Syslem ofun B: The Appendix MechsnicsAccounting

enrninq Q/geeftuag
When you are finishedstudyingthis appendix,you shouldbe able to: and ledgersystem explainhow it works. 1. Definethe general cycle. in 2" Explainandperformthe steps the accounting
and financialstatements make beforepreparing needed 3. Identify the adjustments thoseadjustments.

and the 4" Describe closingprocess explainwhy it is necessary.

575

576

APPENDIXB. THE M EC H A N IC S A N A CC OU N TIN G S TE M OF SY

The general ledger system is the accountant's traditional way of keepingtrack of a company's financial transactions and then using those records preparethe to basic financialstatements. The debitsand creditsusedin this system are simplya mechanical way to keep track of financialtransactions.

In the frst three chaptersof this book, you have beenkeeping track of Tom's Wear transactions using an accounting equation work sheet.We can do that in a simple world with a small number of transactions.In the real world, that wouldn't work very well. A company in the real world needsa better systemto keep track of the large number of transactions representedin the four basic financial statements. company may have an accounting system A that gathersonly accountinginformation-just recording the information that appliesto the financial statements-and other information systemsgathering information for marketing, production, and other parts of the company.Alternatively, a company may have a single, integrated information system in which all company information is recorded-data about suppliers,employees,operations;and the accounting information is simply a small part. For years, the accountantshave had their own separaterecord-keeping system called the general ledger system; and the other functional areasof the business-marketing, production, sales,etc.-have each had their own system for keeping track of the information they need. Since the development of computers and software programs that can manage large amounts of information, more and more companiesare using a single, integratedinformation system.Thus, insteadof keeping their data separately,accountantsmay get their information from the company's overall information system-often referred to as an enterprise-wide resource planning system (ERP). The accountants'traditional general ledger accounting system has been used for such a long time that it has becomeentrenchedin the format and organizationof the basic financial statements every business.That's one reasonwe'Il discussthe generalledger system of in detail in this appendix, even though in many companiesit is being absorbedinto company-wide information systems.Another reasonis that you must be able to understandthe output of the generalledger accounting systembecause new integratedinformation systhe tems are designedto produce the financial records in the sameformat as the generalledger system. The same financial statementsare produced with both the general ledger and the integratedtypes of information systems.We will use the general ledger system,which was designedas a manual system,to demonstratehow transactionsare recorded,classified, and summarizedfor the financial statements.

[,"{}"il Def inet he gener a ll e d g e r systemand explain how it worKs.

Business transactions first are recordedin a journal.Then they are transferred to accounts the generalledger in through a process called posting.

TheGeneral Ledger Accounting System

Keepingtrack of financial information with a traditionalrecord-keeping systemis often called bookkeeping. transactions As occur, they are recordedchronologically by a bookkeeperin a book called a journal. When we preparean accountingequation work sheet-showing the effect of each transactionon the accountingequation-we are doing something similar to what we would record in a journal. The resourcesexchangedare shown with their dollar amounts.The journal containsa record of eachtransactionas it occurs.An exampleis shown in ExhibitB.l. Most companies more than onejournal; eachdepartmentmayhaveits own use journal. Commonjournals arethe (l) salesjournal,(2) cashreceiptsjournal,and (3) cashdisjournal. For simplicity, we'Il use a single,generaljoumal for all our transactions. bursements

ffiMft'{$ffiffiT'ffi.'$

An Example the of J o ur n a l

Page 4: General Journal Ref. Date J-1 June 1 Cash ..

Journal entry

Debits
.. $6b,000

Credits

sales..
J-2 J une4 To record the collection of cash for sa]es. Equi p m e n t C a s h. . To record the purchase of equipment for cash.

.... $6b,ooo
......$20,600

The joumal entries are recorded chronologically. Then, the individual items will be "regrouped" by account as they are posted to the General Ledger. Thacethe cash amognts in the journal entries above to the General Ledger Cash account shown in Exhibit B-2. The amounts for Sales and Equipment will be posted to their own general ledger accounts.

S A L APPENDIX . THE GENERAL EDGER CCOUNTING YSTEM B

577

Becausea company may have thousandsoftransactions during an accounting period, it would be diffrcult, probably impossible, to try to gather and use the information from a chronological record such as thejournal. To be useful, the information needsto be reorganized, grouping togethertransactionsthat involve the sameresource.For example,when all the transactionsthat involve cash are grouped together, then the company's cash balance can be easily determined.As you can seefrom that example, it is useful for similar transactions to be groupedtogether.The transactionsfrom thejournal orjournals are transferred to anotherbook called the general ledger-a processcalled posting the transactionsto the generalledger. Posting is done periodically; it could be daily, weekly, or monthly, depending on the size of the company. The generalledger is the primary record of the financial information of the business.It is organizedby what we have called up to this point a financial statementitem. Fromhete on, we will refer to the financial statementitems as accounts.Like a financial statement item, an account is the basic classification unit of accounting information. Now we can think of eachfinancial statementitem as an account,and each accountas a page in the general ledger. On the page for a particular account,we record all the additions to, and deductions from, that account. For example,one accountin the generalledger is cash.On the cashpage in the general ledger, we find every cashcollection and every cashdisbursementmade by the company.If there are more disbursements collections than can fit on one page, they will be recorded or on as many following pagesas needed,all comprising the cash account.To make it easyto find the amount of cashon hand, the cashaccounthas a running balance.That meansa new balanceis calculatedafter every entry. Think about your own checkbook-that's the record you keep of eachcheck you write-a subtraction;eachdeposityou make-an addition; and the resulting total remaining in your checking account-that's your running balance.If you keep a running balance, it is much faster to find out how much cash you have in your account. (Have you discoveredwhat happenswhen you fail to keep your checkbook balance current?) Accounts in the generalledger include cash,accountsreceivable,inventory,prepaid insurance, equipment, accumulated depreciation, accounts payable, notes payable, contributed capital, and retained earnings.(Notice, theseare given in the order they appearon the balancesheet.)How many accountsdoesa company have?Every company is different, and the number of accounts depends on the detail the company wants in its financial records. For example, one company could have an account called utilities expensesin which many different utility-related expensescould be accumulated.Another company might prefer to have a separateaccount for each type of utility expense-a separatepage in the general ledger for electricity expense,gas expense,water expense,etc. The number of accountsis determined by the amount of detail a company wants to be able to retrieve from its records.If a company usesvery little gas or water, it would be a waste of time and A spaceto keep a separateaccount for those expenses. company that useswater in its proprocess,on the other hand, would definitely want to keep a separateaccount for duction water purchases. Companies also have subsidiary ledgers. These are detailed records that support the balancesin the generalledger.For example, the accountsreceivablesubsidiary ledger wlll have details about the customers-sales, receipts,and accountbalancesfor every customer. The total dollar amount of accountsreceivablein the accountsreceivablesubsidiary ledger will be the total in the general ledger. Most companieshave alarge number of accounts,and they combine the similar ones we for the financial statements. When we look at the financial statements, can't really tell generalledger.Many smaller accounts how many individual accountsa company has in its may be combined for financial statementpresentatton. Anyone who wants to know the balancein any account at any time can find it by looking in the generalledger. A list of the balancesin all the accountsof a company is called a trial balance. Before the financial statementscan be prepared, adjustmentsto the records must be made. We discussedthose adjustmentsand how to make them in Chapter 3. Adjustments are neededbecauseof the nature of accrual accounting. On the financial statements,we

A trial balanceis a list of all of the accounts a company with the relateddebit or credit balance.

574

APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B O S

Debit meansleft sideof an account.

Creditmeansright sideof an account.

need to include revenuesthat have been earnedand expenses that have been incurred, even if we have not yet received the cash earnedor paid the cash for the expenses incurred during the accounting period. These adjustments are called accruals. The action has taken place, but the dollars have not been exchanged. We also need to be sure to include on the income statementfor the period any revenue we've earnedor expenses we've incurred for which the dollars were exchangedat a previous time. These are called deferrals.The dollars were already exchanged,and we recorded the receipt of the cash when we receivedthe cash.However, we did not recognize any revenue or expenseat that time. At the end of the accountingperiod, we have to recognize any revenuewe have earnedand any expenses that we've incurred. No matter what kind of accounting system a company uses,the information produced by that system must be adjustedbefore the financial statementscan be prepared.After the adjustments are made, the financial statementsare prepared. We have actually done all this-recording the transactions, making the adjustments, and preparing the financial statements-using the accounting equation work sheet.The general ledger system is simply a more feasible way to do it in an actual busrness. To use the generalledger systemand to understandthe information it makesavailable, we must learn a bit more accountinglanguage.Don't panic over the terms debit and credit. You will find them easy to understand,but only if first you get rid of any notions of what you alreadythink debit and credit mean.In accounting,eachterm has a very specific meaning that should not be confused with its more generalmeaning.

Debits andCredits
In accounting, when we say debit, we mean the left side; when we say credit, we mean the right side. (This should be easy to remember.) Left is the only thing we can say about what debit means and right, about what credit means-unless we apply the terms to specific accounts. A general ledger has been traditionally composedof a multi-column page, similar to the one shown in Exhibit B.2.The debit column on the right shows the running balancein the cashaccount.Notice there is never a credit balancein this account.Now it is often computerized in a similar format. In the balancecolumns, the column on the left is called the debit (DR) column, and the column on the right is called the credit (CR) column. As a shortcut to using formal preprinted two-column paper,accountants often draw a T-accountto representa page in the generalledger.T-accountsshown in Bxhibit B.3 are our representation the generalledger of shown in Exhibit 8.2. One T:account such as cash, shown next, represents a single page in the general ledger.The left side of a T:account is the debit side, and the right side of a T-accountis the credit side.

Cash

EXHIBIT8.2 The General Ledger

Account: Cash

AccountNo. 1002 Balance

Item JrnI. ref. Debit Credit Debit Credit

Date 2008 June I June 4

J-1,p.4.....65,000 J-2,p.4

...20,600

.....65,000 44,4OO

This is the Cash account. The cash amounts from all the joumal entries are posted here. Tface these amounts back to the joumal entries shown in Exhibit B.1.

APPENDIX . DEBITS ND CREDITS B A

579

EXHIBIT8.3 v. Debits and Credits in T-Accounts

Asset
Debit lncreases (normal balance) Credit decreases Debit decreases Liability Credit Increases (normal balance) Shareholders' Equity Debit decreases Credit rncreases (normal balance)

Revenue Debit decreases Credit lncreases (normal balance)

Expense Debit Increases (normal balance) Credit decreases

Numbers we put on the left side of the account are called debits, andputting a number in the left column is called debiting an account. Debit is a wonderful word that can be an adjective,a noun, or a verb. The samegoesfor the wotd credit. The right side of the accou4t is called the credit side; the numbers we put on the right side are called credits; and putting a number in the right column is called crediting an account. In the fifteenth century, a monk named Fra Luca Paccioli wrote about a system that uses debits and credits with the accounting equation. In his system, the accounting equation staysin balancewith each transactionand the monetary amounts of debits and credits are equal for each transaction.Here's how it works: 1. For the balance sheet equation, the balance in the accountson the left side of the equation (assets) will increasewith debits; and the balancein the accountson the right side of the equation (liabilities and shareholders' equity ) will increasewith credits. It follows that the balancein an assetaccount will decrease with credits. Liability and equity account balancesdecrease with debits. Putting that together, . Asset accountsare increasedwith debits and decreased with credits. . Liability and shareholders'equityaccountsare increasedwith credits and decreased with debits. This meansthat when we want to add an amount to our cashbalance,we put the number of that amount on the left (in the left column of the two columns in the general ledger account for cash)-so that's a debit. When we disburse cash and want to subtract the amount disbursedfrom the cash account, we put the number of that amount on the right side-so that's a credit.The increaseside of an accountis called its "norma1"balance.Cash has a normal debit balance.Becausewe put the cash we receive on the debit side and the cashwe disburseon the credit side, it makessensethat our cash accountwill normally have a debit balance.(It's not normal to disbursemore cashthan you have-it's pretty unusual.) In accounting, we do not literally add and subtract from an account balance-we debit and credit an account to accomplish the samething. If we make an error, we do not erasethe mistake and replace it with the correct answer.Instead, we debit or credit the account to correct the error and make the accountbalancecorrect.When accounting recordsarekept by hand, all entries are made in ink so that no entries can be erasedor changed.This has been traditional in accounting to keep the recordsfrom being altered.Recording every increaseto, and decrease from, an account balance gives a complete record of every changemade to the account. 2. Because shareholders'equity is increasedwith credits, all accountsthat increase shareholders'equitywill increasewith credits. Revenueaccountsincreasewith credits and decreasewith debits. When we make a sale,we credit the salesaccount. 3. Becauseshareholders'equityis decreased with debits,all accountsthat decrease shareholders'equitywork in the oppositeway as revenueaccountswork. For example,

s80

A P P E NDIX . T H EM EC H A N IC S AN AC C OU N TIN G S TE M B OF SY expenseaccounts-where a list of our expensesis kept-increase with debits. As we incur expenses, put the amountson the left side of expenseaccounts. we

Your Turn B-l

H*mmer fug-r"gu

Indicatewhether eachof the following accountsnormally has a debit (DR)or cedit (CR)balanceand what type of accountit is.
Shareholders' Equity

Account Title payable Accounts Accountsreceivable ,Advertising expense Cash Depreciation expense Furnitureand fixtures Accumulated depreciation Unearned fees Salary expense Commonstock Rent expense Dividends Retained earnings (Earned) fees Land Building

Expense

Revenue

Asset

Liability CR

A summary of the use of debits and credits is shown in Exhibit B.3. Remember,it's just a clever system to be sure that, when we record a transaction, the accounting equation is kept in balance and,at the sametime, debits : credits with every transaction.This system is called double-entry bookkeeping.

1.,.{}.? Explain perform and the steps the accounting in cycle.

The accounting cyclebegins with the transactions a new of accountingperiod.lt includes recordingand postingthe transactions, adjustingthe books,preparingfinancia statements, and closing the temporaryaccounts get to readyfor the next accounting oeriod.

TheAccounting Cycle
The processthat starts with recording individual transactions,produces the four basic financial statements,and gets our general ledger ready for the next accounting period is called the accounting cycle. Some of the steps in the accounting cycle won't make any senseto you yet, but this appendixexamineseachin detail. By the end ofthis appendix,you should be able to explain and perform each step.The stepsin the accounting cycle follow: 1. Record transactionsin thejournal, the chronological record of all transactions.These are called journal entries. 2. Post thejournal entries to the generalledger. 3. At the end ofthe accountingperiod, preparean unadjustedtrial balance. 4. Prcparc adjustingjournal entries and post them to the general ledger. 5. Preparean adjustedtrial balance. 6. Preparethe financial statements. 7. Close the temporary accounts. 8. Preparea postclosing trial balance. Let's look at eachof these stepsin detail.

Step 1: Recording JournalEntries

In the normal course ofbusiness, there are dozensoftransactions that must be recordedin the accounting system.Let's look at how the transactionsfor a company's first year of businesswould be recorded in a journal. The transactionsfor the first year of Clint's Consulting Company,Inc. are shown in Exhibit B.4.

APPENDIX . THE ACCOUNTING YCLE B C

581

Date Jan.2 Jan. 10 Feb. 4 Apr. 10 July 12 Aug. 15 Oct.2l Dec. 10

Tfansaction Clint contributes $2,000 of his own money to the business in exchange for common stock Clint's Consulting, Inc. borrows $4,000from a local bank to begin the business Clint's buys supplies for $400 cash Clint's hires a company to prepare and distribute a brochure for the company for $500cash Clint's provides consulting services and earns revenue of $9,000cash Clint's pays someone to do some typing, which costs $350 cash Clint's repays the $4,000note along with $150interest Clint's Consulting, Inc. makes a distribution to Clint, the only shareholder, for $600

EXHIBIT8.4 Transactions Clint's for ConsultingCompany, Inc. during 2006

The frrst transactionin Clint's first year of businessis his own contribution of $2,000 to the businessin exchangefor common stock. What a journal entry looks like on a journal pagefollows: Date

Transaction
Cash Commonstock

Debit

Credit

1t2t06

2,000 2,000 1-1a

To recordowner'scashcontribution in exchanqe common stock for aThis a number journal is we'll useto helpustrace entries the general to ledger.

The cash account is increasedby $2,000, so Clint would debit the cash account for $2,000. Shareholder'sequity is increased,so Clint would credit common stock for $2,000. Notice, in this casetwo accountsare increased-one with a debit and one with a credit. In some transactions, both accountsare increased;in others,one accountcan be increasedand one accountcan be decreased; two accountscan be decreased. or The only requirementfor a journal entry is that the dollar amount of debits must equal the dollar amount of credits. In the secondtransaction, Clint's Consulting Company borrows $4,000 from a local bank. Again, two different accountsare increased-one with a debit and one with a creditin this transaction. Notice, debits($4,000) : credits($4,000).

Date
1110106 Cash

Transaction
Notespayable

Debit 4,000

Credit

To recordthe loan from the bank

4,000 1-2

Debits are always listed first; credits are listed after all the debits-sometimes there is more than one accountto debit or credit-and the accountsbeing credited are indented like the first sentenceof a paragraph.Each page of the journal has a reference number that is usedto tracejournal entriesto the generalledger.We'll seethis number again when we post thejournal entries to the general ledger. The third transactionis the purchaseof suppliesfor $400 cash.This is recordedwith a debit to supplies and a credit to cash. Date Transaction Debit Credit

2t4t06

Supplies
Cash

400 400 1-3

To recordthe purchase supplies of

Notice, this transactionincreasesone assetaccount-supplies-and decreases another assetaccount---cash.Becausesuppliesis an asset,it is increasedwith a debit.

582

S O APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B

The fourth transactionis Clint's hiring a company to prepareand distribute a brochure for his new consulting business.He pays $500 for this service. Date Transaction Advertisingexpense Cash Debit Credit

4t10106

500 500 't-4

To recordthe cost of the brochures

In this transaction,an expenseaccount, advertising expense,is increasedby $500. Because expenseaccounts are eventually deducted from shareholder'sequity, they increase with debits, the opposite of the normal balance in shareholder'sequity accounts.Cash, an with a credit of $500. assetaccount, is decreased Next, the company provides consulting servicesfor $9,000 cash. Date Transaction Debit Credit

Cash fees Consulting revenue To record consulting

7112105

9,000 9,000 1-5

In this transaction,cashis increasedwith a $9,000 debit. Consulting Fees,a revenueacequity, is increasedwith a $9,000 credit. count that will eventuallybe addedto shareholder's Clint's Consulting Company has one employeewho types for him occasionally,and he pays this person $350 for typing during his first year ofbusiness. This is an expense,which Clint categorizesas salary expense.Cash is reducedwith a $350 credit, and salary expense with a $350 debit. is increased Date

Transaction expense Salary Cash

Debit

Credit

8t15t06

350

3s0
1- 5

To recordthe cost of an employeeto type

Next, the company repays the loan to the bank, with interest. The principal of the loan-the amount bonowed-was $4,000; the interest-the cost of using someoneelse's money-was $150. The journal entry for this transaction is an example of an entry with more than one debit. Date

Transaction payable Notes expense Interest Cash

Debit

Credit

10t21t06

4,000 150
4,150 1- 7

To recordthe repaymentof a note plus interest

A distributionto the owner of a soleproprietorship called is a withdrawal; in a corporation, distributions to the shareholders called are dividends.

The debit to notespayablereducesthe balancein that account.Before this transaction, it had a balanceof $4,000. Now, when this debit is posted,the account will have azerobalance.The interestexpenseaccountwill increaseby $150 becauseexpenseaccountsincrease with debits.Cashis reducedby $4,150. The final transactionof Clint's Consulting Company's first year of businessis a $600 distribution to Clint, the only shareholder.In a sole proprietorship, a distribution is also called a withdrawal. BecauseClint's Consulting Company is a corporation, the distribution is called a dividend. The dividends accounthas a debit balanceand will eventually reduce retained earnings.Paying a dividend reducesthe cashbalance.Remember,a dividend payment is not an expense.

APPENDIX . THEACCOUNTING YCLE B C

Transaction Dividends Cash To recorda dividend payment

Debit

Credit

12t10to6

500 1-8

Step 2: PostingJournalEntries the GeneralLedger to

Each of the journal entries a company makesmust be postedto the generalledger.How often this is done dependson the number of journal entries a company normally makes.Some computerizedsystemspost everyjournal entry automatically when it is enteredinto the system. Other companiespost transactionsto the generalledger daily or weekly. The accountsfor Clint's Consulting Company, Inc. all begin with a zero balance,becausethis is Clint's frst year of business.Eachjournal entry has the referencenumber from the journal with it when the entry is posted in the general ledger. This provides a way to trace every entry in the general ledger back to the original record of the transactionin the journal. After all thejournal entries are posted,it is easyto calculatethe balancein any account. The accounts,shown in Exhibit B.5 are listed in the following order: assets,liabilities, shareholder'sequity, revenues,and expenses.

Step3: Prepare Unadjusted Balance an Trial

A trial balaaceis a list of all the accountsin the generalledger, each with its debit or credit balance. The reasonsfor preparing a trial balance are to confirm that debits equal credits and to have a way to quickly review the accountsfor neededadjustments. Exhibit 8.6 shows the unadjustedtrial balancefor Clint's Consulting at December 31,2006.

Step4:Adjusting Journal Entries

Recordingjournalentriesastransactions occur and postingthem to the generalledgerareroutine accounting tasks. When a company gets ready to prepare financial statementsat the end of the accounting period, there are more journal entries needed.These are not routine journal

L.O-3 ldentify adjustments the needed beforepreparing financial statements and makethoseadjustments.

EXHIBIT 8.5 Clint'sConsulting Inc. Cash(asset) Company, T-Accounts

Cash (asset)

Supplies (asset) l-3

1l

Notes payable Qiability)

1-1 2,000 1-2 4,000 1-5 9,000

400 500 350 4,150 600

1-3 4oo I

r-7 4,ooo a,ooo L-2 I

1-6 t-7 1-8

Common stock (shareholder's equity) I | 2,000 l-1

Consulting fees (revenue)

Advertising expense (expense)

l-b I n,ooo

r-4

5ooI
Salary errpense (expense)

Dividends (shareholder's equity temporary account)

Interest expense (expense)

1-8

600 |

r-7

150 |

1-6

350 |

584

S O B APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M

EXHIBIT8.5 Clint'sConsulting Company,Inc. UnadjustedTrial Balanceat December31, 2006

Account

DR

CR

Advertising expense.......... Interest expense Salaryexpense.....................

500 150 350 $11.000

$11.000

in entries;they are called adjustingjoumal entries.As we discussed Chapter3, there are four before the financial statementsare prepared. We need to situations that require adjustments deferred revenues,and deferred accrued expenses, a-djust records for accrued revenues, our in of eachof thoseadjustments a generalledger system' Let's look at an example expenses. Accruals. Accrued Revenue. SupposeClint's Consulting Company did some consulting for a fee of $3,000, but the company has not billed the client yet so the revenuehas not been recognized-when it is recognized, it is put on the income statement.At December 31, Clint will adjustthe company'srecordsto recognizethis revenue,eventhough he has not collected the cash.First, notice the effect ofthe adjustmenton the accounting equation.

Assets +3,000 Accounts receivable

+ earnings capital(CC) Retained + Liabilities Contributed fees +3,000 Consulting

The transaction increasesassets-accounts receivable (AR). That meansClint would debit AR, becauseassetsare increasedwith debits. Clint has also increaseda revenue account, consulting fees. (The $3,000 is recorded in a revenue account, not directly into the retained earnings account. However, the revenue will end up increasing retained earnings on our balance sheet.)Revenueaccountsincreasewith credits, so we would credit the revenueaccountconsulting fees for $3,000' The accountingequation is inbalance and debits : credits for our transaction.Here's what the journal entry would look like: Date

Transaction
Accountsreceivable fees Consulting

Debit

Credit 3,000 A-1

12t31t06

3,000

To accruerevenueearned in 2006

Accrued Expenses Another situation that requires an adjustment is accrued expenses.If we have incurred an expense(the dollar amount that will be paid for an item or a service that has already been used to produce revenue),the matching principle requires us to put on the expenses the sameincome statementas the revenueit helped generate. Sometimes matching an expensewith a specific revenue is impossible to do. In that case,we record the expensein the time period when the expenseitem was used.For example, it is often impossible to match an employee's work with specific revenuethe company earns.So the cost of the work done by an employee is put on the income statementas an expensein the accounting period when the work was done. Let's look at an example of recording salary expensein the period in which the work was done. When companiespay their employees-on normal paydays during the yearthey debit the account salary expenseand credit the account cash. The salary expenseaccount may have a significant balance at year-endbecausethe company has been recording salary expenseas the employeeshave been paid throughout the year. To make sure we've

CY A P P E N DB . TH EA C C OU N TIN G C LE IX included all the salaryexpensefor the year, we must examine the time our employeeshave worked near the end of the year. The purpose is to be sure to include the cost of all wotk done during a year in the salary expenseon that year's income statement. If we owe employeesfor work done in December2006 but we will not pay them until January 2007, we have to accrue salary expensewhen we are adjusting our accounts at December 31,2006. SupposeClint's owes its employee$50 for work done in2o06, but the next payday is in 2ff)7. To get this salary expenseon the income statementfor the year, Clint must debit salary expensefor $50 and credit salariespayable for $50. The salary expenseon for the income statement the yearendedDecember31, 2006 will now include this $50. Salaries payableon the balancesheetat December3l,2006 will show the $50 obligation.Look at the adjustmentin the accounting equation, and then look at the joumal entry. Notice that in the adjusting entry, just like in a routine journal entry, debits : credits. The accounting equation remains in balance.

s85

Assets

Liabilities p + 50 S a l a ri e s a y a b l e

Retainedearnings (50)Salaryexpense

Date 12t31106

Transaction Salary expense payable Salaries

Debit

Credit 50 A-2

50

at To accruesalaryexpense year-end

the 31,2007, date of owesemployees Suppose company a $300on December 3, and the next paydayis January 2008.Givethe adthe financialstatements; expense justingjournalentrynecessary December How muchsalary 31,2007. on on paysthe $300 the employees to when it actually willthe company recognize 3, on entryfor the payment January 2008. Give January 2OO8? the iournal 3,
Deferrals. Deferred Revenue Deferred revenue is revenue that hasn't been earnedyet, so it is recordedas a liability in a company'sleselds-4n obligation-when the cashis collected. Becausecashhas been collected, it must be recorded;but the goods or serviceshave not yet been provided. The company must defer-put off-recognizing the revenue.When the cash is received, the company increasescash and increasesa liability called unearned revenue.In a generalledger system,the amount of cashreceivedis recordedin the cashaccount, where it is shown as a debit-that's an increasebecauseassetsare increasedwith debits. The journal entry is balancedwith a credit to unearnedrevenue-that's an increase becauseliabilities are increasedwith credits. SupposeClint had received $4,000 on May 1 for consulting servicesto be provided over the next 16 months. This is how the receipt of the $4,000 cash for servicesto be provided in the future affects the accountingequation,followed by the journal entry for the receipt ofthe $4.000cash. Liabilities

Your Turn B-2

WMm-ww'" ffi,ww-m'w

cc

Retainedearnings

+4,000cash

+4,000 Unearned fees consulting

Date

Transaction

Debit

Credit

4,000 Cash fees consulting Unearned to for To recordthe receiptof cash services be provided 511106

4,000 1-9

585

S APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B O

Notice that this is not an adjusting entry; it's a regularjournal entry-made when it occurs during the year-to record the receipt of cash.When we look at the T-accountsagain, we'll seeit posted with the transactionswe posted previously. Whenever a company has recorded unearnedrevenue during the year, an adjustment will be necessaryat year-endto recognize the portion ofthe revenuethat has been earned during the time between when the cash was received and year-end.If, on that basis, any of the unearnedrevenuebecomesearnedrevenueby year-end,the unearnedrevenueaccount will be decreasedand the revenue account will be increasedwith an adjustment.In terms of debits and credits, the unearnedrevenueaccount, which is a liability, will be decreased with a debit. In Clint's case,the credit correspondingto that debit will go to consulting fees, which means that the earnedrevenuewill now show up on the income statementwith the other consulting fees Clint has earned during the year. This adjustmentis necessaryto be sure all the earnedrevenuefor the year is recognized-meaning, put on the income statement. SupposeClint had earnedhalf of the unearnedrevenueat year-end.The adjustment in the accounting equation and the correspondingjournal entry for this adjustmentfollow:

Assets

Liabilities

cc

Retainedearnings +2,000 Consulting fees

(2,000) Unearned fees consulting

Date

Transaction

Debit

Credit 2,000 A-3

consulting fees Unearned fees Consulting To record earned revenue year-end at 12131106

2,000

may needto be adjustedbefore the financial stateDeferred Expenses Deferred expenses ments are prepared.Recall, a deferred expenseis something the company paid for in advance.One example is supplies,discussedin Chapter 3. Clint paid $400 for suppliesduring the year, and he recorded them as an asset.At the end of the year, he must determine how many suppliesare left and how many he used.He counts the supplieson hand and then subtracts that amount from the amount he purchased.SupposeClint finds that there is $75 worth of suppliesleft in the supply closet on December31. Since he purchased$400 worth, that means he must have used $325 worth of supplies during the year. He wants to show supplies expenseof $325 on the year's income statement;and he wants the assetsupplies to show $75 on the balance sheetat year end. This is the adjustmentto get the accountsto their correct year-endbalances,first in the accountingequation and then as ajournal entry:

Assets (325) Supplies

Liabilities

cc

Retainedearnings

(325) Supplies expense

Date

Transaction

Debit

Credit 325 A-4

A trial ba lan ce a lis t of all is the accounts, eachwith its debit balanceor its credit balance" unadjusted An trial balanceis preparedbefore any adjustments have been made.An adjustedtrial balanceis preparedafter adjustments have been made, and it can be usedto prepare the f inancialstatements.

E S uppl i es xpense S uppl i es for To recordsupplies expense the year

12t31t06

325

The T-accountswith the adjusting entries posted to them are shown in Exhibit 8.7.

the Steps5 and 6: Preparing AdjustedTrialBalance and the Financial Statements

After all the adjusting entrieshave been postedto the generalledger accountsand new balanceshave been computed in the generalledger, an adjusted trial balance is prepared.An adjustedtrial balance is simply a list of all the general ledger accountsand their balances,

APPENDIX o THEACCOUNTING YCLE B C

587

EXHIBIT8.7 Adjusted T-Accounts Clint'sConsultingCo., Inc. for

Cash (asset) Supplies (asset) Notes payable (liability)

1-1 t-2 1-5 1-9

2,000 4,000 9,000 4,000

400 500 4,150 350 600

1-3 t-4 L-7 1-6 1-8

l-s

4oo I

na o-n

l-7

4,000 |

4,000 L-2

Accounts receivable (asset)

Salaries payable Qiability) | 50 A-2

Common stock (shareholder's equity)

A-1 soooI
Consulting fees (revenue)

r-1 I z,ooo

Uneamed consulting fees Qiabitity) A-3 2,000

I

4,000 1-9

Dividends

1-8

600

9,000 1-5 3,000 A-1 2,000 A-3

Advertising expense (e4pense)

5ooI
Salary expense (ergense)

Supplies expense (expense)

Interest expense (expense)

^-4

s26 |

t-7

150 |

to verify that debits = credits for all the company's accountsafter all the adjustmentshave been made, Preparing an adjusted trial balance-and making sure it actually balanceshelps ensure the accuracy of the recording process.If the adjusted trial balance is in balance-debits : credits-it can be used to preparethe f,rnancialstatements. The adjusted trial balance is shown in Exhibit B.8, and the financial statementsare shownin Exhibit B.9. After the financial statementsare prepared,we are almost ready to begin another accounting cycle. First, we must get our generalledger ready for a new fiscal year.

EXHIBIT8,8
Account

Adjusted TrialBalance for Clint's Consulting Company, for the Inc. Year2006

Advertising expense.......... Interest expense Salaryexpenses.................... Suppliesexpense..........

500 150 400 ..... 325 $18.050

$18,050

588

S APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B O

EXHIBIT8.9

for Financial Statements Clint's Consulting Company, for 2006 Inc.

Revenue Consultingfees Expenses Advertising...... Sa]aries............ Supplies... Interest........... Totalexpenses Net income

Clint's Consulting Company, Inc. Income Statement For the Year Ended December 31, 2006

$14,000 .................... $500 ... 400 325 150 ..................... 1,375 .$12,625

Clint's Consulting Company, Inc. Statement of Changes in Shareholder's Equity For the Year Ended December 31, 2006

Begirmingcommon stock Stockissuedduringthe yeax.................. stock............. Ending common

$0 2,000

Dividends........ Ending retained earnings........ Total shareholder's equity.........

(600) 12,425 AlM

Inc. Clint's Consulting Compa.ny, Balance Sheet At December31, 2006 Liabilities and Shareholder's Equity

$13,000 3,000
ID

Totalassets.....

$16,075

payable................................ Salaries $50 Uneamedconsultingfees .) Common stock................. r2,025 Retained eamings............................. Total liabilities and equrty...................... shareholder's $16,075

Clint's Consulting Company, Inc. Statement of Cash Flow For the Year Ended December 31, 2006

Cash from operating activities Cashcollectedfrom customers Cashpaid for supplies............. Cashpaid for interest ................ Cashpaid to employees Cashpaid for advertising. Net cashfrom operationingactivities.......... Cash from investing activities. Cash from financing activities Cashfrom issueof stock...... Proceeds from bank Ioan........ Repa5rment bank loan........... of paid................. Cashdividends Net cashfrom financingactivities........................ Net increase cash............. in

.... $13,000 (400) (150) (350) (500) $11,600 0 ........$ 2,000 4,000 (4,000) (600) ..... 1,400 .......... n3p00

APPENDIB . THE ACCOUNTING YCLE X C

s89

Accounts Step 7: Closethe Revenue and Expense

Revenueaccountsand expenseaccountsare temporary accounts. The balancesin those accountswill be transferredto retained earnings at the end of each period; therefore, they will start each new period with a zero balance. Think about the accounting equation and the work sheet we've been using to record in transactions. We've been listing the revenuesand expenses the retained earningscolumn, of because they increaseand decrease owner's claims to the assets the business.The balthe ance sheetwill balance only when the revenueand expenseamounts are incorporated into the retained earningsbalance.The net amount of revenuesminus expenses-net incomeis incorporated into retained earnings when we preparethe statementof changesin shareholder's equity. From a bookkeeping perspective,closing the accounts is done-meaning to bring their balancesto zero-with journal entries. Each account receives a debit or a credit to close it. For example,if a revenueaccounthas a balanceof $300-which would be a credit balance-the accountis closed with a debit for $300. The correspondingcredit in that closing journal entry is to retained earnings. Thus, closing the revenue account increasesretained earnings. On the other hand, closing an expense account will decreaseretained earnings. For example, if an expenseaccount has a balance of $100-which would be a debit balance-the account is closed with a credit for $100. The corresponding debit for rethat closingjournal entry is to retainedearnings.Closing the expenseaccountdecreases tained earnings. Keep in mind the reasonfor having revenueaccountsand expenseaccounts.For a single accounting period, usually ayear, the revenuesand expensesare recorded separately from retainedearningsso that we can report them on the year's income statement.Then we want those amounts included in retained earnings, and we want the revenue and expense accountsto be "empty" so they can start over, ready for amountsthat will come during the coming year.Remember,the income statementcoversa single accountingperiod. We don't want to mix up last year's revenuewith this year's revenuein our revenueaccountsor last year's expenses The process ofbringing in accounts. with this year'sexpenses our expense these accountsto a zero balance is called closing the accounts,and the journal entries are called closing entries.We cannot close the revenueaccountsand expenseaccountsuntil we have preparedthe financial statements. accountsare permanent Asset accounts, liability accounts, and shareholders'equity accounts, or real accounts. A balancein any ofthese accountsis carried over from one period to the next. For example, the amount of cash shown in the cash account will never be zero (unless we spend our last cent). Think about your own personal records. If you keep track of your cash (like your checking account),you will have a continuous record of your cash balance.On the date of a personal balance sheet,you would seehow much cash you have on that particular date. As the next year begins, you still have that cash. It doesn't go away becausea new year begins. To get a better idea of what we mean by the continuousrecord in a permanentaccount, let's consider a simple example of atemporary account.Supposeyou were keeping a list of your grocery expensesfor the year. At the end of the year, after you have reported the amount of those expenses your annual income statement,you would want to start a new on for list for the next year. Becausean income statementreports expenses a period of timea yeaL in this example-your grocery expensesfor one year would be reported on one income statement,but those expenseswould not apply to the following year. You would want the grocery expense account to be empty when you begin the next year. Expense amounts must apply to a specific time period for them to make sense. Exhibit B.10 shows the closing journal entries for Clint's Consulting, which are recorded after the financial statementsare prepared.

{..{}.4 Describe closingprocess the and expl ai nw hy i t i s necessary.

Temporaryaccountsare the revenue, expense, and dividends accounts. Their balances brought to zero are at the end of the accountino period,calledclosingthe accounts.

Permanentaccountsor real accountsare accountsthat are neverclosed. Theyare the liability,and asset, shareholder's equity accounts.

Simple Company has one revenue accountwith a balanceof $5,000at yearend and one expenseaccount with a balanceof $3,000.Preparethe closing journal entriesfor SimpleCompany.

Your Turn B-3

'-f. *,rgrr r"gc.*,g.? -ff,

590

S O APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B

EXHIBITB.1O ClosinEEntries

Ref. c-l

Date

Journal entry

DR

CR

12/31

c-2

raSr

c-3

L2/31

fees...................... $14,000 Consulting Retainedeamings......... $14,000 To close revenue account I,375 Retainedearnings......... 500 Advertising expense.......... 400 Salaryexpense...................... 325 Suppliesexpense.......... 150 Interest expense To close the expense accounts Retained earnings........................................... $ 600 . . . . . . . . . . . . . . . . . , . . . .$ 6 0 0 ....... Dividends....... To close dividends

More About Closing Entries and the Relationship Between the Income Statement and the Balance Sheet, The formal way of making the balanceszero in the revenueand expenseaccountsis called closing the accounts.Why do we bother with closing entries? They set the stagefor the next accountingperiod by zeroing out the balancesof all the tembecausetheseaccountskeep track of amountsthat go to porary accounts.This is necessary gives us the net income figure for one specificperiod. Withthe income statement,which for out zeroing out the accounts,net income would include revenuesor expenses more than period's net income (or loss) to the retained earnone period. Closing entries transfer the ings account (or to the owner's capital account in a sole proprietorship), so closing entries are the meansby which net income flows downstreamfrom the income statementthrough the statementof changesin shareholder'sequity to the balance sheet. Here's how the revenue amounts and expense amounts flow through the financial statements: . Income statement.We presentthe details of net income-the revenuesand expenseson the income statement.The bottom line is net income. . Statementof changes in shareholder's equity.We show net income as an addition to shareholder'sequity on the statementof changesin shareholder'sequity. . Balance sheet.We equity-which includes presentthe total amount of shareholder's net income-on the balancesheet. After we've usedthe revenueaccountbalancesand the expenseaccountbalancesto prepare the income statementand after that information has flowed through to the balancesheet,we are ready to close the revenueaccountsand expenseaccounts.That's the formal way of getting the correct balancein RetainedEamings. Here are the stepsin detail to record closing entries: 1. Transfer all credit balancesfrom the revenueaccountsto retained earnings.This is done with a closing entry. The closing journal entry will have a debit to eachof the revenue accountsfor the entire balanceof each-to bring them to a zero balance.The corresponding credit will be to RetainedEarnings for the total amount of the period's revenue. 2. Transfer all debit balancesfrom the expenseaccountsto retained earnings.This is done with a closing entry. The closing journal entry will have a debit to retained earnings and credits to all the expenseaccountsfor their entire balancesto bring them to a zerobalance.The debit to retained earnings will be for the total amount of the period's expenses. 3. Transfer the dividends accountbalanceto retained earnings.When a distribution is of madeto the shareholders a corporation,a specialaccount-dividends-is often used.This accountis a temporary accountthat carriesa debit balance.(When the dividendsare declared and paid, dividendsis debitedand cashis credited.)The dividends accountis closeddirectly to RetainedEarnings.The amount of the dividends is not included on the income statement, The journal entry to close of but it is shown on the statement changesin shareholders'equity. this accountwill have a credit to dividends and a debit to retained earnings. Look at the closing entries posted to Clint's T-accounts, shown in bold print in Exhibit 8.11. Notice how the revenueand expenseaccountshave a zero balance.

C A B APPEND I X . R E V I E W N D S U M M A R Y O F T H E A C C O U N T I N G Y C L E

591

EXHIBIT8.11 with ClosingEntriesfor Clint'sConsultingCompany,Inc. T-Accounts

Cash (asset) Supplies (asset) Notes payable (Iiability)

1-1 L-2 l-5 1-9

2,000 4,000 9,000 4,000

400 500 350 4,150 600

1-3 L-4 1-6 l-7 1-8

1-3

400 |

325 A-4

L-7

I 4,000 |

4,000 r-2

Accounts receivable (asset)

Salariespayable Qiability) | 50 A-2

A-1 sooo I

Unearned consulting fees Oiability)

A-B 2,ooo| +,ooo1-9

Common stock (shareholder's equity) Consulting fees (revenue) Advertising expense (expense) I4

| ,,ooo 1-1
Retained earnings (shareholder's equity)

1-5 9,ooo A-l 3,ooo 2,000 A-3 c-l 14,000

Interest expense (expense)

5ooI

500 c-2

c-2 1, 375 14,000c-l c-3 6006

DMdends (shareholder's equity)

Salary expense (expense)

L-7

150 |

150 C-2

1-6 A-2

350 50

400 c-2

1-8

600 |

ooo c-a

Supplies expense (expense)

s25 |

326 C-2

When closing is done, there is one step left to completing our record keeping for the year: That step is preparing a postclosing trial balance.

TrialBalance a Step 8: Preparing Postclosing

posl The final stepin the accountingcycle is to preparea postclosing trial balance. Remember, meansafter (lke pre meats before). After the temporary accountsare closed, preparing a rial balance-a list of all the accountswith their debit or credit balances-accomplishes two things: . It is a final check ofthe equality ofdebits and credits in the general ledger. . It confirms that we areready to startour next period with only real (permanent)accounts. The postclosing trial balancefor Clint's Consultingis shownin Exhibit B.12.
trial balanceis A postclosing and a list of all the accounts or their debit balances credit preparedafter the balances, have temporaryaccounts Only balance been closed. will appearon sheetaccounts trial balance. the postclosing

Cycle Review Summary the Accounting and of

using To summarize,there are severalstepsin the processof preparing financial statements a traditional generalledger system.Together,they are called the accounting cycle. 1. Record the transactionsin thejournal. 2. Post thejournal entries to the ledger. 3. Preparean unadjustedtrial balance.

APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B O S

EXHIBIT8.12 Postclosing Trial Balance for Clint'sConsulting Company,Inc. at December31, 2006

Account Cash................ Accounts receivable...... Supplies.......... Notes payable payable Salaries ..................... Unearnedconsultingfees................. Commonstock............... Retainedearnings......... Tota1s.............. $13,000 3,000 75 CR

$0 50 2,000 2,000 12,025 $16,075

$16-:075

4. Adjust the accountsat the end of the period-record the adjustingjournal entries and
post them to the generalledger. Preparean adjustedtrial balance. 6. Preparethe financial statements. 7. Close the temporary accountsto get ready for the next accounting period. 8. Preparea postclosing trial balance.

Tom's for WearTransactions March2005 in a General Ledger System

We've already analyzedthe transactionsfor Tom's Wear for the third month of business, and preparedthe financial statementsfor March in Chapter 3. Let's repeat the accounting cycle for the same month, this time using debits and credits. The transactionsfor March are shownin Exhibit B.13. Each transaction recordedas an entry in the generaljournal, is chronologicallyas it occurs during the company'sbusinessactivity. Exhibit 8.14 shows the transactionsin the accounting equation worksheet. Then each transaction is posted to the generalledger (we'll use T-accounts). March 31, we'll post the adjusting entries At neededto preparethe four financial statements. After following along through the adjusted T:accounts,you will prepare the financial statements. To use a general ledger system,we need to set up the accountswith their balanceson March l, 2006. Exhibit B.15 shows all the accountswith their beginning balances(indicatedwith BB). Those accounts,in the Tom's Wear generalledger,will remain with the beginning balancesuntil we post journal entries from the month's transactions. The first step in the accountingcycle is to record eachtransactionin chronological order in the journal-as each occurs in the business.Look at eachtransactionand its iournal entry. Notice, for eachjournal entry there is: . . . . the date ofthe transaction the account names equality between the debits and credits-in every journal entry a briefexplanation ofthe transaction

Study eachjournal entry to make sureyou understandhow the transactionwas recorded.

E XH IBIT .13 8 Transactions for March2006 for Tom's WeaLInc.

March 1

March 10 March 15 March 20 March 24 March2T

Purchased computer for $4,000with $1,000down and a 3-month,l2o/onote for $3,000.The computer is expected to last for 3 years and have a residual value of $400. Paid the rest of last month's advertising biII, $50. Collected accounts receivable of $150 from customers from February. Paid for February purchases-paying off the accounts payable balance-of $800. Purchased 250 shirts @ $4 each for cash, $1,000. Sold 200 shirts for $10 each, all on account, for total sales of $2,000.

AP PENDI X o TO M ' S W EAR TRAN S A C T I O N F O R M A R C H 2 0 0 6 l N A G E N E R A L E D G E R Y S T E M B S L S

593

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LEDGER SYSTEM FOR B APPENDIX . TOM'SWEARTRANSACTIONS MARCH2006 lN A GENERAL

595

Aof Wearat the Beginning March T-Accounts Tom's for

Accounts receivable lnventory

Ltf; tom'swGal
Prenaid Insurance

Computers

Accumulated depreciation

Other payables

Accounts payable

Interest payable

Notes payable

Common stock

Retained eamings

Sales (revenue)

Cost of goods sold

Insurance expense

Depreciation expense

Interestexpense

Note: BB = beginning balance

596

S APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B O

JournalEntriesfor March 2006 Ref. 3 -1 Date 3 1 0 1 1 06

Journal entry
E qui pment Cash Notespayable To recordthe purchase of a computer with a cash paymentof $1,000 and a note payableof $3,000 Other payables Cash To recordthe payment of a liabilityfor lastyear's advertisingexpense Cash Accountsreceivable To recordthe collectionof receivable accounts Accounts payable Cash To record paymentto vendor for last month's purchase Inventory Cash To recordthe purchase of 250 T-shirts $4 each, at paid for in cash Accounts receivable Sales To recordthe saleof 200 T-shirts, account on goods sold Cost of Inventory To record the expense costof goods so/d and reduce the inventoryby 200 x $4

DR

CR

4,000 1,000 3,000

3-2

3110106

50 50

3-3

3115106

150

150

3-4

3120106

800 1,000

3-5

3124106

r,000

3-6a

3127106

2,000 2,000

3-6b

3127106

800 800

Required 1. Post the journal entries for March using the T-accountsshown in Exhibit B.15. 2. Then prepare an unadjustedtrial balance at March 31. adjustingjournal entries at March 3l and post them to the T-accounts. 3. Make the necessary can be For Tom's Wear,three adjustmentsneedto be made before the financial statements prepared.The adjustmentsare: a. Depreciation expensefor the computer: $100 b. Insuranceexpensefor the month: $50 c. Interest payable on the note: $30 4. Preparean adjusted trial balance at March 3I,2006. 5. Use the adjustedtrial balanceto preparethe four basic financial statements.

L S F APPENDI X . TO M ' S W EAR TRAN S A C T I O N S O R M A R C H 2 0 0 6 l N A G E N E R A L E D G E R Y S T E M B

597

Solution to 1. T-accounts shownin the answer part3. are .,

Tom'sWeaL lnc. Trial Balance Unadjusted March 31, 2006 Cash Accountsreceivable Inventory P r epaid ur an c e ins E quipm ent Notespayable Commonstock Ret ained nin g s ear S ales Costof goods sold Totals

$ 3,99s 2,000 300 125 4,000

$ 3,ooo
5,000 1,220 2,000 800

$tt,zzo

$11,220

3. Adjusting journal entries and explanations:

a. The computerhasbeenusedfor one full month, so you must record depreciationexpense.The cost was $4,000, an estimatedresidual value of $400, and a 3-year useful life. Each year the equipmentwill be depreciatedby $1,200 (: (4,000 - 400)/ 3 years).That makesthe depreciationexpense$100 per month.

Transaction
3131106 expense Depreciation AccumulateddePreciation

Debit

Credit 100 Adj-1

100

for To recordthe depreciationexpense March

Tom's Wear signed a $3,000 note on March 1 to purchasethe computer.A month has passed,and Tom's Wear needsto accruethe interestexpenseon that note in the amountof $30 (: $3,000x 0.I2 x IlI2). Date

Transaction

Debit

Credit 30
Adj-2

Interest expense payable Interest for To record interest expense March the 3131106

598

APPENDIXB o THE M ECHANI CS F AN AC C O U N T I N G Y S T E M S O

c. In mid-February,Tom's Wear purchased3 months of insurancefor $ 150, which is $50 per month. On the March 1 balance sheet,there is a current assetcalled prepaid insurancein the amount of $125. A full month's worth of insuranceexpense needsto be recorded for the month of March. That amount will be deductedfrom prepaid insurance. Date Transaction Debit Credit

Insurance expense P repai d nsurance i expense the year for To recordthe insurance

3t31t06

50 50 Adj-3

T:accountswith adjustmentsfor March 2006 posted (Balancesin each account are shown with a double underline)

Cash

Accounts receivable

Inventory

Prepaid Insurance

BB 3-3

6,695 150 3.995

1,000 3-1 50 3-2 800 s-4 3-6

Equipment Notes payable

4.000

Other payables

Accounts payables

Interest payable

Notes payable

3.000 3-l

Common stock

Retained Earnings

1.220 BB

Sales (revenue)

Cost of goods sold

2,0003-6a

3-6b 800

Insurance expense

Depreciation expense

Interestexpense

Aqi-r 100

L S S B AP PENDI X . TO M ' S W EAR TRAN S A C T I O N F O R M A R C H 2 0 0 6 l N A G E N E R A L E D G E R Y S T E M

599

4.
Tom'sWear, Inc. Adjusted Trial Balance M a rc h3 1 ,2 0 0 6 Cash Accountsreceivable Inventory Prepaidinsurance Equipm ent Accumulateddepreciation Interestpayable Notespayable Commonstock R et ained nin g s ear Sales Costof goods sold Insurance expense Depreciation expense Interestexpense Totals 5. The financial statements:

$ 3,ess
2,000 300 75 4,000 $ 100 30 3,000 5,000 1,220 2,000

800 50 100 30 $11,350

511,350

Inc. Tom'sWear, IncomeStatement For the Month EndedMarch31,2006

salesrevenue Expenses Cos t of goods so l d .. Depreciationexpense Insurance expense

In tere ste xp en s e

$ 2'ooo ........... $ 800 100 '. 50

...... 30

N et inc om e

"'

980 $1' o2o $ 1,020

Tom's Wear,Inc. Statem6nt of Changesin Shareholder's Equity For the Month Ended March 31, 2006

Beginning conunon stock . Common stock issued during the month . Ending common stock Begiruring retained earnings Net income for the month

$ 5,000 0 $ 5,000 $ 1,220 1,020

:::: :: :: ff-+#Htr":trilil:::::: ::: ffi ::::::::::: :::::I:

500

APPENDIX . THE M ECHANI CS F AN ACC O U N T I N G Y S T E M B O S

Tom's Wear,Inc. Balance Sheet At March 31, 2006

Liabilities and Shareholder's eouitv Current assets Cash $ 3,995 Accountsreceivable ..... 2,000 Inventory 300 qtr Pr epaidins ur an c e . . . . . . . Total current assets 6,370 Computer (net of $100 accumulated depreciation) 3,900 Total assets Current liabilities Interestpayable .............$ 30 Notespayable 3,000 Total current liabilities . . 3,030 Shareholder's equity Common stock 5,000 Retained earnings 2,240 Total shareholder's equity 7,240 Total liabilities and shareholder'sequity . .$L0,270

8r0,270

Tom's Wear,Inc. Statement of Cash Flows For the Month Ended March 31, 2006

Cash from operating activities: Cas hc ollec t edf r o m c u s t o m e r s. . . . . . . . . . . . . . $ 150 (1,800) Cash paid to vendors (50) Cash paid for operating expense ..., Net cash from operating activities Cash from investing activities: Purchase ofasset* $(1,000) Cash from ffnancing activities: Net increase (decrease) in cash Beginning cash balance Ending cash balance

$ (1,700)

(1,000) 0 $ (2,700) 6,695 $ 3,995

You have seenthese exact financial statementsbefore. When we used the accounting equation to keep track of the transactionsin Chapter 3, the results were the same as using the generalledger systemhere.No matter how we do the record keeping, the financial statements are the same.The mechanicsof any accounting system-stand-alone or integrated with an enterpriseresourceplanning system-must be designedto produce the information neededfor the basic financial statementsaccordins to GAAP.

KeyTerms
generalledger system

(p.s76) journal 576) (p.

trial balance (p. 5'77) debit (p. 578) credit (p. 578)

accountingcycle (p. 580) withdrawal (p.582) dividend (p. 582) adjustedtrial balance

closing the accounts(p. 589) permanentaccounts(p. 589) (p. real accounts 589) postclosing trial balance

(p.s86)
temporaryaccounts(p. 589)

(p.s91)

B APPENDIX . KEYTERMS

601

TURN Answers YOUR to Questions

YourTurnB-1
Account title Accountspayable Accountsreceivable Advertisingexpense Cash Depreciation expense Furnitureand fixtures Accumulated depreciation Unearnedfees Salaryexpense Commonstock Rent expense Di vidends R et ained nings ear (Earned) Fees Land Building CR DR DR DR DR CR DR CR DR DR (Contra)CR CR DR DR DR Expense Revenue Asset Liability CR(Credit) Shareholder's equity

Your TurnB-2
Date 12131107 Transaction
Debit Credit

expense Salaries payable Salaries 2007 for To accrue salary expense December

300

No expensewill be recognizedin January2008, It was recognizedin December 2007, but will be paid in January2008.

Transaction
payable Salaries Cash payable To recordthe cashpayment of salaries 113108

Debit

Credit

300 300

YourTurn B-3
Date 12131107

Transaction
Revenue account e R e ta i n e d a rn i n g s

Debit

Credit

s,000 s,000

To closethe revenueaccountto retainedearnings Debit Credit

Date 12131107

Transaction Retainedearnings account Expense

3,000 3,000

accountto retainedearnings To closethe expense

602

APPENDIX . THE M ECHANI CS AN Ac c o U N T I N G S Y S T E M B oF

Questions
1. 2. 3. 4. 5. What is the general ledger system and what are its advantages? What is an account? What is the trial balance? Which accountsare pennanent and which are temporary? What is the normal balancein each of theseaccounts? Accounts receivable Accounts payable Common stock Retainedearnings Salesrevenue Salaryexpense Cash Supplies expense Distributions (dividends) Inventory Bonds payable Cost ofgoods sold

6. What are the basic stepsin the accounting cycle? be 7. Can accountingtransactions recordeddirectly into the generalledger accounts? of What is the advantage using a journal first? 8. Is a credit a good thing or a bad thing? Explain. 9. What are adjusting entries and why are they necessary?

Multiple-Choice Questions
1. Evans Company completesa service engagement and bills a customer$50,000 on June 19,2006. Included in thejournal entry to record this transaction will be a: a. Debit to cash,$50,000. b. Credit to cash,$50,000. c. Credit to accounts receivable, $50,000. d. Credit to service revenue.$50.000. 2. Atrial balanceis a: a. List of all the accountswith a six-digit account number used by a business. to b. Place to record increasesand decreases a particular financial statementitem's balance. c. Chronological list of all recordedtransactions. d. List ofall the accountsused by the businessalong with each account's debit or credit balance at a point in time. 3. Bob Frederick, the owner of a delivery business,wants to know the balance of cash, accountsreceivable, and sales on April 15 of the current period. Bob should look at what part of his accounting system? a. Thejournal. b. The ledger. c. The balance sheet. d. The subsidiaryjournal. 4. What is accomplishedby preparing a trial balance? a. A firm can make sure the debits equal the credits in the accounting system. b. A firm can make sure there are no errors in the accounting system. c. A firm can identify accrualsand deferrals. d. All of the above. 5. The data neededto preparea trial balancecomes from the: a. Journal. b. Ledger. c. Balancesheet. d. Post-closingincome statement. 6. If the income statementincludes revenuesearned even if the cash has not been collected from customersyet, it meansthat the: a. Closing entries have not been completed yet. b. Journal has errors in it. c. Accrual basisof accountingis being used. d. Adjusting entries have not been done yet.

B EXERCISES603 APPENDIX. SHORT 7. Myers Company pays its employees every Friday for a 5-day workweek (Monday through Friday). The employees earn $3,000 per day of work. If the company pays the employees $15,000 on Friday, October 3, 2008, the entry into the journal would include: a. A debit to wages expensefor $15,000. b. A debit to cashfor $15.000. c. A credit to wagespayablefor $15,000. d. A debit to cashfor $3.000. $l00.DuringJune,thecom8. Jules, Inc.hadaJunel,20Oibalanceof offrcesuppliesof pany purchased$900 more of the office supplies in exchangefor cash. On June 30, 200'7the supplies were counted and it was determinedthat $200 worth of office supplies were left unused.The adjustingjournal entry should include a: a. Debit to supplies expenseof $800. b. Debit to office supplies of $900. c. Credit to cash for $200. of d. Credit to suppliesexpense $800. 9. Why should closing entries be completed at the end of each period? a. Becausecertain accountsare not neededin the future. to b. Becauseit allows the trial balance and financial statements be prepared. c. Becauseall accountsmust begin the next period at zero. d. Becausetemporary accountsneed to start the next period with a zero balance. 10. Which accountbelow should NOT be closed? a. Accounts receivable. b. Interest revenue. c. Salesrevenue. d. Wagesexpense.

\!"

ShortExercises
SEB-I. Normal account balances. Given the following accounts,tell whether the normal balance of each accountis a debit (DR) or credit (CR). (LO 1) 1. Interest receivable payable 2. -Accounts 3. SoniaBostic, Capital account 4. Service revenue 5. Prepaid rent inventory 6. -Supplies expense 7. -Insurance 8. Incometax expense payable 9. -Salaries 10. Retained earnings SEB-2. Recognizerevenueand recordingjournal entries. Indicate which of the following eventswould result in recognizing revenuefor the year in which the describedevent takes place; indicate the amount and the account. Give the journal entry that would be made in each case.(Take the selling company's point of view .) (LO I , 2, 3) a. DELL, Inc. sold a computer systemworth $10,000; the customer financed the purchasebecausehe didn't have any cash. b. Steel USA is producing 3 tons of steel for American Cans.It costs $4,500 per ton to produce,but American Cans has promised to pay $7,750 per ton when it receivesthe steel. Steel USA will probably ship it in the near future' c. Seminole Boostershas received $75,000 in advanceticket salesfor next year's football games. d. Comcast Cable collected severalaccountsthat were outstandingfrom last year. Usually accountsare collected in advance;but in this case,the customerreceived the cable serviceslast year but didn't pay until this year. e. Customerspaid over $6,500 in advancefor servicesto be renderednext year.

\J

604

APPENDIX . THE M EC H A N IC S AN AC C OU N TIN G S TE M B OF SY

and recordingjournal entries.Indicate which of the following SEB-3. Recognizeexpenses for eventswould result in recognizing expenses the year in which the describedevent takes place; give the journal entry. (Take the ?shirt company's point of view.) (LO 1, 2, 3) a. T-Shirts Plus, Inc. paid employees$6,000 for work performed during the prior year. b. T-Shirts Plus, Inc. purchased15,000T-shirts for their inventory for $30,000 on account. c. TShirts Plus, Inc. paid the factory cash for the 15,000 shirts purchased. d. T-ShirtsPlus, Inc. sold 1,500T-shirtsto the FSU Bookstorefor $16,500cash. e. T:Shirts Plus, Inc. received a utility bill for the last month of the year in the amount of $575 but won't actually pay it until next year. f. T-Shirts Plus, Inc. paid $8,600 for a2-year insurancepolicy-for the current year and for next year. SEB-4. Relate the accounting equation to debits and credits. Below are selectedtransactions for Jenna & Yvonne Enterprises,Inc. that occurred during the month of December. For each transaction,tell how it affects the accountingequation.Then, tell which accounts will be affected and how. (Ignore adjustments that may be needed on December 31.) For example,Jenna&Yvonne purchaseda new computer for $5,000 for cash.It is expected to last for 5 years. Solution: Assets are increasedby $5,000 (equipment) and also reduced by $5,000 (cash): debit (increase)equipment, credit (decrease)cash.(LO l) a. The company issuedcommon stock to investorsfor $15,000 cash. b. The company rented a warehousefor $1,500 per month, and paid for 3 months rent on December1. c. The company purchasedinventory for $4,500 on account. SEB-S. Recordjournal entries. The following selectedtransactionsfor Ganet & Wilson's Consulting, Inc. occurredduring the month of April. Give the journal entry for each.(LO I ) a. The firm provided servicesto customersfor $10,000: Seventypercent were paid with cash and thirty percent were on account. b. Garret & Wilson's paid $1,000 for part of a $3,000 purchasemade in March on account. for c. The company incurred operating expenses $800 cash. d. Garret & Wilson's purchasedsuppliesfor $500 cash, to be used during May. SEB-6. Effect of transactionson cash.How do the following transactionsaffect Toys, Toys, (Tell if it would be a debit or a credit.) (LO 1) Toys,Inc.'s cashaccount? purchased a. Toys,Toys,Toys $6,000ofbaby cribs for cash. one of their buildings, allowing the buyer to give them a b. The company sold short-termnote for $135,000. c. The employees were paid $5,400cashin salescommissions. gave customers$1,500 cash for returned merchandise. d. The firm for e. Toys,Toys,Toys issuedstockto investors $7,750cash. on How do SEB-7. Effect of transactions the liability and shareholders'equity accourets. the following transactionsaffect the liability and shareholders'equity accounts for Fast (Tell if it would be a debit or a credit.) (LO 1) Signs,Inc. during 2OO7? a. Fast Signs paid the remainder of a $3,000 loan. b. The company obtained a loan for $10,000. c. FastSignsearned$12,000in salesfor the year. d. An estimated $2,500will be due for yearly income taxes,payablein 2008. SEB-8. Effect of transactionson accounts.Determine how the accountswould be affected. (increaseor decreaseand debit or credit) for the following transactionsoccurring in January 2009 for Networking Solutions, Inc. (LO 1) a. Networking Solutions received $25,000 cash from the owner in exchangefor common stock. b. The company purchased$10,000 ofnew office computerson account.

B APPENDIX . EXERCISES

505

c. d. e. f.

The company sold $2,500 of inventory for cash. Networking Solutions paid $4,500 for next year's rent' The company paid $2,000 of the amount owed for the computers' The company declared and distributed $500 ofdividends.

SEB-!. Determine permanent or temporory accounts.For each of the following accounts, tell whether it is a permanentaccount or a temporary account. (LO 4) 1. Cash fuccountspayable 2. 3. Common stock 4. Salesrevenue Prepaid rent 5. inventory 6. -Merchandise expense 7. -Insurance Interest expense 8. _ taxes payable 9. -Income 10. Common stock

A Exercises-Set
EB-IA. Record transactions to T-accounts. Record the following transactions for Brazwells at Bradford, Inc. in T:accounts and tell how each affects assets,liabilities, or stockholder's equity. The year-endfor Brazwells at Bradford, Inc. is June 30. (LO I, 2) interestand 1, a. On September Brazwellsissueda $6,000note at 72Vo,both principal due in I year. b, On October 1, Brazwells rented a copy machine and paid 1 year of rent in of advanceat a:m;te $200 Per month. c. On December 30, Brazwells purchasedan insurancepolicy for a term of 1 year, beginning immediately. The cost was $800, paid in cash. d. On March 1, Brazwells replenishedthe supply closet with the purchaseof $700 worth of suppliesfor cash.The company startedthe year with $100 worth of supplieson hand. e. Over the course ofthe year, Brazwells earned$45,000 of service revenue, collected in cash. EB-2A. Record adjustmentsto T-accounts. Use the information from EB-IA, including your answersto a through e to make the necessaryadjustmentsto Brazwells' accountsin You may need to use the additional inforpreparationfor the year-endfinancial statements. mation that follows: (LO 1, 2, 3) . On hand at year-endwas $50 worth of supplies.

EB-3A. Record transactions to T-accountsand prepare unadjusted trial balance. Matt openedhis Readingis Fun, Inc., "a bookstore"on April 1, 2008, selling new and usedbooks. (LO I, 2) Matt contributed$4,000 in exchangefor common stock to startthe business. a. On April 1, the businessbuys $3,000 of new books from his supplier with cash. b. On April 30, customersbring in used books and the businessbuys them for $750 cash. c. On June30, $1,200of new books are sold for $3,000.Half of thesesalesare on account. sellsall the usedbooks for $1,500cash. d. On June30, the business Record the transactionsinto T-accountsfor the new company. Calculate the account balancesand preparean unadjustedtrial balanceat June 30, 2008. EB-4A. Record transactionsto T-accountsand prepare unadjustedtrial balance. The trial liInc. on March l,200l ,lists the company'sassets, balanceof WisteriaLane Productions, on abilities,and shareholders'equity that date.(LO I,2)

606

APPENDIX . THE M ECHANI c SoF AN Ac c o U N T I N G S Y S T E M B

BALANCE AccountTitle D ebi t C redi t

Cash Accounts receivable

Accountspayable Commonstock R e ta i n e d a rn i ngs e Total

$15,000 5,700 $ 3,200 9,000 8,500

$2q4q

$29l9q

During March, Wisteria Lane completed the following transactions: a. The company borrowed $6,000 from the bank with a short-term note payable. b. Wisteria Lane paid cash of $12,000 to acquire land. c. The company performed service for a customer and collected the cash of $3,500. d. Wisteria Lane purchasedsupplies on credit, $225. e. The company performed service for a customer on account, $1,800. Set up T-accountsfor the accountsgiven in the March 1 trial balance. Then post the preceding transactionsto the accounts.Calculate the account balancesand preparean unadjustedtrial balance at March 31. EB-54. Recognizeadjusting and closing entries. Use the information from EB4-A to identify the accountsthat will likely needto be adjustedbefore the monthly financial statements are prepared.What additional information would you need in eachcaseto make the appropriate adjustment?Which accountswill need to be closed at the end of the accounting period and why? (LO 3, 4) EB-6A. Record closing entries and computenet income. Given the following adjustedtrial balance,record the appropriateclosing entries.What is net income for the year? (LO 4) BRETT'S BAIT & TACKLE, INC. ADJUSTED TRIALBALANCE JU N E 30,2009 D ebi t Cash Accountsreceivable Su p p l i e s Eq u i p m e n t Accumulateddepreciation Property Prepaidrent Accountspayable Notespayable Interestpayable Commonstock R e ta i n e d a rn i ngs e Dividends Sales Costof goods sold Depreciation expense Salaries expense Totals 45,000 3,000 $ 1:,OOO 20,000 C redi t

21,500 20,000 $ e,000 54,000 28,000 23,000 25,000 2,000 51,000 29,5004 4,000 94,000

15,000 $233,s00

$233,s00

aRetained earningsat July 1, 2008.(No accountshave been closed.)

B APPENDIX . EXERCISES 607

EB-7A. Recordjournal entries, adjusting entries, and explain the accounting cycle. The Problem Solvers Consulting Corporation began businessin 2007. The following transactions took place during January:(LO I,2, 3,4) Jan. 1 1 I 6 8 20 3l 31 31 Owners invested$65,000 in exchangefor common stock' The company borrowed $10,000 from a local bank with a I2Vo note and a 6-month term. Both the principal and interest will be repaid in 6 months. The company purchasedcomputer equipment for $9,360 cash. It should last 4 years, with no residual value. Supplies were purchasedon account for $550. Office rent of $800 for Januarywas paid in cash. The company received $5,i50 from a customerfor servicesto be performed in February. Consulting servicesperformed during January on account totaled $14,000. of The companypaid salaries $8,500to employees. The company paid $400 to the supplies vendor as part of the $550 owed to the vendor from the purchaseon January 6. The company only paid part of the invoice becauseit only used $400 worth of the suppliesin January.

Required: Give the journal entry for each transaction. Provide the reason for each entry. Then, make the necessaryadjusting entries at January 31,200'7. What else should be done to finish the accounting cycle for the month? EB-8A. Recordjournal entries,post to T-Accounts,and prepare unadjustedtrial balance. Ray & Hawthorne CPAs decided to open their own tax practice, Tax Specialists,Inc. The following transactionsare the eventswhich occurred during May 2007, the company's first month:(LO 1,2) May May 1 2 Ray and Hawthorne each donated $20,000 cash in exchangefor common stock. They also signed a note with National Bank for $25,000. Tax Specialistspaid $28,000 prepaid rent for the first year. on Offrce equipmentwas purchased accountfor $17,500' The company purchasedinsurancefor 2 years with $6,500 cash.The policy was effective June 1. A discolored piece of the office equipment arrived and the supplier account. agreedto remove$3,500from Tax Specialists' The company purchasedsome office furniture on sale worth $10,000 on account. Tax Specialistpaid off the balance owed on the equipment. An office managerwas hired at a rate of $110 a day.The startdateis June 1.

May 11 May 16 May 18 May 25 May 28 May 30

Required: Give thejournal entry for each transaction. Set up the required T-accountsand post the entries to these accounts.Preparean unadjustedtrial balance'

Exercises-Set B
EB-IB. Record transactions to T-accounts. Record the following transactionsfor Marilyn Ivory's Pianos & Music, Inc. in T-accountsand tell how each affects assets,liabilities, or shareholders'equity. The year-endfor Pianos & Music, Inc. is Decembet 31. (LO l, 2) a. On March 1, Pianos& Music issueda $15,120note at Ij%o,both interestand principal due in 1 year. b. On May 1, Pianos & Music rented a warehouseand paid $8,400 for 2 years of rent in advance. c. Pianos & Music purchasedan insurancepolicy for a term of 3 years on July 1, beginning immediately. The cost was $5,400, paid in cash.

608

A P P E NDIX . THE MECHANI CS F AN ACCO UNTI NG Y S T E M B O S

d. The company replenishedthe supply closet with the purchaseof $575 worth of supplies for cash on November 1. The company startedthe year with $375 worth of supplies on hand. e. Over the course of the year, Pianos & Music earned$54,500 for cash salesof $15,000 worth of inventory, collected in cash.The company startedthe year with $20,000 in inventory. EB-2B. Record adjustmentsto T-accounts. Use the information from EB-IB, including your answers to a through e to make the necessaryadjustmentsto Pianos & Music's accounts in preparation for the year-endfinancial statements. You may need to use the additional information that follows: (LO 1, 2, 3) . On hand at year-endwas $375 worth of supplies.

EB-38. Record transactions to T-accountsand prepare unadjusted trial balance. Flynt FreedmanopenedFlynt's Grindz & Brew, Inc. on March 1,2007, selling gourmet coffees, teas,and desserts. Flynt contributed $5,500 in exchangefor common stock to start the business.(LO l, 2) a. On March l, the businessbuys $2,750 of inventory from the supplier with cash. b. Flynt's purchases equipmentfor $350 cashon March 15. c. On March 30, Flynt's pays $500 for operating expenses. d. At the end of the month Flynt's has earnedsalesrevenueof $5,500 by selling $2,000 of inventory. Cash salesare $5,000 and a local businesswho purchased items for a conferenceowes Flvnt's $500. Record the transactionsinto T-accountsfor Flynt's. Calculatethe accountbalancesand prepare an unadjustedtrial balanceat March 31,2007 . EB-4B. Record transactionsto T-accountsand prepare unadjustedtrial balance. The trial balanceof Jewel'sDiamondDazzles,Inc.on NovemberI,z0}8,lists the company'sassets, liabilities, and shareholders'equity that date.(LO 1,2) on TRIALBALANCE Accounttitle Cash Accountsreceivable Inventory Accountspayable Commonstock R e ta i n e d a rn i n g s e Total Debit $ 18,000 6,500 7,500 Credit

$ 11,700 8,800 11,500 $32,000 $32,000

During November, Diamond Dazzles completed the following transactions: a. The company borrowed $5,000 from the bank with a short-term note payable. b. Diamond Dazzles paid cash of $8,500 to acquire land. c. The company sold $5,000 of inventory to customersand collected the cash of $15,000. d. Diamond Dazzles purchasedsupplies on credit, $375. e. The company sold $1,000 of inventory to customersfor $2,500 on account. Set up T:accountsfor the accountsgiven in the November 1 trial balance.Then post the preceding transactionsto the accounts.Calculate the accountbalancesand prepare an unadjustedtrial balanceat November 30. EB-SB. Recognize adjusting and closing entries. Use the information from EB-48 to identify the accountsthat will likely needto be adjustedbefore the monthly financial statements are prepared.What additional information would you need in each caseto make the appro-

. APPENDIXB EXERCISES 609

priate adjustment?Which accountswill need to be closed at the end of the accountingperiod and why? (LO 3,4) EB-6B. Record closing entries and computenet income. Given the following adjustedtrial balance,record the appropriateclosing entries.What is net income for the yealr?(LO 4) sKI SCURLOCK'S SHOBINC. LILLIAN TRIALBALANCE ADJUSTED D E C E M BE3 1 ,2008 R Debit Cash Accountsreceivable S upplies Equipm ent depreciation Accumulated Property Prepaidrent Accountspayable Notespayable Interestpayable Commonstock Ret ained nin g s ear Div idends S ales $ t S,OOO 23,000 Credit

21,750 18,000 $ 10,000 72,000 19,600 27,650 30,000 3,610 45,s00 263704 2,000 69,220 15,000 5,000 21,qqq

''-

sold Cost goods of Depreciation expense Salaries expense

Totals

V12;!9_

5212,3s0

aRetained have been closed.) earningsat January1, 2008.(No accounts E,B-78. Recordjournal entries,adjusting entries,and explain the accounting cycle, Health & Nutrition Importance, Inc. beganbusinessJuly 1, 2007. The following transactionstook place during July: (LO 1,2, 3, 4) July 1 1 I 5 15 23 3I 31 3l Owners invested $75,000 in exchangefor common stock' The company borrowed $15,000 from a local bank with a I}vo note and a 6-month term. Both the principal and interest will be repaid in 6 months. The company purchasedhealth equipment for $25,500 cash.It should last 5 years, with no residual value. Supplies were purchasedon account for $750. Rent of $675 for July was paid in cash. The company received $3,500 in customerdues (service revenues)for the month of August. Health consulting servicesperformed during July on accounttotaled

s1s.000.
The company paid salariesof $6,000 to employees. The company paid $500 to the suppliesvendor as part of the $750 owed to the vendor from the purchaseon July 5. The company only paid part of the invoice becauseit only used $500 worth of the supplies in July.

Required: Give the journal entry for each transaction. Provide the reason for each entry. Then, make the necessaryadjusting entries at July 31,200'7. What else should be done to frnish the accounting cycle for the month?

510

APPENDIX . THE M ECHANI CS AN Ac c o U N T I N G S Y S T E M B oF

EB-88. Recordjournal entries,post to T-Accounts,and prepare unadjustedtrial balance. Brunetta decided to open her own dry cleaning shop, PrestigeDry Cleaners,Inc. The following transactionsare the events which occurred during April 2009, the company's frst month:(LO 1,2) April April 1 3 Brunetta donated$45,000 cash in exchangefor common stock. She also signed a note with lst Regional Bank for $30,000. PrestigeDry Cleanersrented out a store at a shopping center and paid $14,400 prepaid rent for the first year. Dry cleaning equipment was purchasedon account for $21,250. The company purchasedinsurancefor 3 years with $5,400 cash.The policy was effective May 1. A damagediron (part of the dry cleaning equipment) arrived and the supplier agreedto remove $3,150 from PrestigeDry Cleaners' account. The company purchasedfurniture for $6,000 for Brunetta's office on account. PrestigeDry Cleanerspaid off the balance owed on the equipment. Three employeeswere hired at a rate of $56 a day each.Their start date is May 1.

April 10 April 19 April 21 April 24 Aprll 27 April 30

Required: Give the journal entry for each transaction. Set up the required T-accountsand post the entries to these accounts.Preparean unadjustedtrial balance. Problems-Set A PB-IA. Prepare a trial balance andfinancial statements. The following is accountinformation for Gifford's Ceramics Corporation as of June 30,2007. (LO 1, 2) Revenue $20,000 Prepaid rent 2,000 Equipment 10,000 Accumulateddepreciation,equipment 3,000 Common stock 5,000a Accounts receivable 5,000 Accounts payable 2,000 expense Salaries 2,000 Depreciation expense 1,000 Cash 1,000 Inventory 8,000 Dividends 1,000 uBalanceJuly1,2006. additional (No at common has stock been issued during year.) the Required: Preparea trial balanceat June 30,2007 , income statementand statementof changes in shareholders' equity for the year endedJune 30,2007, and balancesheetat June30, 2007. PB-2A. Recordjournal entries,post to T-Accounts,and prepare unadjustedtrial balance. Architectural Design and Associates,Inc. began businesson May 1,2009. The following transactionswere enteredinto by the firm during its first two months of business,May and Jwe: (LO 1,2) May 1 1 9 13 20 2l 30 Common stock was issuedto investorsin the amount of $275,000. Architectural Design signed a long-term note with lst Regional Bank for

$6s,000.
The company purchasedan office building with cash for $130,500. Equipment was purchasedon accountfor $35,000. Supplies worth $3,500 were purchasedwith cash. Architectural Design paid for equipment that was purchasedon May 13. The company purchaseda2-year insurancepolicy that began on June 1 with cashfor $4.800.

. A P P E N D IX BP R OB LE MS 611 30 \-, June 1 3 15 The crty utility bill for $675 was received by Architectural Design. The utility bill is always due the 15th of the following month and will be paid then. Architectural Design purchasedsome inventory on accountfor $50,000. The company purchasedsome advertising in a local newspaperand on a local radio station for $5,000 cash. May's utility bill for $675 was paid (note that the bill was recorded as a

during who owed 30 ffr3t'ft#Ylltrr,roo were toemployeesstarted the

30 30 month. Salariesare always paid the last day of the month earned. Architectural Desien earnedservice revenuesof $60,000 for the month, of which $15,000i"." on account. The city utility bill for $625 was receivedby Architectural Design.

Required: 1. Give the journal entry for each transaction. 2. Post each transactionto T-accounts. 3. Preparean unadjustedtrial balance. PB-3A. Prepare closing entries and financial statements.Tia's Cotton Fabrics, Inc. has the following accountinformation on its adjustedtrial balance.(LO 3, 4) INC. TIAS COfiON FABRICS, TRIALBALANCE ADJUSTED 3 M AR C H 1 ,2 008 Debit Cash Accountsreceivable Supplies Equipment Accumulateddepreciation Property Prepaidrent Accounts payable Notespayable lnterestpayable Commonstock Retainedearnings Dividends sales G ainon s aleof e q u i p m e n t 4,000 97 '675 7,450 44,000 9,500 24,805 17,650 2,175 23,5504 35,OOOb $ 24,000 28,000 15,250 25,000 $ Z,SOO Credit

sold Cost goods of Depreciation expense expense Salaries Totals

51,475 2,500 12,180

s,90s $21

s,90s $21

aBalance April 1, 2OO7(No common stock has been issued during the year.) . at bB alanc e A p ri l 1 ,2 0 0 7 .(N o c l o s i n g n tri e sh avebeen made.) e at Required: Prepare the necessaryclosing entries and the income statement,statement of changesin shareholders'equityfor the year endedMarch 37,2008, and balancesheetas of March 31, 2008. \r/ PB-4A. Record adjusting journal entries, post to T-Accounts,and prepare closing en' tries. GourmetTeas& Coffee, Inc. hasthe following accountbalancesat the end of the year: (L O 1, 2, 3, 4)

612

A P P E NDIX . THE ME CHANI CS AN Ac c oUNTI NG S Y S T E M B oF

Prepaid insurance Rental income Unearnedrental income Accumulated depreciation payable Salaries Taxesexpense Depreciation expense Salaries expense

$ 4,000 35,670 3,800 '7,625 5,550 4,398 7,625 10,400

The following information is available at the end of the year: a. $1,000 worth ofthe prepaid insurancehas not yet expired. b. Of the unearnedrental income only $1,500 remains unearned. c. The businessactually owes salariesof $5,500; the accountantrecorded $50 extra by mistake. d. The company owes an additional $4,700 in property taxes,not yet recorded. e. Due to a clerical error, the depreciationexpenseamount is incorrect. It has been recalculated,and the total depreciationexpenseshould be $8,750 for the year. Required: 1. Preparethejournal entries necessaryto adjust the accounts. 2. Use T:-accounts compute and presentthe balancesin these accountsafter the to adjustmentshave been posted. 3. Preparethe closing entries. PB-SA. Record businesstransactions and preparefinancial statements.Salwa openeda tropical fish store as a corporation and called Exotic-Aquatics.com, selling only via the Internet. During2009, Salwa's company had the following transactions:(LO 1, 2, 3, 4) a. The businesswas startedwith Salwa's contribution of $16,500 in exchangefor common stock on January L b. The companyborrowed $10,000from First American Bank at 7.5Vofor 12 months on January L c. The company purchased$6,000 in inventory for cash on February 15. d. The company paid $3,600 of rent to a Webmasteron June 30 for use of a maintained website for two years starting July 1. e. The companyhad cashsalesof $11,100for 2009 with cost of goodssold of 92,500. f. The companypaid $1,050in advertisingfees. Required: 1. Post the above transactionsto T:account to determine the balanceofeach account on December 3L,2009; include any adjusting transactionsnecessary. 2. Preparethe adjustedtrial balanceat December 31,2009, the income statement, statementof changesin shareholder'sequity, a statementof cash flows for the year ended December 3L, 2009, and the balance sheet. 3. Preparethe closing entriesand the postclosingtrial balanceat December31,2009. PB'6A. Record businesstransactions.A partial list of transactions from Quality Auto Repair, Inc. during 2010 follows: (LO 1,2, 3,4) a. Mark, Dave, & Glen each donated $6,500 in exchangefor common stock to start the business. b. On FebruaryI,2OI0, the shoppaid 912,000for 2 yearsrenr in advance. c. The shop purchased$8,000 of suppliesfor cash. d. On March 15,2010, the shop obtained necessaryequipment for $12,000 cash. The equipment should last for 5 years.The company will take a full year of depreciation in20l0. e. On April | , 2010, the shop paid an annual insurancepremium of g 1,000, for coveragebeginning April L f. on June 1,2010, to increasebusiness,the company paid for a year of advertising for $1.020. g. On November1,2070, the companyobtaineda 3-monthloan for $30,000atl2%o from Three Rivers Bank payableon February 1,2011.

. APPENDIXB PROBLEMS

613

totaled$30'000. h. As of December31, 2010, cashrevenues i. At the close of businesson December 31, the company enteredinto a contract with a local company to do all their auto repairs in 2}ll for $8,000 payable in four installments (beginning on March I,20II). j. On December31, the companypaid $1,000in cashdividends. [Note: at the end of the year, remaining supplies totaled $2'000.] Required: 1. Give thejournal entries for the transactions;include any adjusting entries. 2. Post the transactionsto T:Accounts and preparethe adjustedtrial balance at December31,2010. 3. Preparethe closing entries and post-closing trial balancefor Quality Auto Repair, Inc. at December31,2010 The accounting PB-7A. Analyze businesstransactionsand preparefinancial statements. departmentfor Fun in the Great Outdoors Resort, Inc. recorded the following journal entries for 2007, the first year of business.Fun in the Great Outdoors generatesrevenueby renting mountainsidecottagesto vacationersto the area.When a reservationis made in advance,Fun in the Great Outdoors collects half the week's rent to hold the reservation;however, Fun in the Great Outdoors does not require reservations,and sometimescustomers will come in to rent a unit the sameday. Thesetypes of transactionsrequire that Fun in the Great Outdoors' accounting department record some cash receipts as unearned revenues (LO I, 2, 3,4) and othersas earnedrevenues. D E SC R IP T IO N a. Cas h Commonstock b, Office supplies Accountspayable c. Prepaidrent Cash d. B uilding Note PaYable e. Cash Unearnedrent revenue f. Utilitiesexpense Cash g, Accountspayable Cash h. Cash Rent revenue i. j. Unearnedrent revenue Rent revenue S upplies p e n s e ex S upplies D E B IT 50,000 C R E D IT

50,000 300 300 12,000 12,000 225,000 225,000 5,000 5,000 225 225 300 300 12,000 12,000 3,000 3,000 130 130 6,000 5,000 100 100 1,500 1,500 5,000 5,000 1,200 1,200

k, Rent expense Prepaidrent l. Interestexpense Interestpayable

m. Depreciation expense d A c c um u l a te d e p re c i a ti o n -b u i l d i n g n. Div idends Cash o. Salaryexpense p S alar ies a y a b l e

614

APPENDIX . THE M Ec HANI c S oF AN Ac c o U N T I N G S Y S T E M B

Required: a. Explain the transactionor event that resulted in eachjournal entry. b. Post entries a through o to T-accountsand calculate the balancein each account. c. Did Fun in the Great Outdoors generatenet income or net loss for the period ending December 3I,2001? How can you tell? d. Preparethe four financial statementsrequired at year-end. e. Preparethe closing entries. PB-8A. Record businesstransactions and prepare financial statementsThe accounting recordsfor Shelby & Sammy Pet Boarders,Inc. containedthe following balancesas of December31,2010:(LO 1,2, 3,4) Assets Cash Accountsreceivable Land Totals $40,000 16,500 20,000 $76,500 Liabilities and equity Accountspayable $17,000 Commonstock Retainedearnings 45,000 14,500 $ZO,SOO

The following accounting eventsapply to Shelby & Sammy Pet Boarders,Inc.'s 2011 fiscal year: The company acquired an additional $20,000 cash from the owners by issuing common stock. I Pet Boarderspurchaseda computer that cost $17,000 for cash.The computer had a $2,000 salvagevalue and a 3-year useful life. Mar. 1 The companyborrowed$10,000by issuinga l-year noteat l2%o. May 1 The company paid $2,400 cash in advancefor a l-year leasefor offrce space. June 1 The company made a $5,000 cash distribution to the shareholders. July I The companypurchased land that cost $10,000cash. Aug. 1 Cash payments on accountspayable amountedto $6,000. 1 Pet Boardersreceived $9,600 cash in advancefor 12 months of service to be performed monthly for the next year, beginning on receipt of payment. Sept. 1 Pet Boarderssold land for $13,000cash.The land originally cost $13,000. Pet Boarderspurchased Oct. I $1,300of supplieson account. Nov. I Pet Boarderspurchaseda l-yea4 $20,000 certificate of deposit at 67o. Dec. 31 The company earnedservice revenueon account during the year that amountedto $40,000. 3l Cash collections from accountsreceivableamountedto $44,000. 3l The company incurred other operating expenses account during the on year of $6,000. 3l Salariesthat had been earnedby the salesstaffbut not yet paid amounted to $2,300. 3l Supplies worth $200 were on hand at the end of the period. 3l Based on the precedingtransactiondata, there are five additional adjustments that need to be made before the financial statementscan be prepared. Required: Post thejournal entries to T:accounts,make the appropriateadjustments, prepare an adjustedtrial balance,and preparethe financial statements(all four) for 201 1. Then prepare the closing entries and the postclosing trial balance. Jan. 1

. APPENDIXB PROBLEMS

615

Problems-Set B inforThe PB-18. Preparea trial balanceandfinancial statements. following account 31,2010. asof December BikesPlus,Inc. to mationpertains Carrie& Runnels
Sales Prepaid advertising Common stock Accounts payable Operating expense Inventory $22,000 2,000 14,0004 4,000 3,000 18,000 Other revenue Equipment Accounts receivable Cost of goodssold Cash Dividends

$13,000 10,000 5,000 11,000 2,000 2,000

lBalance at January 1, 2010 (No additional common stock has been issued during the year.)

Required: Prepare a trial balance at December 3I,2010, income statementand statement ofchanges in shareholders'equityfor the year endedDecember31,2010, and balancesheet a s o fDec em ber 2 0 1 0 . 31, andprepareunadjustedtrialbalance. posttoT-Accounts, PB-28. Recordjournalentries, Cell Phones,Palm Pilots & More, Inc. beganbusinesson February 1, 2008. The following transactionswere enteredinto by the firm during its first two months of business,February and March: (LO 1, 2) Feb. 1 1 8 12 20 28 29 29 Common stock was issuedto investorsin the amountof $305,000. Cell Phones,Palm Pilots & More signed a long-term note with National Bank for $70,000. The company purchaseda store front building with cash for $125,000. Equipment was purchasedon account for $45,000. Supplies worth $4,300 were purchasedwith cash. Cell Phones,Palm Pilots & More paid for equipment that was purchased on February 12. The company purchased a2-year insurancepolicy that beganon March I with cashfor $5,000. The city utility bill for $475 was received by Cell Phones,Palm Pilots & More. The utility bill is always due the 12th of the following month and will be paid then. Cell Phones,Palm Pilots & More purchasedsome inventory on account for $65,000. The company purchasedsome advertising in a local newspaperand on a local radio stationfor $3,500cash. February's utility bill for $475 was paid (note that the bill was recorded as a payablein Feb.). who startedduring of March salaries $14,150were owed to employees Salariesare always paid on the last day of the month earned. the month. of Palm Pilots & More earnedsalesrevenues $125,000for Cell Phones, month, of which $35,000 were on account.Cost of inventory sold was the $31,2 5 0 . The city utility bill for $425 was receivedby Cell Phones,Palm Pilots & More.

Mar. 1 3 12 3I 3I.

31.

Required: Give thejournal entry for each transaction.Post each transactionto T-accounts. Preparean unadjustedtrial balance at March 3 1, 2008'

616

APPENDIX . THE M ECHANI CS AN Acc o U N T I N G S Y S T E M B oF

PB-3B. Prepare closing entries andfinancial staternents. Here is an adjustedtrial balance from Shamara'sLighting Solutions, Inc. (LO 3, 4) SHAMARA(S LIGHTING SOLUTIONS, INC. ADJUSTED TRIALBALANCE DECEMBER 31,2007 Debit Cash Accountsreceivable Prepaidrent Eq u i p m e n t Accumulateddepreciation Land Pre p a i d n s u rance i p a y a bl e Sa l a ri e s Notespayable Interestpayable Commonstock R e ta i n e d a rni ngs e Dividends 5ales Costof goods sold 46,880 25,755 6,800 $ 32,555 52,000 11,250 40,000 Credit

$ 10.000

1,250 16,875 1,820 25,0004 48,000b 3,500 151,59s 14,000 1,200

5,000 15,500

Rentexpense Insurance expense

Depreciation expense S a l a ri e e x p ense s

$254,540
a Ba l a n c e t December 2006.(N o commonstockhasbeen i ssued a 31, duri ng t he year.) b B a l a n c e t December 2006,(N o cl osi ngentri eshave been made.) a 31, Required: Preparethe necessaryclosing entries, the income statement,and the statement of changesin shareholders'equity for the year ended December 31,2007, and balance sheetas of December 31,2007 . PB-4B. Record adjustingjournal entries,post to T-Accounts,and prepare closing entries. Indoor Sun Solutions, Inc. has the following account balances at the end of the year: (L O 1 ,2 , 3 ,4 ) Service revenue Insuranceexpense Unearned service revenue payable Salaries Accumulated depreciation Taxesexpense Depreciation expense Salariesexpense $34,320 $4,000 3,200 2,550 2,000 3,650 2,000 8,250

The following information is also available: 1. The compary accountantforgot to depreciatethe matrix tanning bed that was purchasedat the beginning of the year. The matrix tanning bed cost $24,000, has a useful life of6 years, and has no expectedresidual value. 2. The unearnedservice revenueconsistsof gift certificates sold during the year. Indoor Sun Solutions has lost track of customersredeemingcertificates,but only $1,200 of the gift certificateshave not been redeemed.

o APPENDIXB PROBLEMS

617

3. The company currently owes employees$200 of salariesin addition to those given here. 4. The company owes an additional $1,075 in real estatetaxes. were incurred; the other $2,000 should still 5. Only $2,000 of insuranceexpenses I be accountedfor as prepaid. Required: a. Preparethe adjustingjournal entries necessaryat year-end. b. Use T:accountsto compute and presentthe balancesin these accountsafter the adjustmentshave been posted. c. Preparethe closingjournal entries. Darinda and Sue PB-58. Record businesstransactionsand preparefinancial statements. The startedGranny Apple Delicious, Inc. on July 1,2007 to sell their famous applesauce. following transactionsoccured during the year. (LO 1,2' 3, 4) a. Darinda and Sue startedthe businessby contributing $15,000 each in exchange for common stock on JulY 1. b. Also on July the company borrowed $20,000 from Local Bank at 9S%o,Theloan was for 1 year. c. The company purchased$10,000 worth of applesand other inventory during the year. d. The company grew and neededto rent a shop. They paid $27,000 for rent on the shop for 18 months, beginning January 1. for e. Granny Apple Delicious, Inc. sold $36,000 worth of applesauce cash during the first fiscal year and of the inventory purchasedin c. only $1,000 remained. f. GrannyApple Delicious,Inc. paid $1,525in operatingexpenses. Required: 1. Post the abovetransactionsto T:accountsto determinethe balanceofeach account on June 30, 2008; include any adjusting transactionsnecessary. 2. Prcparethe adjustedtrial balance,the income statement,statementof changesin shareholder'sequity, balance sheet,and a statementof cash flows' 3. Preparethe closing entries and the postclosing trial balance. PB-68. Record businesstransactions.The following information is a partial list of transactionsfrom Home CleaningService,Inc. (LO 1,2, 3, 4) a. Brenda, Don, Michael, Trina, and McKenzie each donated$3,250 in exchange for common stock to start the businesson January I, 2009. b. On March 1, Home Cleaning paid $6,000 cash for a2-year insurancepolicy that was effective immediately. c . On March 15, the company purchased$10,000 of supplies on account. d. On April 5, the company purchasedsome cleaning equipment for $8,000 cash' The equipment should last for 5 years with no residual value. Home Cleaning will take a full year of depreciationin 2009. On May 1, Home Cleaning purchaseda year's worth of advertising in a local for newspaper $1,500cash. f. On September1, Home Cleaning obtained a 9-month loan for $15,000 at I27o from City National Bank, with interest and principal payable on June 1,2010. I On December 31 Home Cleaning paid $7,000 of what it owed on account for suppliesfrom c.; the company had $3,000 of the supplies still on hand at the end of the year. h. For the year ending December 3I,2009, Home Cleaning had revenuesof $26,225.The cashhad been received for all but $3'000. i. Home Cleaningpaid $1,170in cashdividendson December3I,2OO9'

A PP END I X . THE MECHANICS F AN ACCO UNTI NG B O SYSTEM

Required: 1. Give thejournal entries for the transactions;include any adjusting entries. 2. Post the transactionsto T:Accounts and preparethe adjustedtrial balanceat December 3I,2009. 3. Preparethe closing entries and post-closing trial balancefor Home Cleaning Service,Inc. at December31.2009. PB-78. Analyze businesstransactionsand preparefinancial statements. The accounting departmentfor EntertainmentActivities, Inc. recordedthe following journal entries for the frscal year endedJune 30,2007 . EntertainmentActivities generates revenueby selling tickets for local eventssuch as concerts,fights, and sporting events.Sometimestickets are sold in advanceand sometimescustomerswill purchasetheir tickets the sameday as the event. These types of transactionsrequire that Entertainment Activities accounting department record some cashreceiptsas unearnedrevenuesand others as earnedrevenues.(LO 2, 3, 4) D ES C R IPT ION a. Cash Commonstock b. Office Supplies Accountspayable c. Prepaidrent Cash d. Bu i l d i n g Note payable e. C a s h Unearnedticket revenue f. Utilitiesexpense Cash g. ,Accounts payable Cash h. C a s h Ticketrevenue i. j. Unearnedticket revenue Ticketrevenue Supplies xpense e Supplies D E B IT 1s0,000 C R E D IT

150,000 475 475 18,000 18,000 37s,000 375,000 16,000 16,000 525 525 475 47s 50,000 50,000 10,000 10,000 300 300 7,000 7,000 22s 225 2,000 2,000 7,500 7,500 5,500 5,500

k. Rent expense Prepaidrent l. Interestexpense Interestpayable

m. Depreciation expense Accumu lated depreciation-bui lding n. D i v i d e n d s Cash o. Salaryexpense p Sa l a ri e s a y a b l e

Required: 1. Explain the transactionor event that resulted in eachjournal entry. 2. Post entries a. through o. to T-accountsand calculate the balancein each account. 3. Did Entedainment Activities generatenet income or net loss for the fiscal year ending June 30, 2007? How can you tell? 4. Preparethe four financial statements required at year-end. 5. Preparethe closing entries.

FOR B APPENDIX. ISSUES DISCUSSION619 PB-88. Record businesstransactions and prepare financial statementsThe accounting recordsfor JuanElecffic & CommunicationsCorporation containedthe following balances 31, a so fDec em ber 20 0 8 :(L O 1 ,2 , 3 ,4 )

Assets
Cash Accountsrecd,ivable Prepaidrent (through 0413012009) Land Totals

$s0,000 26,500 3,600 10,500 $90,600

equi ty and sharehol ders' L i abi l i ti es payabl e A ccounts $17,500 Commonstock Retainedearnings 48,600 24,500

$90,500

The following accounting eventsapply to Juan Electric & Communications Corporation's 2009 fiscal year: Jan. 1 Mar. 1 May 1 Juan Electric purchaseda computer that cost $20,000 for cash.The computer had a $2,000 salvagevalue and a3-year useful life. The companyborrowed$20,000by issuinga2-yeat note atl2vo' The company paid $6,000 cash in advancefor a 6-month leasefor office

June 1 July 1 Aug. I 1

space.The lease startedimmediately. The company paid cash dividends of $2,000 to the shareholders' land that cost $15,000cash. The companypurchased Cash payments on accountspayable amountedto $6,000. Juan Electric received $6,000 cash in advancefor 12 months of service to be performed monthly for the next year, beginning on receipt of payment. Sept. 1 JuanElectricsoldland for $13,000cash.The land originallycost$15,000' Oct. 1 JuanElectric purchased $1,300of supplieson account. Juan Electric purchasedaL-year, $10,000 certificate of deposit at 5%' Nov. I Dec.31 The company earned servicerevenueon account during the year that amountedto $50.000. 31 Cash collections from accountsreceivableamountedto $46,000. 31 The company incurred other operating expenseson account during the Also: year that amountedto $6,000. Salariesthat had been earnedby the salesstaff but not yet paid amounted to $2,300. There was $200 of supplies on hand at the end of the period. Basedon the precedingtransactiondata,there are someadditionaladjustments that need to be made before the financial statementscan be prepared.

Required: Give thejournal entries for the transactions;include any adjusting entries. Postthejournal entriesto T-accounts,preparean adjustedtrial balance,and preparethe financial statements(all four) for 2009. Then preparethe closing entries and the postclosins trial balance.

for lssues Discussion

Financial statementanalysis 1. Use the annual report from Staples,Inc. to answer thesequestions: for a. When you look at the financial statements Staples,can you tell if the company usesa generalledger accounting system?Explain. b. Find at least four pieces of quantitative information contained in the Staples annual report that would not be found in a generalledger system. 2. Who are the auditors for Staples? 3. How does havins an audit affect businessrisk?

620

APPENDIX . THE M ECHANI CS F AN AC C O U N T I N G Y S T E M B S O

Ethics
Companiesoften try to manageearningsby recognizing revenuebefore it is actually earned according to GAAP or deferring expensesthat have been incurred. For example, to meet the targetedearningsfor a specific period, a company may capitalizea cost that should be expensed.Read the following scenarioand then decide how you would handle this opportunity to manageearnings. You are a division managerof a large public company.Your bonus is calculatedon your division's net income targetsthat you must meet. This year that target is $1.5 million. You are authorized to sign off on any decision made within your division. You are faced with the following situation: On December 15, 2008, your division of the company ordered $150,000 worth of supplies in anticipation for the seasonal rush. Most of them will be usedby year-end.Thesesupplies were delivered on the eveningof December27.If yourecord this suppliesexpensethis year, your net income will be $1.45 million and you will not meet the target and will therefore not receiveyour bonus of $25,000 that you have worked hard for. (Your company generally expensessupplies when purchased.)If you do record this expensethis year for the year ended December 3 1, 2008, then you and some of your support employeeswill not receive a bonus. What would you do and why?

InternetExercise: lntuit lnc.

The accountingcycle illustrated in this chaptermay be simplified with the aid of a computerized generalledger system.Intuit Inc. is a leader in e-finance and developsand supports Quicken@,the leading personalfinance software;TurboTax@,the best-sellingtax preparation software; and QuickBooks@,the most popular small businessaccounting software. Pleasego to the www.prenhall.com./reimers Web site. Go to Appendix B and use the Internet Exercise company link. IEB.1. a. Briefly summarizethe top story in Today's News. b. In the "Get Quotes and Research" section type INTU, the stock symbol of Intuit Inc., and then click on Go. Review the information provided and comment on one item of interest. IEB-2. In the left-hand column click on Financial Statements. the most recentyear list For the amounts reported for cash, common stock, total revenues,and interest expense.Note that theseamounts are reported in thousands. a. b. c. d. e. f. Which financial statementreports each of theseamounts? What was the beginning balancefor each of these accounts? Which of these accountsis a real account? Which of these accountsis closed at the end of the accountingperiod? Which of these accountshas a normal debit balance? Which of theseaccountsmight be affectedby an adjustingjournal entry? Explain why the account might need to be adjusted.

IEA-3. What are the advantages a computeized general ledger system such as Quickof Books@ developed by Intuit? Is it important to understand the accounting cycle even though computerizedgeneral ledger systemsare available?Explain why or why not. Pleasenote: Internet Web sites are constantly being updated.Therefore, if the information is not found where indicated, pleaseexplore the Web site further to find the information.