module 2- completing the accounting cycle discussion
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MODULE 2Completing the
Accounting Cycle
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COVERAGE:
1. Accounting Cycle
2. Work Sheet
3. Financial Statements
4. Adjusting and Closing Entries
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1. Accounting Cycle
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The accounting process that begins with
analyzing and journalizing transactionsand ends with summarizing and reporting
these transactions is called the
account ing cyc le.
The most important output of this cycle is
the financial statements.
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Seven Basic Steps of the
Accounting Cycle1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data areassembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.
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2. Work Sheet
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The work sheet is a useful device
for understanding the flow of
accounting data from theunadjusted trial balance to the
financial statements.
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The Work Sheet
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
Prepared from the general ledger.
Accounts are listed in the following
order: assets, liabilities, owners
equity, revenues, and expenses.
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Adjustments are entered here. Two
possibilities:
1. DeferralsExisting balances arechanged.
2. AccrualsNew information is
entered.
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
The Work Sheet
http://localhost/var/www/apps/conversion/tmp/scratch_1/OVERVIEW%20OF%20ADJUSTMENTS.ppthttp://localhost/var/www/apps/conversion/tmp/scratch_1/OVERVIEW%20OF%20ADJUSTMENTS.ppt -
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The Work Sheet
Adjustments are combined with
the trial balance. Account
balances are now adjusted.
Trial Balance
Accounts Dr Cr Dr Cr Dr Cr
Adjustments Adjusted TB
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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600
Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
The Unadjusted
Trial Balance
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
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(a) The Suppliesaccount has a debit of
$2,000. A count of supplies at the end of
the period reveals that $760 is on hand.Therefore, $1,240 in supplies was used
during the two-month period.
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Cash 2,065Accounts Receivable 2,220Supplies 2,000Prepaid Insurance 2,400Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600
Utilities Expense 985Supplies Expense 800Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
(a) 1,240
(a) 1,240
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(b) The Prepaid I nsurance account has a
debit balance of $2,400, which
represents prepayment of insurance for24 months beginning December 1.
Thus, the insurance expense for this
month is $100 ($2,40024).
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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
Insurance Expense (b) 100
Accounts are added as needed.
(b) 100
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(c) The Unearned Rent account has a credit
balance of $360, which represents the
receipt of three-months rent beginningwith December 1. Thus, the rent revenue
for December is $120.
FORRENT
N S l i
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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
Insurance Expense (b) 100
(c) 120
Rent Revenue (c) 120
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(d) Wages accrued but not paid at
the end of December total $250.
N tS l ti
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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
Insurance Expense (b) 100
Rent Revenue (c) 120Wages Payable (d) 250
(d) 250
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(e) Fees accrued at the end of
December, but not recorded, total$500.
N tS l ti
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Cash 2,065Accounts Receivable 2,220Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340Wages Expense 4,275 (d) 250Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
78
9
10
11
12
13
1415
16
17
18
19
20
21
22
Insurance Expense (b) 100
Rent Revenue (c) 120
Wages Payable (d) 250
(e) 500
(e) 500
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(f) Depreciation of the office
equipment is $50 for December.
NetSolutions
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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
7
8
9
10
11
12
13
1415
16
17
18
19
20
2122
Insurance Expense (b) 100
Rent Revenue (c) 120
Wages Payable (d) 250
Depreciation Expense (f) 50Accum. Depreciation (f) 50
NetSolutions
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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800
Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600
Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
1
2
3
4
5
6
7
8
9
10
11
12
13
1415
16
17
18
19
20
2122
Insurance Expense (b) 100
Rent Revenue (c) 120
Wages Payable (d) 250
Depreciation Expense (f) 50Accum. Depreciation (f) 50
To make more space,
lets remove theheading.
Adjusted
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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1718
19
20
21
22
23
2425
Insurance Expense (b) 100Rent Revenue (c) 120Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50
2,260 2,260
Summed
and
ruled
31
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Next, the unadjusted Trial
Balance columns and the
Adjustments columns arecombined to determine the
amounts displayed in the
Adjusted Trial Balance.
Adjusted
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Cash 2,065Accounts Receivable 2,220 (e) 500Supplies 2,000 (a) 1,240Prepaid Insurance 2,400 (b) 100Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 360 (c) 120Chris Clark, Capital 25,000Chris Clark, Drawing 4,000Fees Earned 16,340 (e) 500Wages Expense 4,275 (d) 250Rent Expense 1,600Utilities Expense 985Supplies Expense 800 (a) 1,240Miscellaneous Expense 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1718
19
20
21
22
23
2425
Insurance Expense (b) 100Rent Revenue (c) 120Wages Payable (d) 250Depreciation Expense (f) 50Accum. Depreciation (f) 50
2,260 2,260
33
Adjusted
34
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Cash 2,065 2,065Accounts Receivable 2,220 (e) 500 2,720Supplies 2,000 (a) 1,240 760Prepaid Insurance 2,400 (b) 100 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 360 (c) 120 240Chris Clark, Capital 25,000 25,000Chris Clark, Drawing 4,000 4,000Fees Earned 16,340 (e) 500 16,840Wages Expense 4,275 (d) 250 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 800 (a) 1,240 2,040Miscellaneous Expense 455 455
42,600 42,600
Account Title Debit Credit Debit Credit Debit Credit
Adjusted
Trial Balance Adjustments Trial Balance
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
1718
19
20
21
22
23
2425
Insurance Expense (b) 100 100Rent Revenue (c) 120 120Wages Payable (d) 250 250Depreciation Expense (f) 50 50Accum. Depreciation (f) 50 50
2,260 2,260 43,400 43,400
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Revenue and expense balances in
the Adjusted Trial Balance column
are extended to the Income
Statement column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Income State. Balance Sheet
The Work Sheet
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Asset, liability, owners equity, and
drawing balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Income State. Balance Sheet
The Work Sheet
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To make room on the slides for
the Income statement and
Balance Sheet columns, the Trial
Balance and Adjustments
columns have been removed.
Adjusted
38
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Cash 2,065Accounts Receivable 2,720Supplies 760
Prepaid Insurance 2,300Land 20,000Office Equipment 1,800Accounts Payable 900Unearned Rent 240Chris Clark, Capital 25,000Chris Clark, Drawing 4,000
Fees Earned 16,840Wages Expense 4,525Rent Expense 1,600Utilities Expense 985Supplies Expense 2,040Miscellaneous Expense 455
Account Title Debit Credit Debit Credit Debit Credit
Trial Balance Income Statement Balance Sheet
1
2
3
45
6
7
8
9
10
1112
13
14
15
16
17
18
19
20
21
22
23
24
25
Insurance Expense 100Rent Revenue 120Wages Payable 250Depreciation Expense 50Accum. Depreciation 50
43,400 43,400
38
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Now, lets extend the balances
from the Adjusted Trial Balance
column.
Adjusted
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Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000
Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455
Account Title Debit Credit Debit Credit Debit Credit
j
Trial Balance Income Statement Balance Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
2425
Insurance Expense 100 100Rent Revenue 120 120Wages Payable 250 250Depreciation Expense 50 50Accum. Depreciation 50 50 43,400 43,400
40
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These fourcolumns are
summed.
Adjusted
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Cash 2,065 2,065Accounts Receivable 2,720 2,720Supplies 760 760Prepaid Insurance 2,300 2,300Land 20,000 20,000Office Equipment 1,800 1,800Accounts Payable 900 900Unearned Rent 240 240Chris Clark, Capital 25,000 25,000
Chris Clark, Drawing 4,000 4,000Fees Earned 16,840 16,840Wages Expense 4,525 4,525Rent Expense 1,600 1,600Utilities Expense 985 985Supplies Expense 2,040 2,040Miscellaneous Expense 455 455
Account Title Debit Credit Debit Credit Debit Credit
j
Trial Balance Income Statement Balance Sheet
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
2425
Insurance Expense 100 100Rent Revenue 120 120Wages Payable 250 250Depreciation Expense 50 50Accum. Depreciation 50 50 43,400 43,400 9,755 16,960 33,645 26,440
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The difference between the
Income Statement column
totals is the net income (or netloss) for the period.
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The difference between the
Balance Sheet column totals is
also the income (or net loss)for the period.
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9,755 16,960 33,645 26,440
7,205 7,20516,960 16,960 33,645 33,645
Income Statement Balance Sheet
Net Income Net Income
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3. Financial Statements
NetSolutions
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NetSolutions
Income Statement
For Two Months Ended December 31, 2005
Fees earned $16,840Rent revenue 120Total revenues $16,960
Expenses:Wages expense $ 4,525Supplies expense 2,040Rent expense 1,600Utilities expense 985Insurance expense 100Depreciation expense 50Miscellaneous expense 455
Total expenses 9,755Net income $ 7,205
Every amount on this income statement was taken from the
Income Statement column of the work sheet.
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NetSolutions
Statement of Owners Equity
For the Two Months Ended December 31, 2005
Chris Clark, Capital, November 1, 2005 $ 0
Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205Less withdrawals 4,000
Increase in owners equity 28,205
Chris Clark, Capital, December 31, 2005 $28,205
Either from the
income
statement or thework sheet.
From the
Balance Sheet
debit column ofthe work sheet.
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NetSolutions
Balance Sheet
December 31, 2005Assets Liabilities
Current assets: Current liabilities:Cash $ 2,065 Accounts payable $900
Accounts receivable 2,720 Wages payable 250
Supplies 760 Unearned rent 240
Prepaid insurance 2,300 Total liabilities $ 1,390
Total current assets $ 7,845Property, plant, and
equipment:
Land $20,000
Office equip. $1,800
Less accum.depreciation 50 1,750 Owners Equity
Total property, plant Chris Clark, Capital 28,205
and equipment 21,750 Total liabilities and
Total assets $29,595 owners equity $29,595
From the
Statement
of Owners
Equity
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Assets are commonly divided into classes
and that two of these classes are current
assets and property, plant, and equipment.
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Thats correct. Cash and other
assets that are expected to be
converted into cash, sold, orused up usually in less than a
year are current assets.
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So, assets that have a life
over a year are listed under
property, plant, and
equipment.
There are some exceptions, but
thats basically correct. Assets such
as office equipment, machinery,buildings, and land would appear
under that heading.
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Liabilities due usually within one
year or less and that are to be paid
out of current assets are called
current liabilities.
Accounts payable
Wages payable
Interest payable
Unearned fees
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Liabilities not due for
more than a year usuallyare long-term liabilities.
Mortgage note
payable
Mortgage payable
Bond payable
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4. Adjusting and Closing Entries
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Adjusting and Closing Entries
Adjusting entries are recorded
in the journal at the end of the
accounting period.
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Adjusting and Closing Entries
If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
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OWNERS CAPITAL
The Closing Process
Income Summary
1
Revenues are
transferred to
Income Summary
2
Expenses are
transferred to
Income Summary
3Net Income or Net Loss istransferred to Owners Capital
4
Drawings are transferred to
Owners Capital
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OWNERS CAPITAL
Income Summary
1
Revenues are
transferred to
Income Summary
2
Expenses are
transferred to
Income Summary
3Net Income or Net Loss istransferred to Owners Capital
4
Drawings are transferred to
Owners Capital
The I ncome Summary
account does not appear on
the financial statements.
Adjusting and Closing Entries
Th Cl i P
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Note: Thebalances shown
are adjusted
balances before
closing. The
following
sequence
demonstrates the
closing process.
The Closing Process
Th Cl i P
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Debit each revenue
account for the
amount of its
balance, and credit
I ncome Summary
for the total
revenue.
16,840
120
16,960
The Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Debit I ncomeSummaryfor thetotal expenses and
credit each expenseaccount for its
balance.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
The Closing Process
Th Cl i P
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Debit I ncome
Summaryfor the
amount of its
balance (in this
case, the net
income) and credit
the capital account.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
7,205
7,205
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Debit the capital
account for the
balance of the
drawing account,
and credit drawing
for the same
amount.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
7,205
7,205
4,000
4,000
The Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Income Summary
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,480
120
16,9609,775
445
100
2,040
985
50
1,600
4,525
7,205
7,205
4,000
4,000
Close Revenues
Close Expenses
Close Income Summary
Close Drawing
16,840
120
16,960
4,525
1,600
50
985
2,040
100
455
9,775
7,205
7,205
4,000
4,000
Review of the Closing Process
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After the closing entries
are posted, all of the
temporary accounts havezero balances.
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Post-closing Trial Balance
NetSolutionsPost-Closing Trial Balance
December 31, 2005
Cash 2 065 00Accounts Receivable 2 720 00
Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Chris Clark, Capital 28 205 00
29 645 00 29 645 00
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The End
MODULE 2
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