ILLUSTRATION – The Accounting Cycle
Dress Right Clothing Corporation
Transactions for July 2011
July 1
Two individuals formed Dress Right Clothing Corporation. Each invested
$30,000 in the corporation. Each investor was issued 3,000 shares of
common stock.
The company operates a retail store that sells men’s and women’s
clothing.
1
Borrowed $40,000 from a local bank and signed two notes. The first note for
$10,000 requires payment of principal and 10% interest in six months.The
second note for $30,000 requires the payment of principal in two
years.Interest at 10% is payable each year on July 1, 2012, and July 1,
2013.
1
Paid $24,000 in advance for one year’s rent on the store building.
1
Purchased furniture and fixtures from Acme Furniture for $12,000 cash.
3
Purchased $60,000 of clothing inventory on account from the Birdwell
Wholesale Clothing Company.
6
Purchased $2,000 of supplies for cash.
4-31 During the month sold merchandise costing $20,000 for $35,000 cash.
9
Sold clothing on account to St. Jude’s School for Girls for $3,500. The
clothing cost $2,000.
16
Subleased a portion of the building to a jewelry store. Received $1,000 in
advance for the first two months’ rent beginning on July 16.
20
Paid Birdwell Wholesale Clothing $25,000 on account.
20
Paid salaries to employees for the first half of the month, $5,000.
25
Received $1,500 on account from St. Jude’s.
30
The corporation paid its shareholders a cash dividend of $1,000.
ADJUSTING ENTRIES:
A. PREPAYMENTS
1. PREPAID EXPENSES.
-Supplies
Dress Right determines that at the end of July, $1,200 of supplies are still on-hand.
To record the cost of supplies used during the month of July.
-Prepaid Rent
At the beginning of July, the company paid $24,000 to its landlord representing one year's rent in advance.
To record the cost of expired rent for the month of July.
-Depreciation
Furniture and fixtures have a useful life of five years (60 months) and will be worthless at the end of that period.
To record depreciation of furniture and fixtures for the month of July.
2. UNEARNED REVENUES.
The company subleased a portion of its building to a jewelry store for $500 per month. On July 16, the jewelry store paid Dress Right
$1,000 in advance for the first two months' rent.
To record previously unearned rent revenue earned during July.
B. ACCRUALS
1. ACCRUED LIABILITIES (EXPENSES):
-ACCRUED SALARIES
on July 20 the company paid employees $5,000 for salaries for the first half of the month. Salaries for the
second half of July are $5,500 and will probably be paid in early August.
To record accrued salaries at the end of July.
-ACCRUED INTEREST
Interest rate on the $40,000 Notes payable is 10%.
To accrue interest expense for July on notes payable.
2. ACCRUED RECEIVABLES (REVENUES):
Assume that Dress Right loaned another corporation $30,000 at the beginning of August, evidenced by a note receivable. Terms of the
note call for the payment of principal, $30,000, and interest at 8% in three months.
To accrue interest revenue earned in August on note receivable.
There is no accrued revenue adjusting entries required for Dress Right at the end of July.
3. Estimates
Accountants often must make estimates in order to comply with the accrual accounting model.
There is no estimate related adjusting entries required for Dress Right at the end of July.
The General Journal—Adjusting Entries
CLOSING ENTRIES
1. To close the revenue accounts to income summary:
2. To close the expense accounts to income summary:
3. To close the income summary account to retained earnings:
Additional Consideration
An alternative method of recording a cash dividend is to debit a temporary account called dividends,
rather than debiting retained earnings.
If this approach is used, an additional closing entry is required to close
the dividend account to retained earnings, as follows:
4. To close dividends to retained earnings
***This is NOT the case with Dress Right Corporation
Post-Closing Trial Balance
DRESS RIGHT CLOTHING CORPORATION
Post-Closing Trial Balance
July 31, 2013
Account Title
Debits
Credits
Cash
68,500
Accounts receivable
2,000
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
1,917
Totals
143,700
143,700
Lists
permanent
accounts
and their
balances.
Total
debits
equal total
credits.