Chapter 5Completion of the Accounting Cycle

5-1 Work Sheet Form and Procedure

Trial Balance

Adjustments Adjusted Trial

Balance

Income Statement

Balance Sheet

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Work SheetWork Sheet

Account Titles

(Ledger account titles)

(Additional account titles for adjustments)

1. Prepare 1. Prepare a trial a trial

balance on balance on the work the work

sheet.sheet.

2. Enter 2. Enter adjustment adjustment

data.data.

3. Enter 3. Enter adjusted adjusted balances.balances.

4. Extend adjusted 4. Extend adjusted balances to appropriate balances to appropriate

statement columns.statement columns.

5. Total the statement 5. Total the statement columns, compute net columns, compute net

income, (or net loss), and income, (or net loss), and complete work sheet.complete work sheet.

5-2 Step 1: Prepare a Trial Balance on the Work Sheet

INTERNATIONAL TRAVEL AGENCY, INC.INTERNATIONAL TRAVEL AGENCY, INC.Work SheetWork Sheet

For Month Ended March 31, 2008For Month Ended March 31, 2008

Trial Balance

Account Titles Dr. Cr.

Cash 15

Accounts Receivable 5

Prepaid Insurance 4

Office Equipment 20

Accumulated Depreciation

Accounts Payable 4

Common Stock 10

Dividends 2 20

Travel Service Revenue 26

Depreciation Expense 2

Rent Expense 2

Salaries Expense 10

Totals 60 60

Trial balance Trial balance amounts are amounts are taken directly taken directly from ledger from ledger accounts.accounts.

Step 1Step 1

INTERNATIONAL TRAVEL AGENCY, INTERNATIONAL TRAVEL AGENCY, INC.INC.

Work SheetWork SheetFor Month Ended March 31, 2008For Month Ended March 31, 2008

5-3 Step 2: Enter the Adjustments in the Adjustments Column

Trial Balance Adjustments

Account Titles Dr. Cr. Dr. Cr.

Cash 15

Accounts Receivable 5

Prepaid Insurance 4 (a) 1

Office Equipment 20

Accumulated Depreciation 4 (b) 2

Accounts Payable 10

Common Stock 20

Dividends 2

Travel Service Revenue 26

Depreciation Expense 2 (b) 2

Rent Expense 2

Salaries Expense 10 (c) 5

Totals 60 60

Insurance Expense (a) 1

Salaries Payable (c) 5

Totals 8 8

Step 2Step 2

Enter adjustment amounts in Enter adjustment amounts in appropriate columns, total appropriate columns, total adjustments columns and adjustments columns and

check for equality.check for equality.

ADJUSTMENT DATA:ADJUSTMENT DATA:

(a)(a) Prepaid Insurance Prepaid Insurance expired during March, $1.expired during March, $1.

(b)(b) Depreciation expense on Depreciation expense on office equipment for office equipment for March, $2.March, $2.

(c)(c) Salaries expense incurred Salaries expense incurred at the end of March but at the end of March but not yet paid, $5.not yet paid, $5.

5-4 Step 3: Enter the Adjusted Balances in the Adjusted Trial Balance

Trial Balance Adjustments Adjusted Trail Balance

Account Titles Dr. Cr. Dr. Cr. Dr. Cr.

Cash 15 15

Accounts Receivable 5 5

Prepaid Insurance 4 (a) 1 3

Office Equipment 20 20

Accumulated Depreciation

4 (b) 2 6

Accounts Payable 10 10

Common Stock 20 20

Dividends 2 2

Travel Service Revenue 26 26

Depreciation Expense 2 (b) 2 4

Rent Expense 2 2

Salaries Expense 10 (c) 5 15

Totals 60 60

Insurance Expense (a) 1 1

Salaries Payable (c) 5 5

Totals 8 8 67 67

INTERNATIONAL TRAVEL AGENCY, INTERNATIONAL TRAVEL AGENCY, INC.INC.

Work SheetWork SheetFor Month Ended March 31, 2008For Month Ended March 31, 2008 Step 3Step 3

Combine trial Combine trial balance amounts balance amounts with adjustment with adjustment

amounts to obtain amounts to obtain the adjusted trail the adjusted trail

balance.balance.

5-5 Step 4: Extend the Adjusted Trial Balance to the Appropriate Financial Statements

Trial Balance Adjustments Adjusted Trail Balance

Income Statement

Balance Sheet

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 15 15 15

Accounts Receivable 5 5 5

Prepaid Insurance 4 (a) 1 3 3

Office Equipment 20 20 20

Accumulated Depreciation 4 (b) 2 6 6

Accounts Payable 10 10 10

Common Stock 20 20 20

Dividends 2 2 2

Travel Service Revenue 26 26 26

Depreciation Expense 2 (b) 2 4 4

Rent Expense 2 2 2

Salaries Expense 10 (c) 5 15 15

Totals 60 60

Insurance Expense (a) 1 1 1

Salaries Payable (c) 5 5 5

Totals 8 8 67 67 22 26 45 41

INTERNATIONAL TRAVEL AGENCY, INTERNATIONAL TRAVEL AGENCY, INC.INC.

Work SheetWork SheetFor Month Ended March 31, 2008For Month Ended March 31, 2008

5-6 Step 5: Total the Statement Columns, Compute Net Income, and Complete the Work Sheet

Trial Balance Adjustments Adjusted Trail Balance Income Statement Balance Sheet

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 15 15 15

Accounts Receivable 5 5 5

Prepaid Insurance 4 (a) 1 3 3

Office Equipment 20 20 20

Accumulated Depreciation 4 (b) 2 6 6

Accounts Payable 10 10 10

Common Stock 20 20 20

Dividends 2 2 2

Travel Service Revenue 26 26 26

Depreciation Expense 2 (b) 2 4 4

Rent Expense 2 2 2

Salaries Expense 10 (c) 5 15 15

Totals 60 60

Insurance Expense (a) 1 1 1

Salaries Payable (c) 5 5 5

Totals 8 8 67 67 22 26 45 41

Net Income 4 4

Totals 26 26 45 45

INTERNATIONAL TRAVEL AGENCY, INC.INTERNATIONAL TRAVEL AGENCY, INC.Work SheetWork Sheet

For Month Ended March 31, 2008For Month Ended March 31, 2008

Step 5Step 5 Net Income is extended to the credit Net Income is extended to the credit column of the balance sheet columns. column of the balance sheet columns.

(Net loss would be extended to the (Net loss would be extended to the debit column.)debit column.)

5-7 Financial Statements

INTERNATIONAL TRAVEL AGENCYIncome Statement

For the Month Ended March 31, 2008

Revenue

Travel service revenue $26

Expenses

Salaries expense $15

Depreciation expense 4

Rent expense 2

Insurance expense 1

Total expenses 22

Net Income $ 4INTERNATIONAL TRAVEL AGENCY

Retained Earnings StatementFor the Month Ended March 31, 2008

Retained earnings, March 1 $ 0

Add: Net Income 4

4

Less: Dividends 2

Retained Earnings, March 31 $ 2

INTERNATIONAL TRAVEL AGENCYBalance SheetMarch 31, 2008

Assets

Cash $ 15

Accounts receivable 5

Prepaid insurance 3

Office Equipment $ 20

Less: Accumulated depreciation 6 14

Total assets 37

Liabilities and Stockholders’ Equity

Liabilities

Accounts payable $ 10

Salaries payable 5

Total liabilities $15

Stockholders’ equity

Common Stock 20

Retained earnings 2

Total liabilities and stockholders’ equity $ 37

5-8 Closing Process

(Individual)

Expenses

Dr. Bal. To Income Summary

(Individual)

Revenues

To Income Summary

Cr. Bal.

Dividends

Dr. Bal. To Retained Earnings

Income Summary

Expenses

Net Income to Retained Earnings

Revenues

Net Loss to Retained Earnings

Retained Earnings

Net Loss

Dividends

Net IncomePermanentPermanent

AccountsAccounts

TemporaryTemporary

AccountsAccounts22

11

44

33

5-9 Closing Entries

Date Account Titles and Explanation Ref. Debit Credit

Closing Entries

March 31

(1)Travel Service Revenue Income Summary (To close revenue account)

26

26

March 31

(2)Income Summary Depreciation Expense Rent Expense Salaries Expense Insurance Expense (To close expense accounts)

2242

151

31

(3)Income Summary Retained Earnings (To close net income to retained earnings)

44

31

(4)Retained Earnings Dividends (To close dividends to retained earnings)

22

GENERAL JOURNALGENERAL JOURNAL Page 4Page 4

5-10 Accounting Cycle

(1)(1)Analyze business Analyze business

transactionstransactions

(2)(2)Journalize the Journalize the transactionstransactions

(3)(3)Post to ledger Post to ledger

accountsaccounts

(4)(4)Prepare a trial Prepare a trial

balancebalance

(5)(5)Journalize and post Journalize and post adjusting entries: adjusting entries:

Prepayments/AccruPrepayments/Accrualsals

(6)(6)Prepare an Prepare an

adjusted trial adjusted trial balancebalance

(7)(7)Prepare financial Prepare financial

statements: statements: Income statementIncome statement

Retained earnings Retained earnings statementstatement

Balance sheetBalance sheet

(8)(8)Journalize and post Journalize and post

closing entriesclosing entries

(9)(9)Prepare a post-Prepare a post-

closing trial closing trial balancebalance

Work Work sheetsheet

OptionalOptional

Steps in Steps in the the

AccountinAccounting Cycleg Cycle

(The steps in the accounting cycle are performed in sequence and are repeated in each accounting period.)(The steps in the accounting cycle are performed in sequence and are repeated in each accounting period.)

5-11 Standard Classifications

CLASSIFIED BALANCE SHEETCLASSIFIED BALANCE SHEET

LIABILITIES AND STOCKHOLDERS’ LIABILITIES AND STOCKHOLDERS’ EQUITYEQUITY

CURRENT LIABILITIESCURRENT LIABILITIES

1.1. Notes PayableNotes Payable2.2. Account PayableAccount Payable3.3. Unearned RevenueUnearned Revenue4.4. Salaries PayableSalaries Payable5.5. Taxes PayableTaxes Payable

LONG-TERM LIABILITIESLONG-TERM LIABILITIES

1.1. Long-term Notes PayableLong-term Notes Payable2.2. Mortgage PayableMortgage Payable3.3. Bonds PayableBonds Payable

STOCKHOLDERS’ EQUITYSTOCKHOLDERS’ EQUITY

1.1. Common StockCommon Stock2.2. Retained EarningsRetained Earnings

ASSETSASSETS

CURRENT ASSETSCURRENT ASSETS

INTANGIBLE ASSETSINTANGIBLE ASSETS

PROPERTY, PLANT, AND EQUIPMENTPROPERTY, PLANT, AND EQUIPMENT

LONG-TERM ASSETSLONG-TERM ASSETS

1.1. CashCash2.2. Short-term InvestmentsShort-term Investments3.3. ReceivablesReceivables4.4. Prepaid ExpensesPrepaid Expenses

1.1. StocksStocks2.2. BondsBonds

1.1. LandLand2.2. BuildingsBuildings3.3. EquipmentEquipment4.4. FurnitureFurniture

1.1. PatentsPatents2.2. CopyrightsCopyrights3.3. TrademarksTrademarks

>>Less:Less:Accumulated Accumulated DepreciationDepreciation