Review of the
Accounting
Process
Insert Book Cover
Picture
2
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
2-2
The Basic Model
Economic events cause
changes in the financial
position of a company.
External events
involve an exchange
between the company
and another entity.
Internal events do not
involve an exchange
transaction but do
affect the company’s
financial position.
2-3
Learning Objectives
Analyze routine economic events—
transactions—and record their effects on a
company’s financial position using the
accounting equation format.
2-4
The Accounting Equation
A = L + OE
+ Owner Investments - Owner Withdrawals
+ Revenue
+ Gains
- Expenses
- Losses
2-5
Accounting Equation for a Corporation
A = L + SE
+ Paid-in Capital
+ Retained Earnings
+ Revenues - Expenses - Dividends
+ Gains
- Losses
2-6
Account Relationships
Debits and credits affect the Balance Sheet
Model as follows:
A = L + PIC + RE
Assets
Dr. Cr.
+
-
Liabilities
Dr. Cr.
+
Paid-in
Capital
Dr. Cr.
+
Retained
Earnings
Dr. Cr.
+
Revenues
and Gains
Dr. Cr.
+
Expenses
and Losses
Dr. Cr.
+
-
2-7
Account Relationships
Debits and credits affect the Balance Sheet
Model as follows:
A = L + PIC + RE + R + G- E - L
Permanent accounts
represent the basic
financial position
elements of the
accounting equation.
Temporary accounts
keep track of the
changes in the
retained earnings
component of
shareholders’ equity.
2-8
Source
documents
Transaction
Analysis
Record in
Journal
Post to
Ledger
Financial
Statements
Adjusted
Trial Balance
Record & Post
Adjusting
Entries
Unadjusted
Trial Balance
Close Temporary
Accounts
Post-Closing
Trial Balance
The
Accounting
Processing
Cycle
2-9
Learning Objectives
Record transactions using the general journal
format.
2-10
Accounting Processing Cycle
On January 1, 2007, $40,000 was borrowed
from a bank and a note payable was signed.
Two accounts are affected:
Cash (an asset) increases by $40,000.
 Notes Payable (a liability) increases by $40,000.

GENERAL JOURNAL
Date
Page
Post.
Ref.
Prepare
the
journal
entry.
Cash
40,000
Description
Jan 1
Account
numbers are
Payable
references for Notes
posting
to
the General Ledger.
Debit
1
Credit
40,000
2-11
General Ledger
GENERAL LEDGER
Account:
Acct. No.
##
Balance
Date
Item
Post.
Ref.
Debit
Credit
The “T” account is a shorthand used by
accountants to analyze transactions. It
is not part of the bookkeeping system.
DR (CR)
2-12
Learning Objectives
Post the effects of journal entries to T-accounts
and prepare an unadjusted trial balance.
2-13
Posting Journal Entries
On July 1, 2006, the owners invest $60,000 in a new
business, Dress Right Clothing Corporation.
GENERAL JOURNAL
Date
Description
July 1 Cash
Page
Post.
Ref.
Debit
1
Credit
60,000
Common Stock
60,000
Post the debit portion of the entry to the Cash ledger account.
2-14
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
1
Debit
Credit
60,000
Common Stock
60,000
GENERAL LEDGER
Account: Cash
Date
1
Item
Acct. No.
Post.
Ref.
Debit
Credit
100
Balance
2-15
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
Debit
Credit
60,000
Common Stock
2
60,000
GENERAL LEDGER
Account: Cash
Date
July
1
1
3
Acct. No.
Item
Post.
Ref.
Debit
60,000
Credit
100
Balance
2-16
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
1
Debit
July 1 Cash
Credit
60,000
Common Stock
60,000
4
GENERAL LEDGER
Account: Cash
Date
July
1
Acct. No.
Item
Post.
Ref.
J1
100
5
Debit
60,000
Credit
Balance
60,000
2-17
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
100
1
Debit
Credit
60,000
Common Stock
60,000
6
GENERAL LEDGER
Account: Cash
Date
July
1
Acct. No.
Item
Post.
Ref.
J1
Debit
60,000
Credit
100
Balance
60,000
2-18
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
100
1
Debit
Credit
60,000
Common Stock
60,000
Post the credit portion of the entry to the Common Stock ledger
account.
GENERAL LEDGER
Account: Common Stock
Date
Item
1
Post.
Ref.
Acct. No.
Debit
Credit
300
Balance
2-19
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
100
Debit
60,000
GENERAL LEDGER
Account: Common Stock
Date
July
1
Item
Post.
Ref.
Credit
60,000
Common Stock
2
1
Debit
3
Acct. No.
300
Credit
60,000
Balance
2-20
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
100
1
Debit
Credit
60,000
Common Stock
60,000
4
GENERAL LEDGER
Account: Common Stock
Date
July
1
Item
Acct. No.
Post.
Ref.
J1
300
5
Debit
Credit
60,000
Balance
60,000
2-21
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
100
300
Common Stock
1
Debit
Credit
60,000
60,000
6
GENERAL LEDGER
Account: Common Stock
Date
July
1
Item
Acct. No.
Post.
Ref.
J1
Debit
Credit
60,000
300
Balance
60,000
2-22
After recording all entries for the period, Dress
Right’s Trial Balance would be as follows:
Dress Right Clothing Corporation
Unadjusted Trial Balance
July 31, 2006
Account Title
Cash
Accounts receivable
Supplies
Prepaid rent
Inventory
Furniture and fixtures
Accounts payable
Notes payable
Unearned rent revenue
Common stock
Retained earnings
Sales revenue
Cost of goods sold
Salaries expense
Total
Debits
$ 68,500
2,000
2,000
24,000
38,000
12,000
Credits
$
35,000
40,000
1,000
60,000
A Trial
Balance is a
listing of all
accounts
and their
balances at
a point in
time.
1,000
38,500
22,000
5,000
$ 174,500
$ 174,500
Debits = Credits
2-23
Additional Consideration
Perpetual
Inventory
System
Discussed in
more depth in
Chapters 8 & 9.
Periodic
Inventory
System
Inventory account is
continually updated to
reflect purchases and sales.
Purchases account
reflects purchases of
inventory.
Cost of goods sold account
is continually updated to
reflect sales.
Cost of goods sold and
inventory are adjusted at
period end.
2-24
Adjusting Entries
At the end of the period,
some transactions or
events remain
unrecorded.
Because of this, several
accounts in the ledger
need adjustments
before their balances
appear in the financial
statements.
2-25
Learning Objectives
Identify and describe the different types of
adjusting journal entries.
Determine the required adjustments, record
adjusting journal entries in general journal
format, and prepare an adjusted trial balance.
2-26
Adjusting Entries
Prepayments
(Deferrals)
Accruals
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
Estimates
2-27
Prepaid Expenses
Expense
Asset
Unadjusted
Balance
Credit
Adjustment
Debit
Adjustment
Today, I will pay
for my first
6 months’ rent.
Prepaid Expenses
Items paid for in advance
of receiving their benefits
2-28
Prepaid Expenses
Assume that on July 31, 2006, Dress Right
determines that at the end of July $1,200 of
supplies remains. Let’s look at the adjusting
journal entry needed on July 31, 2006.
GENERAL JOURNAL
Date
Page 30
Post.
Prepare
the
adjusting
entry.
Description
Ref.
Debit
July 31 Supplies Expense
Supplies
$2,000 - $1,200 = $800 supplies used
Credit
800
800
2-29
Prepaid Expenses
After posting, the accounts look like this:
Beg. bal.
Bal.
Supplies
2,000
800
1,200
Supplies Expense
Beg. bal.
800
Bal.
800
2-30
Depreciation
Depreciation is the process of computing
expense by allocating the cost of plant and
equipment over their expected useful lives.
Straight-Line
Depreciation
Expense
Asset Cost - Salvage Value
=
Useful Life
2-31
Depreciation
Recall the Furniture and Fixtures for $12,000 listed on
Dress Right’s unadjusted trial balance. Assume the
following:
Asset Cost
$ 12,000
Salvage Value
Useful Life
60 months
Let’s calculate the depreciation expense for the month
ended July 31, 2006.
2-32
Depreciation
Recall the Furniture and Fixtures for $12,000 listed on
Dress Right’s unadjusted trial balance. Assume the
following:
Asset Cost
$ 12,000
Salvage Value
Useful Life
60 months
2006
Depreciation
Expense
$12,000 - $0
=
=
$200
60 months
Now, prepare the
adjusting entry for July
31, 2006.
2-33
Depreciation
GENERAL JOURNAL
Date
Description
July 31 Depreciation Expense
Accumulated Depr. Furniture & Fixtures
To record depreci a ti on
Page 2
PR
Debit
Credit
200
200
Contra Asset
Let’s see how the accounts would look after
posting!
2-34
Depreciation
After posting, the accounts look like this:
Furniture and Fixtures
Beg. bal.
12,000
Bal.
12,000
Depreciation Expense
Beg. bal.
200
Bal.
200
Accumulated Depreciation
Beg. bal.
200
200 Bal.
2-35
Unearned Revenues
Liability
Debit
Adjustment
Unadjusted
Balance
Buy your season tickets for
all home basketball games NOW!
“Go Big Blue”
Revenue
Credit
Adjustment
Unearned Revenue
Cash received in
advance of performing
services
2-36
Unearned Revenues
For Dress Right Corporation, the only unearned revenue in
the trial balance is unearned rent revenue. On July 16
Dress Right received $1,000 in advance for the first two
months’ rent.
First, let’s prepare the entry for July 16.
GENERAL JOURNAL
Date
Description
July 16 Cash
Page 25
Post.
Ref.
Debit
Credit
1,000
Unearned Rent Revenue
1,000
Liability Account
2-37
Unearned Revenues
For Dress Right Corporation, the only unearned revenue in
the trial balance is unearned rent revenue. On July 16
Dress Right received $1,000 in advance for the first two
months’ rent.
Now, let’s prepare the adjusting entry for July 31.
GENERAL JOURNAL
Date
Description
July 31 Unearned Rent Revenue
Rent Revenue
Page 30
Post.
Ref.
Debit
Credit
250
250
2-38
Unearned Revenues
After posting, the accounts look like this:
Unearned Rent Revenue
Beg. bal.
250
1,000
750 Bal.
Rent Revenue
Beg. bal.
250
250 Bal.
2-39
Alternative Approach to Record Prepayments
Prepaid Expenses
Record initial cash
payments as follows:
Expense
Cash
$$$
Cash
$$$
Revenue
$$$
$$$
Adjusting Entry
Record the amount for the
prepaid expense as
follows:
Prepaid expense
Expense
Unearned Revenue
Record initial cash receipts
as follows:
$$
$$
Adjusting Entry
Record the amount for the
unearned liability as
follows:
Revenue
$$
Unearned revenue $$
2-40
Accrued Liabilities
Expense
Debit
Adjustment
I won’t pay you
until the job is done!
Liability
Credit
Adjustment
Accrued Liabilities
Costs incurred in a period
that are both unpaid and
unrecorded
2-41
Accrued Liabilities
Last pay
date
7/20/06
7/1/06
Next pay
date
8/2/06
7/31/06
Month end
Record adjusting
journal entry.
On July 31, 2006, the
employees have earned
salaries of $5,500.
GENERAL JOURNAL
Date
Description
July 31 Salaries Expense
Salaries Payable
Page 30
Post.
Ref.
Debit
Credit
5,500
5,500
2-42
Accrued Liabilities
After posting, the accounts look like this:
Salaries Expense
Beg. bal.
5,000
5,500
Bal.
10,500
Salaries Payable
Beg. bal.
5,500
5,500 Bal.
2-43
Accrued Receivables
Revenue
Asset
Debit
Adjustment
Credit
Adjustment
Yes, you can pay me
in May for your April
15 tax return.
Accrued Receivables
Revenues earned in a
period that are both
unrecorded and not yet
received
2-44
Accrued Receivables
Assume that Dress Right loaned another corporation
$30,000 at the beginning of August. Terms of the note
call for the payment of principal, $30,000, and interest at
8% in three months.
First, let’s determine the amount of interest to accrue at
August 31, 2006.
P×R×T
$30,000
.08
Interest = $200
1/
12
2-45
Accrued Receivables
Assume that Dress Right loaned another corporation
$30,000 at the beginning of August. Terms of the note
call for the payment of principal, $30,000, and interest at
8% in three months.
Now, let’s prepare the adjusting entry for August 31, 2006.
GENERAL JOURNAL
Date
Description
Aug. 31 Interest Receivable
Interest Revenue
Page 30
Post.
Ref.
Debit
Credit
200
200
2-46
Accrued Receivables
After posting, the accounts look like this:
Interest Receivable
Beg. bal.
200
Bal.
200
Interest Revenue
Beg. bal.
200
200 Bal.
2-47
Estimates
 Uncollectible
accounts and
depreciation of fixed
assets are estimated.
 An
estimated item is
a function of future
events and
developments.
$
2-48
Estimates
The estimate of bad debt expense at the end of the
period is an example of an adjusting entry that requires
an estimate.
Assume that Dress Right’s management determines that
of the $2,000 of accounts receivable recorded at July 31,
2006, only $1,500 will ultimately be collected. Prepare
the adjusting entry for July 31, 2006.
GENERAL JOURNAL
Date
Description
July 31 Bad Debt Expense
Allowance for Uncollectible
Accounts
Page 30
Post.
Ref.
Debit
Credit
500
500
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2006
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000
Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debt expense
500
Totals
$ 181,033 $ 181,033
2-49
This is the Adjusted
Trial Balance for
Dress Right after all
adjusting entries have
been recorded and
posted.
Dress Right will use
these balances to
prepare the financial
statements.
2-50
Learning Objectives
Describe the four basic financial statements.
2-51
Dress Right Clothing Corporation
Income Statement
For Month Ended July 31, 2006
Sales revenue
$
Cost of goods sold
Gross profit
Other expenses:
Salaries
$
10,500
Supplies
800
Rent
2,000
Depreciation
200
Bad debt
500
Total operating expenses
Operating income
Other income (expense):
Rent revenue
250
Interest expense
(333)
Net income
$
38,500
22,000
16,500
14,000
2,500
(83)
2,417
The income statement summarizes the results of
operating activities of the company.
2-52
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2006
Assets
Current assets:
Cash
Accounts receivable
Less: Allowance for uncollectible accounts
Supplies
Inventory
Prepaid rent
Total current assets
Property and equipment:
Furniture and fixtures
Less: Accumulated depreciation
Total assets
$
$
2,000
500
68,500
1,500
1,200
38,000
22,000
131,200
12,000
200
$
11,800
143,000
The balance sheet presents the financial position
of the company on a particular date.
2-53
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2006
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable
$
Salaries payable
Unearned rent revenue
Interest payable
Note payable
Total current liabilities
Long-term liabilities:
Note payable
Shareholders' equity:
Common stock
$
60,000
Retained earnings
1,417
Total shareholders' equity
Total liabilities and shareholders' equity
$
35,000
5,500
750
333
10,000
51,583
30,000
61,417
143,000
The balance sheet presents the financial position
of the company on a particular date.
2-54
Dress Right Clothing Corporation
Statement of Cash Flows
For the Month of July 2006
Cash flows from operating activities:
Cash inflows:
From customers
$
From rent
Cash outflows:
For rent
For supplies
To suppliers for merchandise
To employees
Net cash used by operating activities
Cash flows from investing activities:
Purchase of furniture and fixtures
Cash flows from financing activities:
Issue of capital stock
$
Increase in notes payable
Payment of cash dividend
Net cash provided by financing activities
Net increase in cash
36,500
1,000
(24,000)
(2,000)
(25,000)
(5,000)
$
(18,500)
(12,000)
60,000
40,000
(1,000)
$
99,000
68,500
The statement of cash flows discloses the
changes in cash during a period.
2-55
Dress Right Clothing Corporation
Statement of Shareholders' Equity
For the Month of July 2006
Balance at July 1, 2006
Issue of capital stock
Net income for July 2006
Less: Dividends
Balance at July 31, 2006
Common Retained
Stock
Earnings
$
$
60,000
2,417
(1,000)
$
60,000 $
1,417
Total
Shareholders'
Equity
$
60,000
2,417
(1,000)
$
61,417
The statement of shareholders’ equity presents
the changes in permanent shareholder accounts.
2-56
Learning Objectives
Explain the closing process.
2-57
The Closing Process


Resets revenue, expense
and dividend account
balances to zero at the
end of the period.
Helps summarize a
period’s revenues and
expenses in the Income
Summary account.
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
2-58
Temporary and Permanent Accounts
Income
Summary
Liabilities
Permanent
Accounts
Shareholders’
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
The closing process applies
only to temporary accounts.
2-59
Closing Entries
 Close Revenue
accounts to Income
Summary.
 Close Expense
accounts to Income
Summary.
 Close Income Summary
account to Retained
Earnings.
Let’s prepare the
closing entries for
Dress Right.
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2006
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000
Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debt expense
500
Totals
$ 181,033 $ 181,033
2-60
Close Revenue
accounts to
Income Summary.
 Close Revenue Accounts to Income
Summary
GENERAL JOURNAL
Date
Description
July 31 Sales Revenue
Rent Revenue
2-61
Page 34
Post.
Ref.
Debit
Credit
38,500
250
Income Summary
Now, let’s look at the ledger accounts after
posting this closing entry.
38,750
 Close Revenue Accounts to Income
Summary
2-62
Sales Revenue
38,500
38,500
-
Income Summary
38,750
38,750
Rent Revenue
250
250
-
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2006
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000
Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debt expense
500
Totals
$ 181,033 $ 181,033
2-63
Close Expense
accounts to
Income Summary.
 Close Expense Accounts to Income
Summary
GENERAL JOURNAL
Date
Description
July 31 Income Summary
2-64
Page 34
Post.
Ref.
Debit
Credit
36,333
Cost of goods sold
22,000
Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debts expense
500
Now, let’s look at the ledger accounts after
posting this closing entry.
Bad Debts Exp.
500
500
-
 Close Expense Accounts to
Income Summary
Depreciation Exp.
200
200
-
Rent Expense
2,000
2,000
-
Salaries Expense
10,500
10,500
-
Supplies Expense
800
800
-
Interest Expense
333
333
-
Cost of Goods Sold
22,000
22,000
-
2-65
Income Summary
36,333 38,750
2,417
Net Income
DRESS RIGHT CLOTHING CORPORATION
Adjusted Trial Balance
July 31, 2006
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
250
Cost of goods sold
22,000
Salaries expense
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Interest expense
333
Bad debt expense
500
Totals
$ 181,033 $ 181,033
2-66
Close Income
Summary to
Retained
Earnings.
 Close Income Summary to Retained
Earnings
GENERAL JOURNAL
Date
Description
July 31 Income Summary
2-67
Page 34
Post.
Ref.
Debit
Credit
2,417
Retained Earnings
Now, let’s look at the ledger accounts after
posting this closing entry.
2,417
 Close Income Summary to Retained
Earnings
Retained Earnings
1,000
2,417
1,417
Income Summary
36,333 38,750
2,417
-
2-68
2-69
Post-Closing Trial Balance
DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2006
Account Title
Debits
Credits
Cash
$
68,500
Accounts receivable
2,000
Allowance for uncollectible accounts
$
500
Supplies
1,200
Prepaid rent
22,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.-furniture & fixtures
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
750
Salaries payable
5,500
Interest payable
333
Common stock
60,000
Retained earnings
1,417
Totals
$ 143,700 $ 143,700
Lists permanent
accounts and their
balances.
Total debits equal
total credits.
2-70
Learning Objectives
Convert from cash basis net income to accrual
basis net income.
Conversion From Cash Basis to Accrual
Basis
Adjusting entries, for the most part, are
conversions from cash to accrual.
Let’s look at an example.
2-71
Conversion From Cash Basis to Accrual
Basis
Jeter, Inc. paid $20,000 cash for insurance during
the current period. On Jan. 1, Prepaid Insurance
was $5,000, and on Dec. 31, the account balance
was $3,000.
Determine Insurance Expense for the period.
2-72
Conversion From Cash Basis to Accrual
Basis
Jeter, Inc. paid $20,000 cash for insurance during
the current period. On Jan. 1, Prepaid Insurance
was $5,000, and on Dec. 31, the account balance
was $3,000.
Balance, 1/1
Plus: Cash paid
Less: Insurance expense
Balance, 12/31
Prepaid
Insurance
$
5,000
20,000
(22,000)
$
3,000
2-73
2-74
Use of a
Worksheet
Appendix 2A
2-75
Use of a Worksheet
A worksheet can be used as a tool to facilitate the
preparation of adjusting and closing entries and the
financial statements.
Steps to Follow for Worksheet Completion:
1.
Enter account titles in column 1 and the unadjusted trial balances in columns
2 and 3.
2.
Determine end-of-period adjusting entries and enter them in columns 4 and 5.
3.
Add or deduct the effects of the adjusting entries on the account balances and
enter in columns 6 and 7.
4.
Transfer the temporary retained earnings account balances to columns 8 and
9.
5.
Transfer the balances in the permanent accounts to columns 10 and 11.
Let’s look at the completed worksheet for Dress Right.
2-76
Worksheet, Dress Right Clothing Corporation, July 2006
Unadjusted Trial
Balance
Adjusting Entries
Account Title
Dr.
Cr.
Dr.
Cr.
Cash
68,500
Accounts receivable
2,000
Allowance for
uncollectible accounts
(7)
500
Supplies
2,000
(1)
800
Prepaid rent
24,000
(2)
2,000
Inventory
38,000
Furniture and fixtures
12,000
Accumulated depr.furniture & fixtures
(3)
200
Accounts payable
35,000
Note payable
40,000
Unearned rent revenue
1,000 (4)
250
Salaries payable
(5)
5,500
Interest payable
(6)
333
Common stock
60,000
Retained earnings
1,000
Sales revenue
38,500
Rent revenue
(4)
250
Cost of goods sold
22,000
Salaries expense
5,000
(5)
5,500
Supplies expense
(1)
800
Rent expense
(2)
2,000
Depreciation expense
(3)
200
Interest expense
(6)
333
Bad debt expense
(7)
500
Totals
174,500
174,500
9,583
9,583
Net income
Totals
Adjusted Trial
Balance
Dr.
Cr.
68,500
2,000
Income Statement
Dr.
Cr.
Balance Sheet
Dr.
Cr.
68,500
2,000
500
500
1,200
22,000
38,000
12,000
1,200
22,000
38,000
12,000
200
35,000
40,000
750
5,500
333
60,000
200
35,000
40,000
750
5,500
333
60,000
1,000
1,000
38,500
250
22,000
10,500
800
2,000
200
333
500
181,033
38,500
250
22,000
10,500
800
2,000
200
333
500
181,033
2,417
38,750
38,750
144,700
2,417
144,700
2-77
Reversing
Entries
Appendix 2B
2-78
Reversing Entries
Reversing entries remove the effects of some of
the adjusting entries made at the end of the
previous reporting period for the sole purpose of
simplifying journal entries made during the new
period. Reversing entries are optional and are used
most often with accruals.
Let’s consider the following accrual adjusting
entry made by Dress Right.
GENERAL JOURNAL
Date
Description
July 31 Salaries Expense
Salaries Payable
Page 30
Post.
Ref.
Debit
Credit
5,500
5,500
2-79
Reversing Entries
If reversing entries are not used, when salaries actually are
paid in August, the accountant needs to remember to debit
salaries payable and not salaries expense.
GENERAL JOURNAL
Date
Aug
Description
Salaries Payable
Cash
Salaries Expense
Bal. 7/31
10,500
Bal.
10,500
Page 30
Post.
Ref.
Debit
Credit
5,500
5,500
Salaries Payable
5,500 Bal. 7/31
Payment 5,500
Bal.
2-80
Reversing Entries
If reversing entries are used, the following reversing entry is
made on August 1, 2006. This entry reduces the salaries
payable account to zero and reduces the salaries expense
account by $5,500.
GENERAL JOURNAL
Date
Aug
Description
1 Salaries Payable
Salaries Expense
Salaries Expense
Bal. 7/31
10,500
5,500 Reverse
Bal.
5,000
Page 30
Post.
Ref.
Debit
Credit
5,500
5,500
Salaries Payable
5,500 Bal. 7/31
Reverse 5,500
Bal.
2-81
Reversing Entries
When salaries actually are paid in August, the debit is to
salaries expense, thus increasing the account by $5,500.
We can see that the ending balances in the accounts are
identical whether or not reversing entries are used.
GENERAL JOURNAL
Date
Aug
Description
Salaries Expense
Cash
Salaries Expense
Bal. 7/31
10,500
Payment
5,500
5,500 Reverse
Bal.
10,500
Page 30
Post.
Ref.
Debit
Credit
5,500
5,500
Salaries Payable
5,500 Bal. 7/31
Reverse 5,500
Bal.
2-82
Subsidiary
Ledgers and
Special Journals
Appendix 2C
2-83
Subsidiary Ledgers
Subsidiary ledgers contain a group of subsidiary
accounts associated with particular general ledger
control accounts. Subsidiary ledgers are commonly
used for accounts receivable, accounts payable,
plant and equipment, and investments.
For example, there will be a subsidiary
ledger for accounts receivable that keeps
track of the increases and decreases in the
accounts receivable balance for each of the
company’s customers purchasing goods
and services on credit.
After all of the postings are made from the appropriate journals, the balance
in the accounts receivable control account should equal the sum of the
balances in the accounts receivable subsidiary ledger accounts.
2-84
Special Journals
Special journals are used to capture the dual
effect of repetitive types of transactions in
debit/credit form.
Special journals simplify the recording process in the following ways:
1.
Journalizing the effects of a particular transaction is made more efficient
through the use of specifically designed formats.
2.
Individual transactions are not posted to the general ledger accounts but are
accumulated in the special journals and a summary posting is made on a
periodic basis.
3.
The responsibility for recording journal entries for the repetitive types of
transactions is placed on individuals who have specialized training in handling
them.
Let’s look at some special journals.
2-85
Sales Journal
Sales journals record all credit sales. Every
entry in the sales journal has the same effect
on the accounts; the sales revenue account
is credited and the accounts receivable
control account is debited.
Accounts
Receivable
Subsidiary
Account No.
Date
SALES JOURNAL
Page 1
Customer Name
Cr. Sales
Revenue (400)
Dr. Accounts
Receivable (110)
Sales
Invoice
Number
2006
Aug.
5
801
Leland High School
10-221
1,500
9
812
Mr. John Smith
10-222
200
18
813
Greystone School
10-223
825
22
803
Ms. Barbara Jones
10-224
120
29
805
Hart Middle School
10-225
650
3,295
Other
columns
capture
information
needed for
updating the
accounts
receivable
subsidiary
ledger.
2-86
Sales Journal
SALES JOURNAL
Page 1
Customer Name
Cr. Sales
Revenue (400)
Dr. Accounts
Receivable (110)
Accounts
Receivable
Subsidiary
Account No.
Date
Sales
Invoice
Number
2006
Aug.
5
801
Leland High School
10-221
1,500
9
812
Mr. John Smith
10-222
200
18
813
Greystone School
10-223
825
22
803
Ms. Barbara Jones
10-224
120
29
805
Hart Middle School
10-225
650
3,295
Sales Revenue
Beg. bal.
3,295 Aug. 31 SJ1
3,295 Bal.
Accounts Receivable
Bal. 7/31
2,000
Aug. 31 SJ1
3,295
Bal.
5,295
Accounts Receivable
Subsidiary Ledger
Leland High School
Aug. 5 SJ1
1,500
Bal.
1,500
801
2-87
Cash Receipts Journal
Cash receipts journals record all cash
receipts, regardless of the source. Every
entry in the cash receipts journal produces a
debit to the cash account with the credit to
various other accounts.
CASH RECEIPTS JOURNAL
Date
Explanation or
Account Name
Dr.
Cash
(100)
Cr.
Accounts
Receivable
(110)
Page 1
Cr.
Sales
Revenue
(400)
Cr.
Other
Other
Accounts
10,000
Notes
payable
(220)
2006
Aug.
7 Cash sale
11 Borrowed cash
500
500
10,000
17 Leland High School
750
20 Cash sale
300
25 Mr. John Smith
200
11,750
750
300
200
950
800
10,000
2-88
Cash Receipts Journal
CASH RECEIPTS JOURNAL
Date
Explanation or
Account Name
Dr.
Cash
(100)
Cr.
Accounts
Receivable
(110)
Page 1
Cr.
Sales
Revenue
(400)
Cr.
Other
Other
Accounts
10,000
Notes
payable
(220)
2006
Aug.
7 Cash sale
11 Borrowed cash
500
10,000
17 Leland High School
750
20 Cash sale
300
25 Mr. John Smith
200
11,750
Accounts Receivable
Subsidiary Ledger
500
Aug. 5 SJ1
Bal.
750
300
200
950
800
10,000
Leland High School 801
1,500
750 Aug. 17 CR1
750
2-89
End of Chapter 2