Chapter
Three
The Double-Entry
Accounting System
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
THE MECHANICS OF DEBITS AND CREDITS
Debit
Credit
Assets
Expenses
Dividends
Revenue
Liability
Equity
4- 1
DOUBLE ENTRY ACCOUNTING
Assets = Liabilities + Common Stock + Retained Earnings
Debit
=
Credit
+
Credit
+
Credit
4- 2
THE ACCOUNTING CYCLE...
Transactions occur in the normal course of business.
We record them in our records with a JOURNAL ENTRY
(called “Journalizing”).
Journal entries are posted to the GENERAL LEDGER
(called “Posting”).
ADJUSTING ENTRIES are made (journalized) and
posted to the LEDGER.
Financial
Statements
Transactions
The Process
4- 3
ACCOUNTING CYCLE CONTINUED...
A trial balance may be prepared. It shows the
balance (amount and whether debit or credit) of
each account. A trial balance is NOT the same as
a “Balance Sheet”, which is a formal financial
statement.
Financial statements are written.
Closing journal entries are made (journalized) and
posted to the ledger (and another trial balance, called
the “after-closing” or “post-closing” trial balance may be
prepared).
4- 4
DOUBLE-ENTRY ACCOUNTING
Each account can be increased or decreased.
Debit means “left side”
Credit means “right side”
Assets are increased with debits and decreased
with credits
Liabilities and permanent Stockholders’ Equity
are increased with credits and decreased with
debits
In each journal entry, i.e. recording of a
transaction, the DEBITS = CREDITS.
(No exceptions!)
4- 5
T-ACCOUNTS
ASSETS
• In a transaction that
increases an asset, put
that amount on the left
side of the asset account.
Increase
4- 6
T-ACCOUNTS
• In a transaction that
increases an asset, put
that amount on the left
side of the asset account.
ASSETS
Increase
Decrease
• In a transaction that
decreases an asset, put
that amount on the right
side of the asset account.
4- 7
T-ACCOUNTS
Calculate the balance of any account, at any time by:
1. drawing a line across the T-account under the last
posted entry.
2. Adding the amounts on the left side and adding
the amounts on the right side of the account.
3. Subtract the two totals and put the difference on
the side with the larger total.
CASH
200
100
500
50
300
1000
total on
debit
side
150
total on
credit
side
Bal. 850
1000 – 150 = 850
4- 8
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.
4- 9
T-ACCOUNTS: ASSETS
DEBITS
on the
left!!
CASH
debits
increase
assets
e.g., when we
receive cash,
we debit the
CASH account
4- 10
T-ACCOUNTS: ASSETS
Credits
on the
right!!
CASH
debits
increase
assets
e.g., when we
receive cash,
we debit the
CASH
account
credits
decrease
assets
e.g., when we
disburse cash,
we credit the
CASH account
4- 11
T-ACCOUNTS: LIABILITIES AND EQUITY
Debits
on the
left!
Credits
on the
right!!
Accounts Payable
credits
increase
liabilities
4- 12
T-ACCOUNTS: LIABILITIES AND EQUITY
Debits
on the
left!
Credits
on the
right!!
Accounts Payable
credits
Increase
liabilities
e.g., when we
record an
amount we
owe someone
4- 13
T-ACCOUNTS: LIABILITIES AND EQUITY
Debits
on the
left!
Credits
on the
right!!
Accounts Payable
debits
decrease
liabilities
credits
Increase
liabilities
e.g., when we
record an
amount we
owe someone
4- 14
T-ACCOUNTS: LIABILITIES AND EQUITY
Debits
on the
left!
Credits
on the
right!!
Accounts Payable
debits
decrease
liabilities
e.g., when we
pay off some of
our accounts
payable
credits
Increase
liabilities
e.g., when we
record an
amount we
owe someone
4- 15
T-ACCOUNTS
Permanent Equity accts work like liability accounts do:
LIABILITIES
debits
decrease
liabilities
credits
increase
liabilities
Additions to these
accounts are put
on the right.
Permanent Equity Accts.are
Com. Stk. & Ret.Earn.
debits
decrease
Cm. Stk. &
Ret. Earn.
credits
increase
Cm. Stk. &
Ret. Earn.
Deductions from
these accounts are
put on the left.
4- 16
HOW DO JOURNAL ENTRIES RELATE TO T-ACCOUNTS?
Journal entries are recorded chronologically as the
transactions occur (before “posting” to General Ledger):
e.g., On Jan. 6 services are performed for our
customers for which we collect $100 cash:
Date
Account Title
Debit Credit
Jan. 6 Cash
100
The asset “CASH” is increasing. Increases in assets
are recorded by DEBITING the asset account.
4- 17
HOW DO JOURNAL ENTRIES RELATE TO T-ACCOUNTS?
Increases in revenue accounts are recorded with CREDITS.
Journal entries are recorded chronologically as the
transactions occur:
e.g., On Jan. 6 services are performed for $100 cash:
Date
Account Title
Jan. 6 Cash
Service Revenue
Debit
100
Credit
100
An explanation goes here.
Journal entries are written in a journal and then posted to
the general ledger accounts (our t-accounts).
4- 18
General Journal
Date
Account Title
Jan. 6 Cash
Service Revenue
Debit
100
Credit
100
Services rendered for cash
Post from General Journal to the General Ledger
Cash
Service Revenue
100
100
4- 19
NORMAL BALANCES
The normal balance of any account is
the side where you record the
INCREASES.
For example, ASSETS are increased by
DEBITING them. So, the normal balance
of any asset account is a DEBIT
balance.
4- 20
JOURNAL ENTRY FORM
When journalizing, the debit portion of the
entry is recorded first. The account title is
written starting at the left margin.
The credit portion is recorded next. The
name of the account to be credited is written
on the line below the debit and the title is
indented.
A “line of explanation” may be written next.
Skip-a-line between transactions.
4- 22
Beginning Balances (ending balances from last year)
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
BB
5,000
Rec.
+ Rent + Supplies =
4,000
Pay.
+
Rev. + Stk. + Earn.
7,000
=
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
2,000
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
5,000 bal.
GENERAL JOURNAL
Date
Account Titles
Debit
Credit
GENERAL LEDGER ("T" - Accounts)
Cash
bb 5000
Prepaid Rent
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
bb 4000
Supplies
Salaries Payable
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
Service Revenue
Supplies Expense
Salaries Expense
Rent Expense
4- 23
1. On Jan. 2, issued Common Stock for $1,000 cash.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
1
Rec.
+ Rent + Supplies =
Pay.
+
Rev. + Stk. + Earn.
1,000
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
1,000
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
1,000 FA
GENERAL JOURNAL
Account Titles
Date
Jan. 2
Debit
Cash
Credit
1000
Common Stock
1000
Issued Stock for cash
GENERAL LEDGER ("T" - Accounts)
The asset CASH
is
increasing.
Increases
in assets
are recorded
with
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
DEBITS.
bb
1/2
5000
1000
bb 4000
7000 bb
1000 1/2
2000 bb
The
permanent Stockholders’
Equity
account, COMMON
STOCK, is
Prepaid Rent
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
increasing. Increases in permanent Equity accounts are recorded with
CREDITS.
Accumulated Deprec.
Salaries Expense
Rent Expense
Now let’s POST from the JOURNAL to the LEDGER.
4- 24
1. On Jan. 2, issued Common Stock for $1,000 cash.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
1
Rec.
+ Rent + Supplies =
Pay.
+
Rev. + Stk. + Earn.
1,000
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
1,000
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
1,000 FA
GENERAL JOURNAL
Account Titles
Date
Jan. 2
Debit
Cash
Credit
1000
Common Stock
1000
Issued Stock for cash
GENERAL LEDGER ("T" - Accounts)
bb
1/2
Cash
5000
1000
Prepaid Rent
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
bb 4000
Supplies
Salaries Payable
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
Service Revenue
Supplies Expense
Salaries Expense
Rent Expense
4- 25
2. On Feb. 1, performed customer services for
$7,000 on account.
Acc't.
Cash +
2
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
+ Supplies =
7,000
Pay.
+
Rev.
INCOME STATEMENT
Net
- Exp. = Inc.
+ Stk. + Earn.
Rev.
7,000
7,000
=
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
7,000
GENERAL JOURNAL
Date
Feb. 1
Account Titles
Accounts Receivable
Service Revenue
Debit
Credit
7000
7000
Performed customer services on credit.
GENERAL LEDGER ("T" - Accounts)
The asset ACCOUNTS
RECEIVABLE
is
increasing.
Increases inEquity
assets are
Assets
=
Liabilities
+
Cashwith DEBITS.
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
recorded
bb
1/2
5000
1000
bb 4000
2/1 7000
7000 bb
1000 1/2
2000 bb
ThePrepaid
revenue
account,
SERVICE REVENUE,
is increasing.
Increases in
Rent
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7000 2/1
revenue accounts are recorded with CREDITS.
Deprec.
Now let’sAccumulated
POST from
the JOURNAL to the LEDGER.Salaries Expense
Rent Expense
4- 26
2. On Feb. 1, performed customer services for
$7,000 on account.
Acc't.
Cash +
2
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
+ Supplies =
7,000
Pay.
+
INCOME STATEMENT
Net
Rev. + Stk. + Earn.
Rev.
7,000
7,000
=
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
7,000
GENERAL JOURNAL
Account Titles
Date
Feb. 1
Debit
Accounts Receivable
Service Revenue
Credit
7000
7000
Performed customer services on credit.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
Cash
5000
1000
Prepaid Rent
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
bb 4000
2/1 7000
Supplies
Salaries Payable
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
Service Revenue
7000 2/1
Supplies Expense
Salaries Expense
Rent Expense
4- 27
3. On Mar. 7, collected $8,000 cash from customers
for services to be performed in the future.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
3
Rec.
+ Rent
+ Supplies =
8,000
Pay.
+
Rev.
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
8,000
=
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
8,000 OA
GENERAL JOURNAL
Account Titles
Date
Debit
Mar. 7 Cash
Credit
8000
Unearned Service Revenue
8000
Collected cash for future services.
GENERAL LEDGER ("T" - Accounts)
The asset CASH
is
increasing.
Increases
in assets
are recorded
with DEBITS.
Assets
=
Liabilities
+
Equity
bb
1/2
Cash
5000
1000
8000
Accounts Receiv.
bb 4000
2/1 7000
Common Stock
7000 bb
1000 1/2
Unearned Serv.Rev.
8000 3/7
Retained Earnings
2000 bb
3/7
The
liability account, UNEARNED SERVICE REVENUE, is increasing.
Increases
in liability
accounts are recorded
with CREDITS.
Prepaid Rent
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7000 2/1
Now let’s POST from the JOURNAL to the LEDGER.
Accumulated Deprec.
Salaries Expense
Rent Expense
4- 29
3. On Mar. 7, collected $8,000 cash from customers
for services to be performed in the future.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
3
Rec.
+ Rent
+ Supplies =
8,000
Pay.
+
Rev.
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
8,000
=
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
8,000 OA
GENERAL JOURNAL
Account Titles
Date
Debit
Mar. 7 Cash
Credit
8000
Unearned Service Revenue
8000
Collected cash for future services.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
Cash
5000
1000
8000
Prepaid Rent
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
bb 4000
8000 3/7
2/1 7000
Supplies
Salaries Payable
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
Service Revenue
7000 2/1
Supplies Expense
Salaries Expense
Rent Expense
4- 30
4. On April 9th, collected $7,000 of the receivables.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
4
Cash +
Rec.
7,000
(7,000)
+ Rent + Supplies =
Pay.
+
Rev. + Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
7,000 OA
=
GENERAL JOURNAL
Account Titles
Date
Debit
Apr. 9 Cash
Credit
7000
Accounts Receivable
7000
Collected $7,000 cash from customers' receivables.
GENERAL LEDGER ("T" - Accounts)
The asset CASH
is
increasing.
Increases
in assets
are recorded
with DEBITS.
Assets
=
Liabilities
+
Equity
Cash
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid Rent
bb
Accounts Receiv.
bb 4000 7000 4/9
2/1 7000
Common Stock
7000 bb
1000 1/2
Unearned Serv.Rev.
8000 3/7
Retained Earnings
2000 bb
The asset account, ACCOUNTS RECEIVABLE, is decreasing. Decreases in
asset accounts areOffice
recorded
with CREDITS.
Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7000 2/1
Now let’s POST from the JOURNAL to the LEDGER.
Accumulated Deprec.
Salaries Expense
Rent Expense
4- 31
4. On April 9th, collected $7,000 of the receivables.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
4
Cash +
Rec.
7,000
(7,000)
+ Rent + Supplies =
Pay.
+
Rev. + Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
7,000 OA
=
GENERAL JOURNAL
Account Titles
Date
Debit
Apr. 9 Cash
Credit
7000
Accounts Receivable
7000
Collected $7,000 cash from customers' receivables.
GENERAL LEDGER ("T" - Accounts)
Cash
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid Rent
bb
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
bb 4000 7000 4/9
8000 3/7
2/1 7000
Supplies
Salaries Payable
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
Service Revenue
7000 2/1
Supplies Expense
Salaries Expense
Rent Expense
4- 32
5. On May 3, paid $2,000 salaries in cash.
Acc't.
Cash +
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent + Supplies =
5 (2,000)
Pay.
+
Rev. + Stk. + Earn.
=
INCOME STATEMENT
Net
Rev.
(2,000)
- Exp. = Inc.
2,000
(2,000)
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(2,000) OA
GENERAL JOURNAL
Date
May 3
Account Titles
Salaries Expense
Cash
Debit
Credit
2000
2000
Paid $2,000 salaries in cash.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
4/9
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
5000 2000 5/3
bb 4000 7000 4/9
8000 3/7
7000 bb
2000 bb
1000
2/1 7000
1000 1/2
8000
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
7000 2/1
Salaries Expense
5/3 2000
Rent Expense
4- 33
6. On July 1, purchased supplies by
paying $9,000 cash.
Acc't.
Cash +
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
+ Supplies =
6 (9,000)
Pay.
+
Rev.
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
9,000 =
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(9,000) OA
GENERAL JOURNAL
Account Titles
Date
Debit
July 1 Supplies
Cash
Credit
9000
9000
Purchased supplies for $9,000 cash.
GENERAL LEDGER ("T" - Accounts)
The asset, Supplies,
is
increasing.
Increases
in +assets are recorded
with
Assets
=
Liabilities
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
DEBITS.
bb
5000 2000 5/3
1/2
1000 9000 7/1
3/7
8000
4/9
7000
Prepaid Rent
bb 4000 7000 4/9
2/1 7000
8000 3/7
7000 bb
1000 1/2
2000 bb
The asset account,
CASH, is decreasing.
Decreases
in asset accounts are
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7/1 9000
7000 2/1
recorded with CREDITS.
Accumulated Deprec.
Salaries Expense
Now let’s
POST from the JOURNAL to the LEDGER.
5/3 2000
Rent Expense
4- 34
6. On July 1, purchased supplies by
paying $9,000 cash.
Acc't.
Cash +
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
+ Supplies =
6 (9,000)
Pay.
+
Rev. + Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
9,000 =
GENERAL JOURNAL
Account Titles
Date
July 1 Supplies
Cash
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(9,000) OA
Debit
Credit
9000
9000
Purchased supplies for $9,000 cash.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
4/9
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
5000 2000 5/3
bb 4000 7000 4/9
8000 3/7
7000 bb
2000 bb
1000 9000 7/1
2/1 7000
1000 1/2
8000
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
7/1 9000
7000 2/1
Salaries Expense
5/3 2000
Rent Expense
4- 35
7. On Nov. 1, paid $3,000 to rent office space for the
next three months.
Acc't.
Cash +
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
7 (3,000)
+ Supplies =
3,000
Pay.
+
Rev. + Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(3,000) OA
=
GENERAL JOURNAL
Account Titles
Date
Debit
Nov. 1 Prepaid Rent
Cash
Credit
3000
3000
Prepaid 3 months rent for $3,000.
GENERAL LEDGER ("T" - Accounts)
The asset PREPAID
RENT
is increasing.
Increases
in assets are
recorded
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
with DEBITS.
bb
5000 2000 5/3
1/2
1000 9000 7/1
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
11/1 3000
bb 4000 7000 4/9
2/1 7000
8000 3/7
7000 bb
1000 1/2
2000 bb
The asset account,
CASH, is decreasing.
Decreases
in asset accounts are
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7/1 9000
7000 2/1
recorded with CREDITS.
Deprec.
Expense
Now let’sAccumulated
POST from
the JOURNAL to the LEDGER.Salaries
5/3 2000
Rent Expense
4- 36
7. On Nov. 1, paid $3,000 to rent office space for the
next three months.
Acc't.
Cash +
7 (3,000)
Rec.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
+ Rent
+ Supplies =
3,000
Pay.
+
Rev.
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(3,000) OA
=
GENERAL JOURNAL
Account Titles
Date
Nov. 1 Prepaid Rent
Cash
Debit
Credit
3000
3000
Prepaid 3 months rent for $3,000.
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb
5000 2000 5/3
bb 4000 7000 4/9
8000 3/7
7000 bb
2000 bb
1/2
1000 9000 7/1
2/1 7000
1000 1/2
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
11/1 3000
7/1 9000
7000 2/1
Salaries Expense
5/3 2000
Rent Expense
4- 37
ADJUSTING ENTRIES...
Before financial statements are
prepared, adjusting entries must be
journalized and posted to
make
sure that all accounts are properly
stated and that nothing has been
omitted.
Adjustments need to be made for all:
Accruals (Accrued Revenues and Accrued
Expenses)
Deferrals (Deferred Revenues and
Deferred Expenses)
4- 38
8. Year-end adjustment recognizing ¼ of services
required by transaction #3 have been performed.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn
Com.
Ret.
Acc't.
Cash +
3
Rec.
+
Rent
8,000
8
+ Supplies =
Pay.
+
Rev.
=
8,000
=
(2,000)
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
8,000 OA
2,000
2,000
2,000
GENERAL JOURNAL
Account Titles
Date
Debit
Dec. 31 Unearned Service Revenue
Service Revenue
Credit
2000
2000
Completed 1/4 of work on $8,000 contract.
GENERAL LEDGER ("T" - Accounts)
The liability account,
UNEARNED
SERVICE
REVENUE,
is decreasing.
Assets
=
Liabilities
+
Equity
Cash in liabilities
Accounts
Unearned
Serv.Rev.
Common Stock
Retained Earnings
Decreases
areReceiv.
recorded
with DEBITS.
bb
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid
11/1 3000
2000 5/3
9000 7/1
3000 11/1
bb 4000 7000 4/9
2/1 7000
adj 2000 8000 3/7
7000 bb
1000 1/2
2000 bb
The revenue
account,
SERVICE REVENUE,
is increasing.
Increases in
Rent
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
7000 2/1
revenue accounts 7/1
are9000
recorded with CREDITS.
2000 adj
Deprec.
Expense
Now let’sAccumulated
POST from
the JOURNAL to the LEDGER.Salaries
5/3 2000
Rent Expense
4- 39
8. Year-end adjustment recognizing ¼ of services
required by transaction #3 have been performed.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn
Com.
Ret.
Acc't.
Cash +
3
8,000
8
Rec.
+
Rent
+ Supplies =
Pay.
+
Rev.
=
8,000
=
(2,000)
+ Stk. + Earn.
INCOME STATEMENT
Net
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
8,000 OA
2,000
2,000
2,000
GENERAL JOURNAL
Date
Account Titles
Dec. 31 Unearned Service Revenue
Service Revenue
Debit
Credit
2000
2000
Completed 1/4 of work on $8,000 contract.
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb
5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2
1000 9000 7/1
2/1 7000
1000 1/2
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
11/1 3000
7/1 9000
7000 2/1
2000 adj
Salaries Expense
5/3 2000
Rent Expense
4- 40
9. A physical count reveals that there are $8,000 of
supplies left over. Supplies of $1,000 were used.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
Rec.
+
Rent
9
+ Supplies =
Pay.
+
Rev.
INCOME STATEMENT
Net
+ Stk. + Earn.
(1,000) =
Rev.
(1,000)
- Exp. = Inc.
1,000
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(1,000)
GENERAL JOURNAL
Account Titles
Date
Debit
Dec. 31 Supplies Expense
Supplies
Credit
1000
1000
$1,000 of Supplies were used.
GENERAL LEDGER ("T" - Accounts)
The expense account,
SUPPLIES
EXPENSE,
is increasing.
Increases
in
Assets
=
Liabilities
+
Equity
Cash are recorded
Accounts
Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
expenses
with
DEBITS.
bb
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid
11/1 3000
2000 5/3
9000 7/1
3000 11/1
Rent
bb 4000 7000 4/9
2/1 7000
adj 2000 8000 3/7
Supplies
Salaries Payable
7000 bb
1000 1/2
2000 bb
Service Revenue
Depreciation Exp.
Salaries Expense
5/3 2000
Rent Expense
The asset account,7/1SUPPLIES,
is decreasing. Decreases 7000
in asset
accounts
9000
2/1 adj
1000
2000 adj
are recorded with CREDITS.
Accumulated Deprec.
1000 adj
Now let’s POST from the JOURNAL to the LEDGER.
4- 41
9. A physical count reveals that there are $8,000 of
supplies left over. Supplies of $1,000 were used.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
9
Rec.
+
Rent
+ Supplies =
Pay.
+
Rev.
INCOME STATEMENT
Net
+ Stk. + Earn.
(1,000) =
Rev.
- Exp. = Inc.
(1,000)
1,000
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(1,000)
GENERAL JOURNAL
Date
Account Titles
Dec. 31 Supplies Expense
Supplies
Debit
Credit
1000
1000
$1,000 of Supplies were used.
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb
5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2
1000 9000 7/1
2/1 7000
1000 1/2
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
11/1 3000
7/1 9000
7000 2/1 adj 1000
1000 adj
2000 adj
Salaries Expense
5/3 2000
Rent Expense
4- 42
10. Year-end rent adjustment.
$3000/3 Mo. = $1,000/mo. Nov. & Dec. expired =$2,000.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn
Com.
Ret.
Acc't.
Cash +
7
(3,000)
10
Rec.
+
Rent
+ Supplies =
3,000
=
(2,000)
=
Pay.
+
Rev.
INCOME STATEMENT
Net
+ Stk. + Earn.
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(3,000) OA
(2,000)
2,000
(2,000)
GENERAL JOURNAL
Account Titles
Date
Dec. 31
Debit
Rent Expense
Prepaid Rent
Credit
2000
2000
Two months (Nov. & Dec.) prepaid rent expired.
GENERAL LEDGER ("T" - Accounts)
The expense account,
RENT
EXPENSE,
is increasing.
Increases
in expenses
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
are recorded
with DEBITS.
bb
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid
11/1
3000
2000 5/3
9000 7/1
3000 11/1
bb 4000 7000 4/9
2/1 7000
adj 2000 8000 3/7
7000 bb
1000 1/2
2000 bb
The assetRent
account,Office
PREPAID
RENT,Salaries
is decreasing.
Decreases in assets are
Equipment
Payable
Service Revenue Depreciation Exp.
7/1 9000
7000 2/1 adj 1000
recorded 2000
withadj
CREDITS.
2000 adj
Deprec.
Salaries Expense
Now let’s Accumulated
POST from
the
JOURNAL
to
the
LEDGER.
1000 adj
5/3 2000
Rent Expense
adj 2000
4- 43
10. Year-end rent adjustment.
$3000/3 Mo. = $1,000/mo. Nov. & Dec. expired =$2,000.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn
Com.
Ret.
Acc't.
Cash +
7
(3,000)
10
Rec.
+
Rent
+ Supplies
=
3,000
=
(2,000)
=
Pay.
+
Rev.
INCOME STATEMENT
Net
+ Stk. + Earn.
Rev.
- Exp. = Inc.
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(3,000) OA
(2,000)
2,000
(2,000)
GENERAL JOURNAL
Date
Dec. 31
Account Titles
Rent Expense
Prepaid Rent
Debit
Credit
2000
2000
Two months (Nov. & Dec.) prepaid rent expired.
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb
5000
2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2
1000 9000 7/1
2/17000
1000 1/2
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
11/1
3000 2000 adj
7/1 9000
7000 2/1 adj 1000
1000 adj
2000 adj
Salaries Expense
5/3 2000
Rent Expense
adj 2000
4- 44
11. Year-end adjustment to accrue $600 salaries.
BALANCE SHEET (and Accounting Equation)
ASSETS
= LIABILITIES
+ STK. EQUITY
PrePaid
Salary
Unearn Com.
Ret.
Acc't.
Cash +
Rec.
+
Rent
11
+ Supplies =
Pay.
=
600
+
INCOME STATEMENT
Net
Rev. + Stk. + Earn.
Rev.
- Exp. = Inc.
(600)
600
CASHFLOW
STATEMENT
OA,IA,FA
$ amt
(600)
GENERAL JOURNAL
Account Titles
Date
Dec. 31
Debit
Salaries Expense
Salaries Payable
Credit
600
600
Accrue $600 salaries incurred, but not yet paid.
GENERAL LEDGER ("T" - Accounts)
The expense account,
SALARIES
EXPENSE
is increasing.
Increases
in
Assets
=
Liabilities
+
Equity
Cash are recorded
Accounts
Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
expenses
with
DEBITS.
bb
5000
1/2
1000
3/7
8000
4/9
7000
Prepaid
11/1
3000
2000 5/3
9000 7/1
3000 11/1
bb 4000 7000 4/9
2/1 7000
adj 2000 8000 3/7
7000 bb
1000 1/2
2000 bb
The liability
account,
SALARIES PAYABLE,
is increasing.
Increases in
Rent
Office Equipment
Salaries Payable
Service Revenue Depreciation Exp.
2000 adj
7/1 9000
600 adj
7000 2/1 adj 1000
liability accounts
are
recorded with CREDITS.
2000 adj
Deprec.
Salaries Expense
Now let’s Accumulated
POST from
the
JOURNAL
to
the
LEDGER.
1000 adj
5/3 2000
adj
Rent Expense
adj 2000
600
4- 45
11. Year-end adjustment to accrue $600 salaries.
BALANCE SHEET (and Accounting Equation)
ASSETS
=
LIABILITIES
+ STK. EQUITY
PrePaid
Salary Unearn Com.
Ret.
Acc't.
Cash +
11
Rec.
+
Rent
+ Supplies = Pay. +
=
Rev.
+ Stk. + Earn.
600
INCOME STATEMENT
CASHFLOW
STATEMENT
Net
Rev.
OA,IA,FA
- Exp. = Inc.
(600)
600
$ amt
(600)
GENERAL JOURNAL
Date
Dec. 31
Account Titles
Salaries Expense
Salaries Payable
Debit
Credit
600
600
Accrue $600 salaries incurred, but not yet paid.
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb
5000
2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2
1000 9000 7/1
2/17000
1000 1/2
3/7
8000 3000 11/1
4/9
7000
Prepaid Rent
Supplies
Salaries Payable
Service Revenue Supplies Expense
11/1
3000 2000 adj
7/1 9000
600 adj
7000 2/1 adj 1000
1000 adj
2000 adj
Salaries Expense
5/3 2000
adj 600
Rent Expense
adj 2000
4- 46
Let’s assume one additional transaction.
On Dec. 31, the Patriot Co. paid its stockholders a $400
cash dividend.
The “Dividends” account is a “contra-equity” account.
An increase in this account results in a decrease in the
Retained Earnings portion of equity.
GENERAL JOURNAL
Account Titles
Date
Dec. 31
Debit
Dividends
Cash
Credit
400
400
$400 dividend paid to stockholders.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
4/9
Cash
5000
2000
1000 9000
8000 3000
7000
400
Assets
=
Liabilities
+
Accounts Receiv.
Unearned Serv.Rev.
5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7/1
2/1 7000
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
11/1
12/31
Dividends
12/31 400
Salaries Payable
600 adj
Prepaid Rent
11/1
3000 2000 adj
Supplies
7/1 9000
1000 adj
Service Revenue Supplies Expense
7000 2/1 adj 1000
2000 adj
Salaries Expense
5/3 2000
adj 600
Rent Expense
adj 2000
4- 47
Calculate ledger account ending balances (eb)
after all adjustments have been posted.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
4/9
eb
Assets
=
Liabilities
+
Cash
Accounts Receiv.
Unearned Serv.Rev.
5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
1000 9000 7/1
2/1 7000
6000 eb
8000 3000 11/1 eb 4000
7000 400 12/31
6600
Prepaid Rent
11/1 3000 2000 adj
eb 1000
Supplies
7/1 9000
1000 adj
eb 8000
Salaries Payable
600 adj
600 eb
This is still the
beginning
balance until
the closing
entries are
made.
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
8000 eb
Dividends
12/31 400
eb 400
Service Revenue Supplies Expense
7000 2/1 adj 1000
2000 adj eb 1000
9000 eb
Salaries Expense
5/3 2000
adj 600
eb 2600
Rent Expense
adj 2000
eb 2000
4- 48
TRIAL BALANCE
debits
credits
Since debits = credits in all
journal entries, at any point
in time we should be able
to take the balances in all
of our general ledger
accounts and confirm that
DEBITS = CREDITS for all
accounts together.
Trial Balances are commonly prepared both
before and after recording adjusting entries (and
after recording “closing” entries, which will be
explained later).
4- 49
ADJUSTED TRIAL BALANCE FOR PATRIOT COMPANY
GENERAL LEDGER ("T" - Accounts)
Assets
Cash
bb 5000 2000 5/3
1/2 1000 9000 7/1
3/7 8000 3000 11/1
4/9 7000
400 12/31
eb 6600
Accounts Receiv.
bb 4000 7000 4/9
2/1 7000
eb 4000
Prepaid Rent
11/1 3000 2000 adj
eb
1000
Supplies
7/1 9000
1000 adj
eb 8000
Accounts in Ledger
Dr.
Cash
6600
Accounts. Receivable
4000
Prepaid Rent
1000
Supplies
8000
Unearned Serv. Revenue
Salaries Payable
Common Stock
Retained Earnings
Dividends
400
Service Revenue
Supplies Expense
Salaries Expense
2600
Rent Expense
2000
Totals
25,600
Cr.
6000
600
8000
2000
9000
1000
25,600
4- 50
ADJUSTED TRIAL BALANCE FOR PATRIOT COMPANY
Liabilities
Unearned Serv.Rev.
adj 2000 8000 3/7
6000 eb
Salaries Payable
600 adj
600 eb
Accounts in Ledger
Dr.
Cash
6600
Accounts. Receivable
4000
Prepaid Rent
1000
Supplies
8000
Unearned Serv. Revenue
Salaries Payable
Common Stock
Retained Earnings
Dividends
400
Service Revenue
Supplies Expense
Salaries Expense
2600
Rent Expense
2000
Totals
25,600
Cr.
6000
600
8000
2000
9000
1000
25,600
4- 51
ADJUSTED TRIAL BALANCE FOR PATRIOT COMPANY
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
8000 eb
Dividends
12/31 400
Service Revenue Supplies Expense
7000 2/1 adj 1000
2000 adj eb 1000
9000 eb
Salaries Expense
5/3 2000
adj 600
eb 2600
Rent Expense
adj 2000
eb 2000
Accounts in Ledger
Dr.
Cash
6600
Accounts. Receivable
4000
Prepaid Rent
1000
Supplies
9000
Unearned Serv. Revenue
Salaries Payable
Common Stock
Retained Earnings, begin.
Dividends
400
Service Revenue
Supplies Expense
Salaries Expense
2600
Rent Expense
2000
Totals
25,600
Cr.
6000
600
8000
2000
9000
1000
25,600
4- 52
ADJUSTED TRIAL BALANCE FOR PATRIOT COMPANY
This is the Trial
Balance based on
the balances of each
Ledger account (Tacct) after the
adjusting entries
have been
journalized and
posted.
debits
=
credits
Accounts in Ledger
Cash
Accounts. Receivable
Prepaid Rent
Supplies
Dr.
6600
4000
1000
8000
6000
600
8000
2000
Unearned Service Revenue
Salaries Payable
Common Stock
Retained Earnings
Dividends
Service Revenue
Supplies Expense
Salaries Expense
Rent Expense
Totals
Cr.
400
9000
1000
2600
2000
25,600 25,600
4- 53
LEDGER ACCOUNT BALANCES AFTER
THE ADJUSTING ENTRIES, BUT BEFORE
THE CLOSING ENTRIES, ARE THE
DOLLAR AMOUNTS THAT GO ON THE
FINANCIAL STATEMENTS.
4- 54
THE GOAL OF THE WHOLE PROCESS:
Financial Statements that
reflect the true financial
condition and transactions of
the company
Balance Sheet
Income Statement
Statement of Changes in
Stockholders’ Equity
Statement of Cash Flows
4- 55
CLOSING ENTRIES
All temporary “nominal”
accounts (income statement
accounts and dividends) are
closed at the end of the
accounting period, after the
financial statements are
prepared.
Their balances are brought to
ZERO, and the offsetting entry
is made to the retained
earnings account.
4- 56
CLOSING ENTRIES
Balance
Sheet
(Retained
Earnings
part of equity)
Income
Statement
(revenues
and expenses)
Since revenue and
expense accounts
keep track of
transactions for a
period of time, we
need them to be zero
at the end of an
accounting period.
To do this, we close
them to retained
earnings.
This effectively kicks
them from the
income statement to
the balance sheet.
4- 57
JOURNAL ENTRIES TO CLOSE REVENUE AND EXPENSE
ACCOUNTS: CLOSING ENTRIES
Like all entries, closing entries are Journalized and
then Posted.
Revenue accounts have credit balances, so we must
DEBIT them to close them (to get a zero balance).
What should we credit?
Retained Earnings
4- 58
CLOSING CONTINUED...
Because expense accounts
have debit balances, to close
expense accounts we credit
the expense account and
debit the Retained Earnings
account.
We are emptying the revenue
and expense accounts...
Their balances must be “zero”
after closing.
4- 59
Only the temporary equity accounts below
will be closed.
GENERAL LEDGER ("T" - Accounts)
bb
1/2
3/7
4/9
eb
Assets
=
Liabilities
+
Cash
Accounts Receiv.
Unearned Serv.Rev.
5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
1000 9000 7/1
2/1 7000
6000 eb
8000 3000 11/1 eb 4000
7000 400 12/31
6600
Prepaid Rent
11/1 3000 2000 adj
eb 1000
Supplies
7/1 9000
1000 adj
eb 8000
Salaries Payable
600 adj
600 eb
Equity
Common Stock
Retained Earnings
7000 bb
2000 bb
1000 1/2
8000 eb
Dividends
12/31 400
eb 400
Service Revenue Supplies Expense
7000 2/1 adj 1000
2000 adj eb 1000
9000 eb
Salaries Expense
5/3 2000
adj 600
eb 2600
Rent Expense
adj 2000
eb 2000
4- 60
Journalize and Post the Closing Entries
GENERAL JOURNAL
Date
Account Titles
Closing Entries
31 Service Revenue
Retained Earnings
Debit
Credit
9000
9000
to close all revenue accounts
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb 5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2 1000 9000 7/1
2/1 7000
6000 eb
1000 1/2
9000 cl
3/7 8000 3000 11/1 eb 4000
8000 eb
4/9 7000
400 12/31
eb 6600
Salaries Payable
Dividends
600 adj
12/31 400
Prepaid Rent
Supplies
600 eb
eb 400
11/1 3000 2000 adj
7/1 9000
1000 adj
eb 1000
Service Revenue Supplies Expense
eb 8000
7000 2/1 adj 1000
2000 adj eb 1000
cl 9000 9000 eb
0
4- 61
Date
Account Titles
31
Retained Earnings
Supplies Expense
Salaries Expense
Rent Expense
to close all expense accounts
Debit
Credit
5600
1000
2600
2000
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock
Retained Earnings
bb 5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2 1000 9000 7/1
2/1 7000
6000 eb
1000 1/2 cl 5600 9000 cl
3/7 8000 3000 11/1 eb 4000
8000 eb
4/9 7000
400 12/31
eb 6600
Salaries Payable
Dividends
600 adj
12/31 400
Prepaid Rent
Supplies
600 eb
eb 400
11/1 3000 2000 adj
7/1 9000
eb 1000
1000 adj
Service Revenue Supplies Expense
eb 8000
7000 2/1 adj 1000
2000 adj eb 1000 1000 cl
cl 9000 9000 eb
0
0
Salaries Expense
Rent Expense
5/3 2000
adj 2000
adj 600
eb 2000 2000 cl
eb 2600 2600 cl
0
0
4- 62
ONE MORE ACCOUNT TO CLOSE:
Retained Earnings
Dividends
Beginning balance
Dividends
Dividends
Balance before
closing
Expenses
Dividends
Revenues
Ending balance
The DIVIDENDS (to stockholders) account is closed by
crediting it (since it has a debit balance) and making an
offsetting debit to RETAINED EARNINGS.
4- 63
ONE MORE ACCOUNT TO CLOSE:
Dividends (Distributions)
Bal. 400
Retained Earnings
2000 Beg. Bal.
(exp) 5600 9000 (rev.)
The DIVIDENDS (to stockholders) account is
closed with a credit (since it has a debit balance)
and an offsetting debit to RETAINED EARNINGS.
4- 64
ONE MORE ACCOUNT TO CLOSE:
Dividends (Distributions)
Bal. 400
400 (to close)
end 0
Retained Earnings
2000 Beg. Bal.
(exp) 5600 9000 (rev.)
(div.) 400
5000 End Bal.
The DIVIDENDS (to stockholders) account is
closed with a credit (since it has a debit balance)
and an offsetting debit to RETAINED EARNINGS.
4- 65
ONE MORE ACCOUNT TO CLOSE:
Dividends (Distributions)
Bal. 400
400 (to close)
end 0
Retained Earnings
2000 Beg. Bal.
(exp) 5600 9000 (rev.)
(div.) 400
5000 End Bal.
The DIVIDENDS (to stockholders) account is
closed with a credit (since it has a debit balance)
and an offsetting debit to RETAINED EARNINGS.
Do NOT close the Retained Earnings account.
Its $5,000 ending balance becomes the
beginning balance of the next period.
4- 66
GENERAL JOURNAL
Date
31
Account Titles
Retained Earnings
Dividends
to close the Dividends account
Debit
400
Credit
400
GENERAL LEDGER ("T" - Accounts)
Assets
=
Liabilities
+
Equity
Cash
Accounts Receiv.
Unearned Serv.Rev.
Common Stock Retained Earnings
bb 5000 2000 5/3
bb 4000 7000 4/9
adj 2000 8000 3/7
7000 bb
2000 bb
1/2 1000 9000 7/1
2/1 7000
6000 eb
1000 1/2 cl 5600 9000 cl
3/7 8000 3000 11/1 eb 4000
8000 eb
cl 400
4/9 7000
400 12/31
5000 eb
eb 6600
Salaries Payable
Dividends
600 adj
12/31 400
Prepaid Rent
Supplies
600 eb
eb 400 400 cl
11/1 3000 2000 adj
7/1 9000
0
eb 1000
1000 adj
Service Revenue
Supplies Expense
eb 8000
7000 2/1 adj 1000
2000 adj eb 1000 1000 cl
cl 9000 9000 eb
0
0
Salaries Expense
Rent Expense
5/3 2000
adj 2000
adj 600
eb 2000 2000 cl
eb 2600 2600 cl
0
0
4- 67
Summary of Closing Entries in the Journal
GENERAL JOURNAL
Date
Account Titles
Closing Entries
Dec. 31 Service Revenue
Retained Earnings
Debit
Credit
9000
9000
to close all revenue accounts
31 Retained Earnings
Supplies Expense
Salaries Expense
Rent Expense
5600
1000
2600
2000
to close all expense accounts
31 Retained Earnings
Dividends
400
400
to close the Dividends account
4- 68
THE POST-CLOSING TRIAL BALANCE
A trial balance written after
closing the books is called a
post-closing or after-closing
trial balance.
What accounts will have nonzero balances on this trial
balance?
THE
END
Assets
Liabilities
Permanent Stockholders’ Equity accts.
(Common Stock & Ret. Earn.)
There will be NO balances in Revenue, Expense
or Dividend accounts on this Trial Balance.
So, they may be omitted from this Trial Balance.
4- 69
POST-CLOSING TRIAL BALANCE FOR PATRIOT COMPANY
This is the Trial
Balance based on
the balances of each
Ledger account (Tacct) after the
closing entries have
been journalized
and posted.
debits
=
credits
Accounts in Ledger
Cash
Accounts. Receivable
Prepaid Rent
Supplies
Dr.
6600
Cr.
4000
1000
8000
6000
Salaries Payable
600
Common Stock
8000
Retained Earnings (end)
5000
Dividends
0 19,600
Totals
19,600
Service Revenue
0
SuppliesExpense
Because the Revenue, 0
Salaries Expense
0
Expense,
and
Dividend
Rent Expense
0
accounts
have zero 19,600
balances
Totals
19,600
Unearned Service Revenue
they may be left off the Postclosing Trial Balance.
4- 70
POST-CLOSING TRIAL BALANCE FOR PATRIOT COMPANY
Notice that
Retained Earnings
account now has
the ending
balance in it.
The effect of the
income statement
accounts and
dividends account
are now included
in Retained
Earnings.
debits
=
Accounts in Ledger
Cash
Accounts. Receivable
Prepaid Rent
Supplies
Unearned Service Revenue
Salaries Payable
Common Stock
Retained Earnings (end)
Totals
Dr.
6600
Cr.
4000
1000
9000
6000
600
8000
5000
19,600 19,600
credits
4- 71
CHAPTER 3
The End
4- 72
