expense
accounts to Income
Summary.
Expense Accounts
10,000 10,000
-
Closing Process
The balance in Income
Summary equals net
income.
Owner's Capital
30,000
15,000
45,000
Owner's Capital
30,000
15,000
45,000
Withdrawals Account
5,000
5,000
Withdrawals Account
5,000
5,000
OClose Income
Summary to
Owners Capital.
Revenue Accounts
25,000 25,000
-
Expense Accounts
10,000 10,000
-
Income Summary
10,000 25,000
15,000
-
Closing Process
Owner's Capital
30,000
15,000
45,000
Owner's Capital
5,000 30,000
15,000
40,000
Withdrawals Account
5,000
5,000
Withdrawals Account
5,000 5,000
-
Revenue Accounts
25,000 25,000
-
Expense Accounts
10,000 10,000
-
Income Summary
10,000 25,000
15,000
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Closing Process
OClose Withdrawals
account to Owners
Capital.
FastForward
Adjusted Trial Balance
December 31, 2004
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. 375 $
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals 47,685 $ 47,685 $
Using the
adjusted trial
balance, lets
prepare the
closing
entries for
FastForward.
OClose Revenue
accounts to
Income Summary.
FastForward
Adjusted Trial Balance
December 31, 2004
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. 375 $
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals 47,685 $ 47,685 $
OClose Revenue Accounts to
Income Summary
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150
Now, lets look at the ledger accounts after
posting this closing entry.
Now, lets look at the ledger accounts after
posting this closing entry.
O Close Expense Accounts to
Income Summary
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Income Summary
4,365 7,850
300
3,785
Utilities Expense
230 230
-
Rent Expense
1,000 1,000
-
Net Income
O Close Expense Accounts to
Income Summary
O Close Expense Accounts to Income
Summary







Supplies Expense
1,050 1,050
-
Depreciation
Expense- Eq.
375 375
-
Salaries Expense
1,610 1,610
-
Insurance Expense
100 100
-
OClose Income
Summary to
Owners Capital.
FastForward
Adjusted Trial Balance
December 31, 2004
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. 375 $
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals 47,685 $ 47,685 $
Now, lets look at the ledger accounts after
posting this closing entry.
OClose Income Summary to
Owners Capital
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785
C. Taylor, Capital
30,000
3,785
33,785
OClose Income Summary to
Owners Capital
OClose Income Summary to Owners
Capital
Income Summary
4,365 7,850
3,785 300
-
OClose
Withdrawals to
Owners Capital.
FastForward
Adjusted Trial Balance
December 31, 2004
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. 375 $
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 600
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals 47,685 $ 47,685 $
Now, lets look at the ledger accounts after
posting this closing entry.
O Close Withdrawals to
Owners Capital
Dec. 31 C. Taylor, Capital 600
C. Taylor, Withdrawals 600
C. Taylor, Capital
600 30,000
3,785
33,185
C. Taylor,
Withdrawals
600 600
-
O Close Withdrawals to
Owners Capital
About Closing Entries
Be Careful!
Remember: owners drawing does not move to
the Income Summary account. Owners drawing
is not an expense and it is not a factor in
determining net income.
POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized
the post-closing trial balance is prepared from
the ledger.

The purpose of this trial balance is to
prove the equality of the permanent account
balances that are carried forward into the next
accounting period.
Lets look at
FastForwards
post-closing trial
balance.
Post-Closing Trial Balance
List of permanent
accounts and their
balances after posting
closing entries.

Total debits and
credits must be equal.
FastForward
Post-Closing Trial Balance
December 31, 2004
Cash 3,950 $
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equipment 375 $
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C.Taylor, Capital 33,185
Totals 42,720 $ 42,720 $
Post-Closing Trial Balance
Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare trial
balance.
Make end-of-
accounting period
adjustments.
Prepare adjusted
trial balance.
Prepare
financial
statements.
Prepare after closing
trial balance.
Journalize and
post closing
entries.
The Accounting Cycle
What is the difference between accounts
payable and notes payable?
Notes Payable involves a written promissory note. For
example, if your company wishes to borrow $100,000
from its bank, the bank will require company officers to
sign a formal loan agreement before the bank provides
the money.
Contrast the bank loan with phoning one of your
companys suppliers and asking for a delivery of
products or supplies. On the next day the products
arrive and you sign the delivery receipt. A few days
later your company receives an invoice from the
supplier and it states that the payment for the products
is due in 30 days.
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This transaction did not involve a promissory note. As a
result, this transaction is recorded in your companys
general ledger account Accounts Payable.
Accounts payable are amounts due to vendors in the
normal course of business, such as for rent and utilities,
supplies, and the like.
98