Chapter 2
Review of the Accounting
Process
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-2
The Accounting Equation
A = L + OE
+ Owner Investments - Owner Withdrawals + Revenue - Expenses
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-3
Accounting Equation for a
Corporation
A = L + SE
+ Paid-in Capital
+ Retained Earnings
+ Revenues - Expenses - Dividends
+ Gains
- Losses
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-4
Account Relationships
Debits and credits affect the Balance Sheet
Model as follows:
A = L + PIC + RE + R - E
Paid-in
Capital
Dr. Cr.
+
Assets
Dr. Cr.
+
Liabilities
Dr. Cr.
+
McGraw-Hill/Irwin
Revenues
and Gains
Dr. Cr.
+
Retained
Expenses
Earnings
and Losses
Dr. Cr.
Dr. Cr.
+
+
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-5
Account Relationships
Debits and credits affect the Balance Sheet
Model as follows:
A = L + PIC + RE + R - E
Permanent accounts
represent the basic
financial position
elements of the
accounting equation.
McGraw-Hill/Irwin
Temporary
accounts keep
track of the
changes in the
retained earnings
component of
shareholders’
equity.
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-6
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
McGraw-Hill/Irwin
Post-Closing
Trial Balance
The
Accounting
Processing
Cycle
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-7
Accounting Processing Cycle
On January 1, 2004, CWC, Inc.
borrows $10,000 from the bank.
Two accounts are affected:
Cash (an asset) increases by $10,000.
 Notes Payable (a liability) increases by $10,000.

Prepare the journal entry.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-8
Accounting Processing Cycle
Two accounts are affected:
Cash (an asset) increases by $10,000.
 Notes Payable (a liability) increases by $10,000.

GENERAL JOURNAL
Date
Jan.
Description
1 Cash
Notes Payable
McGraw-Hill/Irwin
Page 2
Post.
Ref.
Debit
10,000
Credit
10,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-9
Accounting Processing Cycle
Two accounts are affected:
Cash (an asset) increases by $10,000.
 Notes Payable (a liability) increases by $10,000.

GENERAL JOURNAL
Date
Jan.
Description
1 Cash
Account
are
Notesnumbers
Payable
references for posting to
the General Ledger.
McGraw-Hill/Irwin
Page 2
Post.
Ref.
Debit
10,000
Credit
10,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-10
General Ledger
GENERAL LEDGER
Account:
Acct. No.
##
Balance
Date
Item
Post.
Ref.
Debit
Credit
DR (CR)
The “T” account is a shorthand used by
accountants to analyze transactions. It
is not part of the bookkeeping system.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-11
Posting Journal Entries
On July 1, 2003, 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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-12
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
McGraw-Hill/Irwin
1
Item
Acct. No.
Post.
Ref.
Debit
Credit
100
Balance
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-13
Posting Journal Entries
GENERAL JOURNAL
Date
Page
Post.
Ref.
Description
July 1 Cash
Debit
2
60,000
GENERAL LEDGER
Account: Cash
McGraw-Hill/Irwin
Credit
60,000
Common Stock
Date
July
1
1
3
Acct. No.
Item
Post.
Ref.
Debit
60,000
Credit
100
Balance
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-14
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
McGraw-Hill/Irwin
Acct. No.
Item
Post.
Ref.
J1
100
5
Debit
60,000
Credit
Balance
60,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-15
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
McGraw-Hill/Irwin
Acct. No.
Item
Post.
Ref.
J1
Debit
60,000
Credit
100
Balance
60,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-16
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
McGraw-Hill/Irwin
Item
1
Post.
Ref.
Acct. No.
Debit
Credit
300
Balance
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-17
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
McGraw-Hill/Irwin
Item
Post.
Ref.
Credit
60,000
Common Stock
2
1
Debit
3
Acct. No.
300
Credit
60,000
Balance
© 2004 The McGraw-Hill Companies, Inc.
Slide
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
4
GENERAL LEDGER
Account: Common Stock
Date
July
1
McGraw-Hill/Irwin
Item
Acct. No.
Post.
Ref.
J1
300
5
Debit
Credit
60,000
Balance
60,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-19
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
McGraw-Hill/Irwin
Item
Acct. No.
Post.
Ref.
J1
Debit
Credit
60,000
300
Balance
60,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-20
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, 2003
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
McGraw-Hill/Irwin
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
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-21
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-22
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-23
Adjusting Entries
Prepayments
(Deferrals)
Accruals
Estimates
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-24
Prepaid Expenses
Expense
Asset
Unadjusted
Balance
Credit
Adjustment
Today, I will pay
for my first
6 months’ rent.
Debit
Adjustment
Prepaid Expenses
Items paid for in advance
of receiving their benefits
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-25
Prepaid Expenses
On December 1, 2004, Scott Company paid $12,000 to
cover rent for December 2004 through May 2005.
Let’s look at the adjusting journal entry needed on
December 31, 2004.
GENERAL JOURNAL
Date
McGraw-Hill/Irwin
Description
Page 30
Post.
Ref.
Debit
Credit
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-26
Prepaid Expenses
On December 1, 2004, Scott Company paid $12,000 to
cover rent for December 2004 through May 2005.
Let’s look at the adjusting journal entry needed on
December 31, 2004.
GENERAL JOURNAL
Date
Description
Dec. 31 Rent Expense
Page 30
Post.
Ref.
Debit
Credit
2,000
Prepaid Rent
2,000
$12,000 ÷ 6 months = $2,000 per month
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-27
Prepaid Expenses
After posting, the accounts look like this:
Prepaid Rent
12/1
$12,000 12/31
Bal.
$10,000
McGraw-Hill/Irwin
$2,000
Rent Expense
12/31
$2,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-28
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
McGraw-Hill/Irwin
Asset Cost - Salvage Value
=
Useful Life
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-29
Depreciation
On January 1, 2004, Monroe, Inc. purchased the
following oil pumping equipment:
Asset Cost
$
Salvage Value
Useful Life
62,000
2,000
5 yrs.
Let’s record depreciation expense for the year ended
December 31, 2004.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-30
Depreciation
On January 1, 2004, Monroe, Inc. purchased the
following oil pumping equipment:
Asset Cost
$
Salvage Value
Useful Life
2000
Depreciation
Expense
62,000
2,000
5 yrs.
$62,000 - $2,000
=
=
$12,000
5
Now, prepare the adjusting
entry for December 31,
2004.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-31
Depreciation
GENERAL JOURNAL
Date
Page 2
Description
PR
Dec. 31 Depreciation Expense
Debit
12,000
Accumulated Depr. - Equip.
To record annual depreciation
Credit
12,000
Contra Asset
Let’s see how the accounts would look after
posting!
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-32
Depreciation
After posting, the accounts look like this:
Equipment
1/1
$62,000
Depreciation Expense
12/31
$12,000
Accumulated Depreciation
12/31 $12,000
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-33
Depreciation
Monroe, Inc.
Balance Sheet
December 31, 2004
AssetsThe
Cash
$ 18,000
equipment
.
account
is
.
.shown on
Equipment
$ 62,000
the balance
Less: accumulated depreciation
(12,000)
50,000
sheet
like
.
this.
.
.
Total Assets
$ 249,800
McGraw-Hill/Irwin
The
equipment
account is
shown on
the balance
sheet like
this.
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-34
Unearned Revenue
Liability
Debit
Adjustment
Unadjusted
Balance
Buy your season tickets for
all home basketball games NOW!
“Go Big Blue”
McGraw-Hill/Irwin
Revenue
Credit
Adjustment
Unearned Revenue
Cash received in
advance of performing
services
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-35
Unearned Revenue
On December 1, 2004, Ox University sold 1,000
seasons tickets to its 20 home basketball games for
$100 each. OxU makes the following entry:
GENERAL JOURNAL
Date
Description
Dec. 1 Cash
Page 25
Post.
Ref.
Debit
Credit
100,000
Unearned Revenue
100,000
Liability Account
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-36
Unearned Revenue
By December 31, OxU has played 8 of its regular home
games, winning 6 and losing 2.
GENERAL JOURNAL
Date
McGraw-Hill/Irwin
Description
Page 30
Post.
Ref.
Debit
Credit
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-37
Unearned Revenue
By December 31, OxU has played 8 of its regular home
games, winning 6 and losing 2.
GENERAL JOURNAL
Date
Description
Dec. 31 Unearned Revenue
Basketball Revenue
McGraw-Hill/Irwin
Page 30
Post.
Ref.
Debit
Credit
40,000
40,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-38
Unearned Revenue
After posting, the accounts
will look like this . . .
Unearned Basketball
Revenue
12/31 $40,000 12/1 $100,000
Basketball Revenue
12/31
$40,000
Bal. $60,000
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
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
McGraw-Hill/Irwin
Unearned Revenue
Record initial cash receipts
as follows:
$$
$$
Adjusting Entry
Record the amount for the
unearned liability as
follows:
Revenue
$$
Unearned revenue $$
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-40
Accrued Liabilities
Expense
Debit
Adjustment
I won’t pay you
until the job is done!
McGraw-Hill/Irwin
Liability
Credit
Adjustment
Accrued Liabilities
Costs incurred in a period
that are both unpaid and
unrecorded
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-41
Accrued Liabilities
Denton, Inc.’s weekly
salaries are $78,750.
Last pay
date
12/26/04
12/1/04
Next pay
date
1/2/05
12/31/04
Year end
Record adjusting
journal entry.
On December 31, 2004, the
employees have earned
salaries of $47,250.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-42
Accrued Liabilities
GENERAL JOURNAL
Date
Description
Dec. 31 Salaries Expense
Salaries Payable
McGraw-Hill/Irwin
Page 30
Post.
Ref.
Debit
Credit
47,250
47,250
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-43
Accrued Liabilities
After posting, the accounts will look like this . . .
Salaries Expense
12/26 $78,750
12/31 47,250
Salaries Payable
12/31 $47,250
Bal. $126,000
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-44
Accrued Receivables
Revenue
Asset
Debit
Adjustment
Credit
Adjustment
Yes, you can pay me
in May for your April
15 tax return.
McGraw-Hill/Irwin
Accrued Receivables
Revenues earned in a
period that are both
unrecorded and not yet
received
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-45
Accrued Receivables
At year-end, Smith & Jones, CPAs, had completed
$31,200 of work but had not yet billed the clients.
Prepare the adjusting entry for December 31, 2004.
GENERAL JOURNAL
Date
Description
Page 30
Post.
Ref.
Debit
Credit
Dec. 31
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-46
Accrued Receivables
At year-end, Smith & Jones, CPAs, had completed
$31,200 of work but had not yet billed the clients.
Prepare the adjusting entry for December 31, 2004.
GENERAL JOURNAL
Date
Description
Dec. 31 Accounts Receivable
Service Revenue
McGraw-Hill/Irwin
Page 30
Post.
Ref.
Debit
Credit
31,200
31,200
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-47
Accrued Receivables
After posting, the accounts involved
will look like this . . .
Accounts Receivable
12/31 $31,200
McGraw-Hill/Irwin
Service Revenue
12/31 $31,200
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-48
Estimates
Uncollectible accounts
and depreciation of
fixed assets are
estimated.
An estimated item is a
function of future
events and
developments.
McGraw-Hill/Irwin
$
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-49
Estimates
The estimate of bad debt expense at the
end of the year is an example of an
adjusting entry that requires an estimate.
GENERAL JOURNAL
Date
Description
Dec. 31 Bad Debt Expense
Allowance for Uncollectible
Page 30
Post.
Ref.
Debit
Credit
5,000
5,000
Accounts
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-50
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-51
Dress Right Clothing Corporation
Income Statement
For Month Ended July 31, 2003
Sales revenue
$
Cost of goods sold
Gross profit
Other expenses:
Salaries expense
$
10,500
Supplies expense
800
Rent expense
2,000
Depreciation expense
200
Bad debt expense
500
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.
© 2004 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Slide
2-52
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2003
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.
© 2004 The
McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Slide
2-53
Dress Right Clothing Corporation
Balance Sheet
At July 31, 2003
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.
© 2004 The
McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Slide
2-54
Dress Right Clothing Corporation
Statement of Cash Flows
For the Month of July 2003
Cash flows from operating activities:
Cash inflows:
From operations
$
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.
© 2004 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
Slide
2-55
Dress Right Clothing Corporation
Statement of Shareholders' Equity
For the Month of July 2003
Balance at July 1, 2003
Issue of capital stock
Net income for July 2000
Less: Dividends
Balance at July 31, 2003
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-56
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.
McGraw-Hill/Irwin
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-57
Temporary and Permanent
Accounts
Income
Summary
McGraw-Hill/Irwin
Liabilities
Permanent
Accounts
Shareholders’
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
The closing process applies
only to temporary accounts.
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-58
Closing Entries
 Close Revenue accounts to
Income Summary.
Let’s prepare the
closing entries for
Consulting Inc.!
 Close Expense accounts to
Income Summary.
 Close Income Summary
account to Retained
Earnings.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-59
Consulting Inc.
Adjusted Trial Balance
December 31, 2004
Cash
$ 7,950
Accounts receivable
1,800
Supplies
2,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-equipment
$
375
Accounts payable
1,100
Note payable
5,100
Salaries payable
210
Unearned consulting revenue
2,750
Retained earnings
29,400
Consulting revenue
5,850
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
$ 45,085 $ 45,085
McGraw-Hill/Irwin
Close Revenue
accounts to
Income Summary.
© 2004 The McGraw-Hill Companies, Inc.
 Close Revenue Accounts to
Income Summary
Slide
2-60
GENERAL JOURNAL
Date
Description
Dec. 31 Consulting Revenue
Rental Revenue
Page 34
Post.
Ref.
Debit
Credit
5,850
300
Income Summary
6,150
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-61
 Close Revenue Accounts to
Income Summary
Consulting Revenue
5,850
5,850
-
Income Summary
5,850
300
Rental Revenue
300
300
-
6,150
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-62
Consulting Inc.
Adjusted Trial Balance
December 31, 2004
Cash
$ 7,950
Accounts receivable
1,800
Supplies
2,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-equipment
$
375
Accounts payable
1,100
Note payable
5,100
Salaries payable
210
Unearned consulting revenue
2,750
Retained earnings
29,400
Consulting revenue
5,850
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
$ 45,085 $ 45,085
McGraw-Hill/Irwin
Close Expense
accounts to
Income Summary.
If Consulting
Inc. had a Cost
of Goods Sold
account, it
would be
closed with the
expenses.
© 2004 The McGraw-Hill Companies, Inc.
 Close Expense Accounts to
Income Summary
Slide
2-63
GENERAL JOURNAL
Date
Description
Dec. 31 Income Summary
Page 34
Post.
Ref.
Debit
Credit
4,365
Depreciation expense-equipment
375
Salaries expense
1,610
Insurance expense
100
Rent expense
1,000
Supplies expense
1,050
Utilities expense
230
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-64
 Close Expense Accounts to
Income 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
McGraw-Hill/Irwin
Utilities Expense
230
230
-
Income Summary
375
5,850
1,610
300
100
1,000
1,050
230
1,785
Net Income
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-65
Consulting Inc.
Adjusted Trial Balance
December 31, 2004
Cash
$ 7,950
Accounts receivable
1,800
Supplies
2,670
Prepaid insurance
2,300
Equipment
26,000
Accumulated depreciation-equipment
$
375
Accounts payable
1,100
Note payable
5,100
Salaries payable
210
Unearned consulting revenue
2,750
Retained earnings
29,400
Consulting revenue
5,850
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
$ 45,085 $ 45,085
McGraw-Hill/Irwin
Close Income
Summary to
Retained
Earnings.
© 2004 The McGraw-Hill Companies, Inc.
 Close Income Summary to
Retained Earnings
Slide
2-66
GENERAL JOURNAL
Date
Description
Dec. 31 Income Summary
Page 34
Post.
Ref.
Debit
Credit
1,785
Retained Earnings
1,785
Now, let’s look at the ledger accounts after
posting this closing entry.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-67
 Close Income Summary to
Retained Earnings
Retained Earnings
29,400
1,785
Income Summary
5,850
375
300
1,610
100
1,000
1,050
230
1,785
-
31,185
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-68
Post-Closing Trial Balance
Consulting Inc.
Post-Closing Trial Balance
December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment
Accum. depr.-equip.
Accounts payable
Note payable
Salaries payable
Unearned revenue
Retained earnings
Totals
McGraw-Hill/Irwin
$
7,950
1,800
2,670
2,300
26,000
Lists permanent
accounts and their
balances.
$
$ 40,720
375
1,100
5,100
210
2,750
31,185
$ 40,720
Total debits equal
total credits.
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-69
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-70
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.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
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.
Balance, 1/1
Plus: cash paid
Less: insurance expense
Balance, 12/31
McGraw-Hill/Irwin
Prepaid
Insurance
$
5,000
20,000
(22,000)
$
3,000
© 2004 The McGraw-Hill Companies, Inc.
Slide
2-72
End of Chapter 2
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.