Chapter
4
McGraw-Hill/Irwin
Completing the
Accounting Cycle
© The McGraw-Hill Companies, Inc., 2005
Learning objective
1.
2.
3.
4.
5.
6.
Use of Worksheet
Closing Process
Accounting Cycle
Classification of Financial Statement
Decision Analysis: Current ratio
Review Exercise
•
McGraw-Hill/Irwin
(6 Problems, Please be Prepared)
© The McGraw-Hill Companies, Inc., 2005
FastForward
Work Sheet
For Month Ended December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
6,200
3,000
30,000
600
5,800
300
1,400
1,000
230
45,300
Cr.
Adjusted
Trial Balance
Dr.
Cr.
First, enter
the
unadjusted
amounts to
the
worksheet.
45,300
© The McGraw-Hill Companies, Inc., 2005
FastForward
Work Sheet
For Month Ended December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
f
6,200
3,000 d
30,000
Adjusted
Trial Balance
Dr.
Cr.
Cr.
Next, enter the
adjustments.
1,800
b
a
1,050
100
c
375
e
210
d
f
250
1,800
250
600
5,800
300
1,400
1,000
230
45,300
45,300
c
e
a
375
210
100
b
1,050
3,785
3,785
© The McGraw-Hill Companies, Inc., 2005
Prepare
adjusted trial
balance.
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin
FastForward
Work Sheet
For Month Ended December 31, 2004
Unadjusted
Trial Balance
Dr.
Cr.
3,950
9,720
2,400
26,000
Adjustments
Dr.
f
6,200
3,000 d
30,000
Cr.
1,800
b
a
1,050
100
c
375
e
210
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
250
600
600
5,800
d
f
250
1,800
7,850
300
1,400
1,000
230
45,300
45,300
375
6,200
210
2,750
30,000
300
c
e
a
375
210
100
b
1,050
3,785
3,785
375
1,610
100
1,000
1,050
230
47,685
47,685
© The McGraw-Hill Companies, Inc., 2005
FastForward
Sort adjusted
trial balance
Work Sheet
amounts
to Ended
financial
statements.
For Month
December
31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
McGraw-Hill/Irwin
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
Income
Statement
Dr.
Cr.
Balance Sheet &
Statement of Equity
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
375
6,200
210
2,750
30,000
375
6,200
210
2,750
30,000
600
600
7,850
300
7,850
300
375
1,610
100
1,000
1,050
230
47,685
47,685
375
1,610
100
1,000
1,050
230
4,365
8,150
43,320
39,535
© The McGraw-Hill Companies, Inc., 2005
FastForward
Total statement columns,
compute income or loss, and
Work Sheet
balance
columns.
For Month
Ended
December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr. - Equip.
Accounts payable
Salaries payable
Unearned revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depr. expense
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
Net income
McGraw-Hill/Irwin
Adjusted
Trial Balance
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
Income
Statement
Dr.
Balance Sheet &
Statement of Equity
Dr.
Cr.
3,950
1,800
8,670
2,300
26,000
Cr.
375
6,200
210
2,750
30,000
375
6,200
210
2,750
30,000
600
600
7,850
300
7,850
300
375
1,610
100
1,000
1,050
230
47,685
Profit
Total
expenses
47,685
375
1,610
100
1,000
1,050
230
4,365
3,785
8,150
Total
revenue
8,150
8,150
43,320
39,535
43,320
3,785
43,320
© The McGraw-Hill Companies, Inc., 2005
Prepare the Financial Statements
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
McGraw-Hill/Irwin
Prepare the Income
Statement.
A work sheet
does not
substitute for
financial
statements.
© The McGraw-Hill Companies, Inc., 2005
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
Prepare the Statement of
Changes in Owner’s Equity.
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2004
C. Taylor, Capital 12/1/04
Add: Net income
$ 3,785
Investment by owner
30,000
Total
Less: Withdrawal by owner
C. Taylor, Capital 12/31/04
McGraw-Hill/Irwin
$
-0-
33,785
33,785
600
$ 33,185
© The McGraw-Hill Companies, Inc., 2005
FastForward
Statement of Changes in Owner's Equity
For the Month Ended December 31, 2004
C. Taylor, Capital 12/1/04
Add: Net income
$
Investment by owner
Total
Less: Withdrawal by owner
C. Taylor, Capital 12/31/04
$
3,785
30,000
$
-033,785
33,785
600
33,185
Prepare the
Balance Sheet.
FastForward
Balance Sheet
December 31, 2004
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Less: accum. depr.
Total assets
$
$
26,000
(375)
3,950
1,800
8,670
2,300
$
25,625
42,345
$
9,160
$
33,185
42,345
Liabilities
Accounts payable
$
Salaries payable
Unearned consulting revenues
Total liabilities
6,200
210
2,750
Owner's Equity
C.Taylor, Capital
Total liabilities and equity
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Benefits of a Work Sheet
Aids the
preparation of
financial
statements.
Assists in
planning and
organizing an
audit.
Reduces
possibility of
errors.
Helps in
preparing
interim
financial
statements.
Links accounts
and their
adjustments.
McGraw-Hill/Irwin
Not a
required
report.
Shows the
effects of
proposed
transactions.
© The McGraw-Hill Companies, Inc., 2005
2. Closing Process
 Resets revenue,
expense and
withdrawal account
balances to zero at
the end of the period.
 Helps summarize a
period’s revenues
and expenses in the
Income Summary
account.
McGraw-Hill/Irwin
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
© The McGraw-Hill Companies, Inc., 2005
Temporary and Permanent Accounts
 Temporary accounts accumulate data related
to one accounting period.
 Permanent accounts report on activities
related to one or more future accounting
periods.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Temporary and Permanent Accounts
Income
Summary
McGraw-Hill/Irwin
Liabilities
Permanent
Accounts
Owner’s
Capital
Temporary
Accounts
Assets
Withdrawals
Expenses
Revenues
The closing process
applies only to
temporary accounts.
© The McGraw-Hill Companies, Inc., 2005
Recording Closing Entries
 Close Revenue accounts
to Income Summary.
 Close Expense accounts
to Income Summary.
Let’s see how the
closing process
works!
 Close Income Summary
account to Owner’s
Capital.
 Close Withdrawals to
Owner’s Capital.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
FastForward
Adjusted Trial Balance
December 31, 2004
Cash
$
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
McGraw-Hill/Irwin
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
7,850
300
375
1,610
100
1,000
1,050
230
47,685 $
Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.
47,685
© The McGraw-Hill Companies, Inc., 2005
FastForward
Adjusted Trial Balance
December 31, 2004
Cash
$
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
McGraw-Hill/Irwin
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
Close Revenue
accounts to
Income Summary.
7,850
300
375
1,610
100
1,000
1,050
230
47,685 $
47,685
© The McGraw-Hill Companies, Inc., 2005
 Close Revenue Accounts to Income
Summary
Dec. 31 Consulting revenue
Rental revenue
Income summary
7,850
300
8,150
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
 Close Revenue Accounts to Income
Summary
Consulting Revenue
7,850
7,850
Income Summary
7,850
300
Rental Revenue
300
300
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
FastForward
Adjusted Trial Balance
December 31, 2004
Cash
$
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
McGraw-Hill/Irwin
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
Close Expense
accounts to
Income Summary.
7,850
300
375
1,610
100
1,000
1,050
230
47,685 $
47,685
© The McGraw-Hill Companies, Inc., 2005
 Close Expense Accounts to Income
Summary
Dec. 31 Income summary
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
4,365
375
1,610
100
1,000
1,050
230
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005

Close
CloseExpense
ExpenseAccounts
AccountstotoIncome
Income
Summary
Summary
Depreciation
Expense- Eq.
375
375
-
Rent Expense
1,000
1,000
-
Salaries Expense
1,610
1,610
-
Supplies Expense
1,050
1,050
-
Insurance Expense
100
100
-
Utilities Expense
230
230
-
McGraw-Hill/Irwin
Income Summary
4,365
7,850
300
3,785
Net Income
© The McGraw-Hill Companies, Inc., 2005
FastForward
Adjusted Trial Balance
December 31, 2004
Cash
$
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
McGraw-Hill/Irwin
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
Close Income
Summary to
Owner’s Capital.
7,850
300
375
1,610
100
1,000
1,050
230
47,685 $
47,685
© The McGraw-Hill Companies, Inc., 2005
 Close Income Summary to Owner’s
Capital
Dec.
31 Income summary
C. Taylor, Capital
3,785
3,785
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005

Close
CloseIncome
IncomeSummary
SummarytotoOwner’s
Owner’s
Capital
Capital
C. Taylor, Capital
30,000
3,785
Income Summary
4,365
7,850
3,785
300
-
33,785
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
FastForward
Adjusted Trial Balance
December 31, 2004
Cash
$
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equip.
Accounts payable
Salaries payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Depreciation expense-Equipment
Salaries expense
Insurance expense
Rent expense
Supplies expense
Utilities expense
Totals
$
McGraw-Hill/Irwin
3,950
1,800
8,670
2,300
26,000
$
375
6,200
210
2,750
30,000
600
Close
Withdrawals to
Owner’s Capital.
7,850
300
375
1,610
100
1,000
1,050
230
47,685 $
47,685
© The McGraw-Hill Companies, Inc., 2005
 Close Withdrawals to Owner’s
Capital
Dec.
31 C. Taylor, Capital
600
C. Taylor, Withdrawals
600
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
 Close Withdrawals to Owner’s
Capital
C. Taylor,
Withdrawals
600
600
-
McGraw-Hill/Irwin
C. Taylor, Capital
600
30,000
3,785
33,185
© The McGraw-Hill Companies, Inc., 2005
Post-Closing Trial Balance
 List of permanent
accounts and their
balances after posting
closing entries.
Let’s look at
FastForward’s
post-closing trial
balance.
 Total debits and
credits must be equal.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Post-Closing Trial Balance
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
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
3. Accounting cycle
1. Analyze transactions
9. Prepare Post-closing
Trial balance
2. Journalize
8. Close
3. Post
7. Prepare statements
4. Prepare unadjusted
Trial balance
McGraw-Hill/Irwin
5. Adjust
6. Prepare adjusted
Trial balance
© The McGraw-Hill Companies, Inc., 2005
Let’s discuss
the
components
of a classified
balance
sheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
4. Classified Balance Sheet
Categories of a Classified Balance Sheet
Assets
Liabilities and Equity
Current Assets
Current Liabilities
Noncurrent Assets
Noncurrent Liabilities
Long-Term Investments Equity
Plant Assets
Intangible Assets
Current items are those expected to come due (both
collected and owed) within the longer of one year or
the company’s normal operating cycle.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Classified Balance Sheet
 Operating cycle is the time span from when cash is
used to acquire goods and services until cash is
received from the sale of those goods and services.
 Operating cycle of supermarket (a few weeks) vs.
operating cycle of a construction company (several
years).
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
Current assets
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expenses
Total current assets
Long-term investments
Notes receivable
Investments in stocks and bonds
Land held for future expansion
Total investments
Plant assets
Store equipment
Less accumulated depreciation
Buildings
Less accumulated depreciation
Land
Total plant assets
Intangible assets
Total assets
$ 6,500
2,100
4,400
27,500
2,400
$ 42,900
1,500 to be
Current assets are expected
18,000
48,000
sold, collected, or used within
one
67,500
year or the company’s operating
$ 33,200
cycle. 8,000 25,200
McGraw-Hill/Irwin
170,000
45,000
125,000
73,200
223,400
10,000
$ 343,800
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
Current assets
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expenses
Total current assets
Long-term investments
Notes receivable
Investments in stocks and bonds
Land held for future expansion
Total investments
Plant assets
Store equipment
Less accumulated depreciation
Buildings
Less accumulated depreciation
Land
Total plant assets
Intangible assets
Total assets
$ 6,500
2,100
4,400
27,500
2,400
$ 42,900
1,500
18,000
48,000
67,500
$ 33,200
Long-term investments
are
8,000
25,200
expected to be held170,000
for the longer
45,000 125,000
of one year or the operating
73,200 cycle.
McGraw-Hill/Irwin
223,400
10,000
$ 343,800
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
Current assets
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expenses
Total current assets
Long-term investments
Notes receivable
Investments in stocks and bonds
Land held for future expansion
Total investments
Plant assets
Store equipment
Less accumulated depreciation
Buildings
Less accumulated depreciation
Land
Total plant assets
Intangible assets
Total assets
$ 6,500
2,100
4,400
27,500
2,400
$ 42,900
Plant assets are tangible long-lived
1,500
assets used to produce18,000
or sell
48,000
products and services. 67,500
McGraw-Hill/Irwin
$ 33,200
8,000
170,000
45,000
25,200
125,000
73,200
223,400
10,000
$ 343,800
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
ASSETS
Current assets
Cash
Short-term investments
Accounts receivable
Merchandise inventory
Prepaid expenses
Total current assets
Long-term investments
Notes receivable
Investments in stocks and bonds
Land held for future expansion
Total investments
Plant assets
Store equipment
Less accumulated depreciation
Buildings
Less accumulated depreciation
Land
Total plant assets
Intangible assets
Total assets
$ 6,500
2,100
4,400
27,500
2,400
$ 42,900
1,500
18,000
48,000
67,500
Intangible assets are long-term
$ 33,200
resources used to produce
8,000
25,200or sell
170,000
products and services
and that
45,000 125,000
73,200
lack physical form.
223,400
McGraw-Hill/Irwin
10,000
$ 343,800
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
Current liabilities
Accounts payable
Wages payable
Notes payable
Current portion of long-term liabilities
Total current liabilities
Long-term liabilities:
Notes payable (net of current portion)
Total liabilities
EQUITY
T. Hawk, Capital
Total liabilities and equity
$ 15,300
3,200
3,000
7,500
$ 29,000
150,000
$ 179,000
164,800
$ 343,800
Current liabilities are obligations due
within the longer of one year or the
company’s operating cycle.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
Current liabilities
Accounts payable
Wages payable
Notes payable
Current portion of long-term liabilities
Total current liabilities
Long-term liabilities:
Notes payable (net of current portion)
Total liabilities
EQUITY
T. Hawk, Capital
Total liabilities and equity
$ 15,300
3,200
3,000
7,500
$ 29,000
150,000
$ 179,000
164,800
$ 343,800
Long-term liabilities are obligations
not due within the longer of one year
or the company’s operating cycle.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Snowboarding Components
Balance Sheet
January 31, 2005
LIABILITIES
Current liabilities
Accounts payable
Wages payable
Notes payable
Current portion of long-term liabilities
Total current liabilities
Long-term liabilities:
Notes payable (net of current portion)
Total liabilities
EQUITY
T. Hawk, Capital
Total liabilities and equity
$ 15,300
3,200
3,000
7,500
$ 29,000
150,000
$ 179,000
164,800
$ 343,800
Equity is the owner’s claim on the
assets.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
5. Decision Analysis
- Current Ratio
Helps assess the company’s ability to
pay its debts in the near future
Liquidity measure
Current Assets
Current Ratio =
Current Liabilities
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Chapter
Review
Exercise
1-3
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Exercise 1: Business Entity (Chap 1)
Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.

Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.

Jo Chen and Al Fitch own Financial Services, a financial services provider. Neither Chen
nor Fitch

has personal responsibility for the debts of Financial Services.
Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally
liable for the debts of the business.

XLT Services does not have separate legal existence apart from the one person who
owns it.

BioProducts does not pay income taxes and has one owner.

Tampa Biz pays its own income taxes and has two owners.
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Exercise 1: Business Entity (Chap 1)
Sole proprietorship, Partnership, or Corporation?

Ownership of Spirit Company is divided into 1,000 shares of stock.
Characteristics Proprietorship Partnership Corporation
 Delta is owned by Sarah Gomez, who is personally liable for the debts of the business.
Business
entity
yes a financial services
yes provider. Neither
yesChen
 Jo Chen and
Al Fitch own Financial Services,
nor Fitch
Financial Services. yes
Legal
entity has personal responsibility
no for the debts of no
 Sung Kwon and Frank Heflin own Get-It-There, a courier service. Both are personally
Limited
liability
no
no
yes
liable for the debts of the business.
Unlimited
life
yes
 XLT Services
does not have separateno
legal existence apart no
from the one person
who
owns it.
Business
taxed
no
no
yes
 BioProducts does not pay income taxes and has one owner.
One
owner
allowed
yes
 Tampa
Biz pays
its own income taxesyes
and has two owners. no
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Exercise 2: Accounting Equation & F/S (Chap 2)
What is the number for ‘?’
December 31. 2004:
Assets
Liabilities
December 31 , 2005:
Assets
Liabilities
During year 2005:
Owner investments
Net income
Owner cash withdrawals
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A
$45,000
23,500
B
$35,000
22,500
C
$29,000
14,000
D
$80,000
38,000
E
$123,000
?
48,000
?
41,000
27,500
?
19,000
125,000
64,000
112,500
75,000
5,000
7,500
2,500
1,500
?
3,000
7,750
9,000
3,875
?
12,000
0
4,500
18,000
9,000
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Exercise 3: Account Type (Chap 2)
(1) What is the type of account as an asset, liability, equity, revenue, or expense?
(2) should we debit (Dr.) or credit (Cr.) the account when account increase?
(3) Which side is the normal balance of the account?
Type
Account increase Normal balance
Unearned Revenue
Accounts Payable
Postage Expense
Prepaid Insurance
Wages Expense
Land
Owner Capital
Accounts Receivable
Owner Withdrawals
Cash
Equipment
Fees Earned
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Review Accounts:
Asset Accounts
Cash
Land
Buildings
Asset
Accounts
Accounts
Receivable
Notes
Receivabl
e
Prepaid
Accounts
Equipment
Supplies
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Asset account
 Cash: reflects a company’s cash balance.
 Account receivable: held by a seller and refer
to promises of payment from customers to
sellers. (credit sales or sales on account)
 Note receivable: a written promise of another
entity to pay a definite sum of money on a
specified future date to the holder of the note.
 Prepaid account: represent prepayments of
future expenses. (ex. prepaid insurance)
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Asset account
 Supplies: belong to asset until they are used.
When they are used, their costs are
transferred from the asset accounts to
expense accounts.
 Equipment: When it is used and gets worn
down its cost is gradually reported as an
expense (called depreciation).
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Liability Accounts
Accounts
Payable
Notes
Payable
Liability
Accounts
Accrued
Liabilities
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Unearned
Revenues
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Liability accounts
 Accounts payable: oral or implied promises to
pay later, commonly arise from purchases of
merchandise.
 Note payable: a formal promise, usually
denoted by the signing of a promissory note, to
pay a future amount.
 Accrued liabilities: They are amounts owed
that are not yet paid (ex. Wages payable,
taxes payable).
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Liability accounts
 Unearned revenue: a liability that is settled in
the future when a company delivers its
products or services. When customers pay in
advance for products or services (before
revenue is earned), the revenue recognition
principle requires that the seller consider this
payment as unearned revenue (ex. Unearned
ticket revenue).
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Equity Accounts
Owner’s
Capital
Owner’s
Withdrawals
Equity
Accounts
Revenues
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Expenses
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Equity Accounts
Assets
+
Owner’s
Capital
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=
Liabilities
–
Owner’s
Withdrawals
+
Equity
–
+
Revenues
Expenses
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Equity accounts
 Revenues: gross increase in equity from a
company’s earnings activities.
 Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owner’s
equity.
 Owner investments: the amounts an owner
puts into the company.
 Owner withdrawals: the amounts take away
from the company for personal use.
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Exercise 4: T-Account, Debit & Credit (Chap 2)
Use the information in each of the following separate
cases to calculate the unknown amount:
•
During October, Shandra Company had $97,500 of cash receipts and
$101,250 of cash disbursements. The October 31 Cash balance was
$16,800. What is the cash balance on September 30.
•
On September 30, Li Ming Co. had a $97,500 balance in Accounts
Receivable. During October, the company collected $88,950 from its credit
customers. The October 31 balance in Accounts Receivable was
$100,500. Determine the amount of sales on account that occurred in
October.
•
Nasser Co. had $147,000 of accounts payable on September 30 and
$136,500 on October 31. Total purchases on account during October were
$270,000. how much cash was paid on accounts payable during October.
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Exercise 5: Journal Entry, Posting, & Trial Balance (Chap 2)
Roberto Ricci opens a computer consulting business called Viva Consultants and
completes the following transactions in its first month of operations:
Apr. 1: Ricci invests $100,000 cash along with office equipment valued at $24,000 in the
business.
Apr. 2: Prepaid $7,200 cash for twelve months' rent for office space.
Apr. 3: Made credit purchases for $12,000 in office equipment and $2,400 in office supplies.
Payment is due within 10 days.
Apr. 6: Completed services for a client and immediately received $2,000 cash.
Apr. 9: Completed an $8,000 project for a client, who must pay within 30 days.
Apr. 13: Paid $14,400 cash to settle the account payable created on April 3.
Apr. 19: Paid $6,000 cash for the premium on a 12-month insurance policy.
Apr. 22: Received $6,400 cash as partial payment for the work completed on April 9.
Apr. 25: Completed work for another client for $2,640 on credit.
Apr. 28: Ricci withdrew $6,200 cash for personal use.
Apr. 29: Purchased $800 of additional office supplies on credit.
Apr. 30: Paid $700 cash for this month's utility bill.
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Exercise 6: Adjusting Journal Entry (Chap 3)
Prepare Adjusting Journal Entry for year ended on 12/31/2005
1) Depreciation on equipment for 2005 is $16,000
2) Prepaid Insurance had $7,000 at 12/31/2005 before adjustment. An analysis show only
$1,040 unexpired
3) Office supply had $300 debit balance on 12/31/204, during 2005, $2,680 supplies was
purchased. On 12/31/2005, physical count show $345 supplies remain.
4) Half of work related to$10,000 cash received in advance was performed in 2005.
5) Prepaid insurance had debit balance of $5,600 before adjustment. An analysis show that
$4,600 coverage had expired.
6) Wage expense of $4,000 have been incurred but are not paid yet as on 12/31/2005
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End of Chapter 4
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