Accounting Assignment

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Financial Accounting

John J. Wild

Sixth Edition

McGraw-Hill/Irwin

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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In presentations for each chapter in this text, we will provide you with sound to go along with the material on your screen. There will be sound on every slide you view. Please make sure your computer speakers are set up properly when viewing the material. Good luck and we hope you enjoy this new format.

Chapter 03

Adjusting Accounts and Preparing Financial Statements

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In Chapter 3, we will look at the timing of reports and the need to adjust accounts. Adjusting entries are necessary because not all transactions begin and end in one accounting period. For example, a customer may purchase inventory at the end of December and not pay for it until January of the next year. Adjusting accounts is important for recognizing revenues and expenses in the proper period.

Toward the end of the chapter, we will review the preparation of the basic financial statements.

Conceptual Chapter Objectives

C1: Explain the importance of periodic
reporting and the time period
assumption.

C2: Explain accrual accounting and how
it improves financial statements.

C3: Identify steps in the accounting cycle.

C4: Explain and prepare a classified
balance sheet.

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Conceptual Chapter Objectives:

C1: Explain the importance of periodic reporting and the time period assumption.

C2: Explain accrual accounting and how it improves financial statements.

C3: Identify steps in the accounting cycle.

C4: Explain and prepare a classified balance sheet.

Analytical Chapter Objectives

A1: Explain how accounting adjustments
link to financial statements.

A2: Compute profit margin and describe
its use in analyzing company
performance.

A3: Compute the current ratio and
describe what it reveals about a
company’s financial condition.

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Analytical Chapter Objectives:

A1: Explain how accounting adjustments link to financial statements.

A2: Compute profit margin and describe its use in analyzing company performance.

A3: Compute the current ratio and describe what it reveals about a company’s financial condition.

Procedural Chapter Objectives

P1: Prepare and explain adjusting entries.

P2: Explain and prepare an adjusted trial
balance.

P3: Prepare financial statements from an
adjusted trial balance.

P4: Describe and prepare closing entries.

P5: Explain and prepare a post-closing trial balance.

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Procedural Chapter Objectives

P1: Prepare and explain adjusting entries.

P2: Explain and prepare an adjusted trial balance.

P3: Prepare financial statements from an adjusted trial balance.

P4: Describe and prepare closing entries.

P5: Explain and prepare a post-closing trial balance.

Procedural Chapter Objectives (Continued)

P6: Appendix 3A – Explain the
alternatives in accounting for
prepaids (see text for details).

P7: Appendix 3B – Prepare a work sheet
and explain its usefulness (see text for details).

P8: Appendix 3C – Prepare reversing entries and explain their purpose (see text for details).

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P6: Appendix 3A – Explain the alternatives in accounting for prepaids (see text for details).

P7: Appendix 3B – Prepare a work sheet and explain its usefulness (see text for details).

P8: Appendix 3C – Prepare reversing entries and explain their purpose (see text for details).

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2

3

4

5

6

7

8

9

10

11

12

1

2

3

4

Annually

1

2

Monthly

Quarterly

Semiannually

The Accounting Period

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

C 1

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The most common accounting period is one month. Companies also prepare quarterly reports and semiannual reports. At the end of each year, most companies prepare an annual report of operations and financial position.

When we divide business activities into arbitrary fixed periods of time, it is often necessary to have special accounting for transactions that cross from one time period to the next.

Most of our time will be spent looking at the special adjusting process for some of these transactions.

Accounting

Accrual Basis vs. Cash Basis

Accrual Basis

Revenues are recognized when earned and expenses are recognized when incurred.

Cash Basis

Revenues are recognized when cash is received and expenses recorded when cash is paid.

C 1

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Not GAAP

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Part I

The accrual basis dictates that revenues be recognized when earned and expenses be recognized when incurred. The accrual basis of accounting is considered to be in compliance with generally accepted accounting principles, or GAAP.

The cash basis of accounting dictates that revenues be recognized when the cash is actually received and that expenses are recorded when the cash is paid.

Part II

The cash basis is not considered to be compliant with GAAP. While you may be on the cash basis for your transactions, almost all companies follow the accrual basis of accounting. We believe that the cash basis waits too long to recognize revenue and expenses and, therefore, misstates income.

Accrual Basis vs. Cash Basis

On the cash basis the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or 2013, periods covered by the policy.

C 1

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In our first transaction, on December 1, 2011, FastForward paid $2,400 cash for a 24 month business insurance policy.

On the cash basis, the entire $2,400 would be recognized as an expense in 2011 even though the policy provides protection for 2011, 2012, and 2013. Let’s look at how this type of transaction is handled in an accrual basis accounting system.

Sheet1

Example: FastForward paid $2,400 for a 24-month insurance policy beginning December 1, 2011.
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RP21

Insurance Expense 2011
Jan Feb Mar Apr
$ - 0 $ - 0 $ - 0 $ - 0
May Jun Jul Aug
$ - 0 $ - 0 $ - 0 $ - 0
Sep Oct Nov Dec
$ - 0 $ - 0 $ - 0 $ 2,400
Insurance Expense 2005
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ 100
Insurance Expense 2006
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ - 0

RB22

Ref. Description Debit Credit
c. Work in process - Base Fab 665,000
Work in process - Finishing 405,000
Manufacturing overhead 1,070,000
d. Work in process - Finishing 1,850,000
Work in process - Base Fab 1,850,000
e. Finished goods 3,200,000
Work in process - Finishing 3,200,000

Sheet3

Accrual Basis vs. Cash Basis

On the accrual basis $100 of insurance expense is recognized in 2011, $1,200 in 2012, and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.

C 2

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On the accrual basis, we would record $100 of insurance expense in the month of December, 2011, $100 for each month in 2012, and $100 for the months January through November in 2013. We match the expense with the periods benefited by the insurance coverage. We believe this is a better cost matching of revenues and expenses.

RP21

Insurance Expense 2011
Jan Feb Mar Apr
$ - 0 $ - 0 $ - 0 $ - 0
May Jun Jul Aug
$ - 0 $ - 0 $ - 0 $ - 0
Sep Oct Nov Dec
$ - 0 $ - 0 $ - 0 $ 100
Insurance Expense 2012
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ 100
Insurance Expense 2013
Jan Feb Mar Apr
$ 100 $ 100 $ 100 $ 100
May Jun Jul Aug
$ 100 $ 100 $ 100 $ 100
Sep Oct Nov Dec
$ 100 $ 100 $ 100 $ - 0

RB22

Ref. Description Debit Credit
c. Work in process - Base Fab 665,000
Work in process - Finishing 405,000
Manufacturing overhead 1,070,000
d. Work in process - Finishing 1,850,000
Work in process - Base Fab 1,850,000
e. Finished goods 3,200,000
Work in process - Finishing 3,200,000

Sheet3

Adjustments

An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.

Adjusting Accounts

Framework for Adjustments

*including depreciation

C2, P1

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Paid (or received) cash before expense (or revenue) recognized

Paid (or received) cash after expense (or revenue) recognized

Prepaid (Deferred) expenses*

Unearned (Deferred) revenues

Accrued
expenses

Accrued
revenues

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Here is a framework for adjusting the books of the company.

There are two broad categories of adjustments. The first is when cash is paid or received before the expense or revenue is recognized. This category includes prepaid or deferred expenses (including depreciation) and unearned or deferred revenues.

The second major category of adjustments is when cash is paid or received after the expense or revenue is recognized. These are some very common adjustments. The category includes accrued expenses and accrued revenues.

Here is the check

for my first

6 months’ insurance.

Prepaid (Deferred) Expenses

Resources paid for prior to receiving the actual benefits.

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Asset

Expense

Unadjusted

Balance

Credit

Adjustment

Debit

Adjustment

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In the example earlier that dealt with the insurance premium being paid ahead of time, we demonstrated how a prepaid expense would properly be accounted for. This is summarized in the slide above where we increase, or debit, an expense account and reduce, or credit, an asset account.

Now, let’s look at an example of the supplies adjustment.

Supplies

During 2011, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand.

What adjustment is required?

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126

652

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In our second transaction, Scott Company spent $15,500 on office supplies during 2011. When the supplies were purchased, an entry was made to debit, or increase, the asset account (Supplies), and the Cash account was decreased. On December 31, 2011, the balance in the Supplies account was $15,500. On that date we conducted an inventory of the office supplies on hand and determined that we still had $2,655 in supplies. We used the other supplies during 2011. Let’s make the adjusting entry required on December 31, 2011, to get the balance in the Supplies account stated properly.

Part II

Debit, or increase, Supplies expense by $12,845, the amount of the supplies used, and credit, or reduce, the asset account, Supplies, by the same amount. If we had supplies available of $15,500 and only had $2,655 on hand at the end of the year, we must have used $12,845 worth of supplies during 2011. Now let’s post our adjusting entry.

Part III

You can see that we now have the proper balance in the asset account, Supplies, and we have fully recognized an expense for the supplies used during 2011. Now let’s look at a new type of adjusting entry.

Larson

T- Account Company Name Dec. 31 Supplies Expense 12,845
Financial Statement Supplies 12,845
Date To record supplies used during 2011

Depreciation

Depreciation is the process of allocating the costs of plant assets over their expected useful lives.

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Straight-Line

Depreciation

Expense

=

Asset Cost - Salvage Value

Useful Life

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Plant assets, with the exception of land, are depreciated over their useful lives. Depreciation is the process of allocating the cost of a plant asset over its useful life in a systematic and rational manner. At this point in the accounting process, we want to introduce you to a depreciation method known as straight-line depreciation. Straight-line depreciation is the most popular method used by companies. They determine the amount of annual depreciation by taking the cost of the plant assets, subtracting the estimated salvage value and dividing that amount by the useful life of the asset. The salvage value is the amount we expect to receive for the asset when we dispose of it at the end of its useful life. In a later chapter, we will discuss other acceptable methods of depreciation. For now, let’s look at the adjusting entry to record depreciation expense.

Depreciation

On January 1, 2011, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash.

Let’s record depreciation expense for the year ended December 31, 2011.

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2011

Depreciation

Expense

=

$62,000 - $2,000

5

=

$12,000

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Part I

On January 1, 2011, Barton purchased equipment for $62,000 cash. The equipment has an estimated useful life of five years and an estimated salvage value of $2,000. Can you determine the annual depreciation expense for 2011?

Part II

How did you do? The numerator of the equation is $60,000 , cost less salvage value, and the denominator is 5, so our annual depreciation expense is $12,000. Now, let’s record the adjusting journal entry.

Depreciation

On January 1, 2011, Barton, Inc. purchased equipment for $62,000 cash. The equipment has an estimated useful life of 5 years and Barton expects to sell the equipment at the end of its life for $2,000 cash.

Let’s record depreciation expense for the year ended December 31, 2011.

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Accumulated depreciation is

a contra asset account.

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Part I

On December 31, 2011, we will debit, or increase, depreciation expense for $12,000 and credit a new account called Accumulated Depreciation – (dash) -- Equipment.

Part II

Accumulated Depreciation is a contra asset account. A contra-account means that the amount in the account reduces the related asset account. In our case, Accumulated Depreciation will reduce the asset account, equipment. Because this is a new type of account, let’s look at the treatment of the contra and related asset account.

We have posted the adjusting entry to record depreciation expense. We have also shown you the balance in the Equipment account. The Depreciation Expense account will appear on our income statement for the year ended December 31, 2011. The Accumulated Depreciation balance will be used to reduce the carrying value of the Equipment account on the balance sheet.

Larson

Insurance Expense Company Name Dec. 31 Depreciation Expense 12,000
Dec. 31 2,000 Financial Statement Accumulated Depreciation - Equipment 12,000
Date To record equipment depreciation

Depreciation

Equipment is shown net of accumulated depreciation. This amount is referred to as the asset’s book value.

$

P1

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The contra-account, Accumulated Depreciation, will be shown as a reduction in the cost of the asset, equipment.

Cost of a plant asset less accumulated depreciation is known as book value. So the asset, equipment, will be shown on the balance sheet at its net amount, or book value, of $50,000.

Because the contra account appears on the balance sheet it will not be closed at the end of the period. It will be carried forward to 2012 and used to accumulate the depreciation related to the equipment.

Now let’s move on to the second category of adjusting entries, deferred revenues.

Sheet1

BARTON, INC.
Partial Balance Sheet
At December 31, 2011
Assets
Cash
.
Equipment $ 62,000
Less: accumulated deprec. (12,000) 50,000
.
.
Total Assets
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Sheet2
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Sheet3
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Sheet4
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Sheet5
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Sheet6
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Unearned (Deferred) Revenues

Revenue

Credit

Adjustment

Debit

Adjustment

P1

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Buy your season tickets for

all home basketball games NOW!

“Go Big Blue”

Cash received in advance of providing products or services.

Liability

Unadjusted

Balance

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Part I

When accounting for deferred revenues, we are faced with a transaction where cash is received in advance of providing a product or service. In other words, we have received the cash but have done nothing to earn it. In our example, we will examine accounting for the sale of season tickets to a university’s home basketball games.

Part II

When dealing with adjustments for deferred revenues we always debit, or reduce, a liability account and credit, or increase, a revenue account. Let’s move on to our season ticket example.

Unearned (Deferred) Revenues

On October 1, 2011, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. Ox University makes the following entry:

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Part I

On October 1, 2011, Ox University sold 1,000 season tickets to its 20 home basketball games for $100 each. On the date of sale, the university made a debit, or increase, to the Cash account and a credit, or increase, to a liability account called Unearned Revenue. We know the use of the word revenue may be a little confusing for now, but remember that the key word is unearned. The university has done nothing to earn the revenue from the sale of the tickets. Let’s post the entry to the ledger account, Unearned Revenue.

Part II

Remember, the Unearned Revenue account is a liability account and will remain a liability until the university provides basketball games for the season ticket holders. Now, let’s look at the adjusting entry the university will make on December 31, 2011, the end of the accounting period.

Larson

Insurance Expense Company Name Oct. 1 Cash 100,000
Dec. 31 2,000 Financial Statement Unearned Revenue 100,000
Date Basketball revenue received in advance

Larson

Unearned Revenue Company Name Oct. 1 Cash . . . . . . . . . . . . . . . . 100,000
Oct.1 100,000 Financial Statement Unearned revenue . . 100,000
Date Basketball revenue received in advance

Unearned (Deferred) Revenues

On December 31, Ox University has played 10 of its regular home games, winning 2 and losing 8.

P1

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Part I

As of December 31, 2011, the university had played 10 home games and compiled a record of two wins and eight losses. Let’s make the adjusting entry.

Part II

The adjusting entry is to debit, or decrease, the liability account, Unearned Revenue and credit, or increase, the revenue account basketball revenue for $50,000. The team has played one-half of its home games so one-half of the unearned revenue has now been earned. Let’s post the adjusting entry so we can look at the balances in the ledger account.

Part III

The Unearned Revenue account has a credit balance of $50,000. This money will be recognized as more home games are played. The Basketball Revenue account has a credit balance of $50,000. The revenue account will appear on the income statement and be closed at the end of the accounting period. The liability account, Unearned Revenue, will appear on the balance sheet on December 31, 2011.

Now let’s change the subject and look at adjustments for accrued expenses.

Larson

Unearned Revenue Company Name Dec. 31 Unearned Revenue 50,000
Oct. 1 100,000 Financial Statement Basketball Revenue 50,000
Date To recognize 10-games of revenue

We’re about one-half

done with this job and

want to be paid for
our work!

Costs incurred in a period that are

both unpaid and unrecorded.

Accrued Expenses

P1

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Expense

Liability

Credit

Adjustment

Debit

Adjustment

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Part I

An accrued expense is defined as a cost incurred in the current period that is both unpaid and unrecorded. When you use your credit card, often you do not record the transaction until you pay your monthly invoice; even though you have incurred the cost.

Part II

For all accrued expense adjusting entries, we debit, or increase an expense account, and credit, or increase, a liability account. Let’s look at a specific example of an accrued expense.

Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 12/31/11, falls on a Thursday. As of 12/31/11, the employees have earned salaries of $47,250 for Monday through Thursday.

P1

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12/1/11

12/31/11

Year-end

Last pay

date

12/25/11

Next pay

date

Record adjusting

journal entry.

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Part I

Barton, Inc. pays its employees every Friday. The current year-end, December 31, 2011, falls on a Thursday. As of December 31, 2011, the employees have earned salaries of $47,250 that will not be paid until the following Friday, January 1, 2012.

Part II

Here is a schematic of the dates. We need to record an adjusting entry on December 31, 2011, to recognize the salaries earned by employees but not paid. Let’s look at the adjusting entry.

Accrued Expenses

Barton, Inc. pays its employees every Friday. Year-end, 12/31/11, falls on a Thursday. As of 12/31/11, the employees have earned salaries of $47,250 for Monday through Thursday.

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Part I

In our adjusting journal entry we will debit, or increase, Salaries Expense and credit, or increase, salaries payable. After the adjustment, salaries expense for 2011 is stated properly. Let’s look at the posting to the ledger accounts.

Part II

Salaries expense recorded during the year amounted to $657,500. After posting our adjusting entry, the new balance at the end of the year is $704,750. The Salaries Payable account will be eliminated when the employees are paid on January 1, 2012. Now let’s move on and look at accrued revenue.

Larson

Basketball Revenue Company Name Dec. 31 Salaries Expense 47,250
Dec. 31 50,000 Financial Statement Salaries Payable 47,250
Date To accrue 4-days' salary

Accrued Revenues

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2011, the end of the firm’s fiscal year.

P1

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The term accrued revenues refers to revenues earned in a period that are both unrecorded and not yet received.

Part I

This adjusting entry is needed because many firms have delivered a product or provided a service but have not recorded the revenue in the current period. You can see our example of an accountant who prepared a tax return for a client but has yet to send that client a bill for the service. The accountant has earned the revenue but has not recorded it at year-end.

Part II

In adjusting entries, to record accrued revenue, we will always debit, or increase, an asset account and credit, or increase, a revenue account. Let’s look at a specific example.

Part I

In our example, Smith and Jones, CPAs, have completed work amounting to $31,200 dollars at the end of the year but have not billed this amount to specific clients. Let’s look at the necessary adjusting entry.

Part II

The company will debit, or increase, the asset, Accounts Receivable, and credit, or increase, the revenue account, Service Revenue for the $31,200. Let’s look at the adjusted account balances.

Part III

Notice that the Accounts Receivable and Service Revenue accounts have been updated to include the earned but unbilled amount of services provided. On the next slide we have prepared a summary of the adjusting process.

Larson

Salaries Payable Company Name Dec. 31 Accounts Receivable 31,200
Dec. 31 47,250 Financial Statement Service Revenue 31,200
Date To accrue revenue earned

Larson

Accounts Receivable Company Name Dec. 31 Salaries expense . . . . . . . . 47,250
Other receivables Financial Statement Salaries payable . . . . 47,250
1,325,268 Date To accrue 3-day's salary
Dec. 31 31,200
Bal. 1,356,468

Larson

Service Revenue Company Name Dec. 31 Accounts receivable . . . . . . 31,200
Other revenues Financial Statement Service revenue . . . . 31,200
6,589,500 Date To accrue 3-day's salary
Dec. 31 31,200
Bal . 6,620,700

Links to Financial Statements

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This summary will prove very useful when completing your homework or studying for the next exam. Here is how we read the table. Before we record a prepaid expense, the assets of the company are overstated and the expenses are understated in the current period. The proper adjusting entry is to debit, or increase, an expense account and credit, or decrease, an asset account.

Take a few minutes to go over the remaining three types of adjusting entries before going to the next slide where we will use a spreadsheet to prepare the adjusting entries and financial statements.

Sheet1

Summary of Adjustments and Financial Statement Links
Before Adjustment
Type Balance Sheet Account Income Statement Account Adjusting Entry
Prepaid Asset Overstated Expense Dr. Expense
Expenses Equity Overstated Understated Cr. Asset
Unearned Liability Overstated Revenue Dr. Liability
Revenues Equity Understated Understated Cr. Revenue
Accrued Liability Understated Expense Dr. Expense
Expenses Equity Overstated Understated Cr. Liability
Accrued Asset Understated Revenue Dr. Asset
Revenues Equity Understated Understated Cr. Revenue

Sheet2

Sheet3

FastForward – Trial Balance - December 31, 2011

First, the initial unadjusted amounts are added to the work sheet.

$

P2


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We prepared this work sheet using Excel but you could use any electronic spreadsheet. We begin with the unadjusted trial balance, that is, the trial balance before we make our adjusting entries. On the next slide, we will post our adjusting entries for FastForward.

]Sheet1

Unadjusted Adjusted
Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable -
Supplies 9,720
Prepaid insurance 2,400
Equipment 26,000
Accum. depr. - Equip. -
Accounts payable 6,200
Salaries payable -
Unearned revenue 3,000
Common Stock 30,000
Retained Earnings 0
Dividends 600
Consulting revenue 5,800
Rental revenue 300
Depr. expense -
Salaries expense 1,400
Insurance expense -
Rent expense 1,000
Supplies expense -
Utilities expense 230
Totals 45,300 45,300

]Sheet2

]Sheet3

Next, FastForward’s adjustments are added.

FastForward – Recording Adjustments

Trial Balance - December 31, 2011

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Look at adjusting journal entry c. This is the entry to record depreciation expense for the period ended December 31, 2011. We debit, or increase, Depreciation Expense and credit, or increase, Accumulated Depreciation– Equipment. Do you recall this type of adjusting entry from our previous discussion? The total debits and credits are equal on the unadjusted trial balance and on the adjustments set of columns. Let’s move on to the adjusted trial balance.

]Sheet1

Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950
Accounts receivable - f 1,800
Supplies 9,720 b 1,050
Prepaid insurance 2,400 a 100
Equipment 26,000
Accum. depr. - Equip. - c 375
Accounts payable 6,200
Salaries payable - e 210
Unearned revenue 3,000 d 250
Common Stock 30,000
Retained Earnings 0
Dividends 600
Consulting revenue 5,800 d 250
f 1,800
Rental revenue 300
Depr. expense - c 375
Salaries expense 1,400 e 210
Insurance expense - a 100
Rent expense 1,000
Supplies expense - b 1,050
Utilities expense 230
Totals $45,300 $45,300 $3,785 $3,785

]Sheet2

]Sheet3

Finally, the totals are determined.

FastForward – Computing the Adjusted Trial Balance - December 31, 2011

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The adjusted trial balance combines the unadjusted trial balance account balances with the adjustments we make. Be careful when doing the arithmetic. For example, look at entry b. It is the entry to adjust the Supplies account for the physical inventory taken at year-end. The Supplies account on the unadjusted trial balance is $9,720. Our adjustment reduced the supplies on hand, so the adjusted trial balance account is $8,670.

Once we have completed the work sheet, we can move on to the preparation of the company’s financial statements. We always begin with the income statement.

]Sheet1

Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Cash 3,950 3,950
Accounts receivable - f 1,800 1,800
Supplies 9,720 b 1,050 8,670
Prepaid insurance 2,400 a 100 2,300
Equipment 26,000 26,000
Accum. depr. - Equip. - c 375 375
Accounts payable 6,200 6,200
Salaries payable - e 210 210
Unearned revenue 3,000 d 250 2,750
Common Stock 30,000 - 30,000
Retained Earnings - -
Dividends 600 600
Consulting revenue 5,800 d 250 7,850
f 1,800
Rental revenue 300 300
Depr. expense - c 375 375
Salaries expense 1,400 e 210 1,610
Insurance expense - a 100 100
Rent expense 1,000 1,000
Supplies expense - b 1,050 1,050
Utilities expense 230 230
Totals $45,300 $45,300 $3,785 $3,785 $47,685 $47,685

]Sheet2

]Sheet3
  • Prepare Income Statement

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You can see how we took the information directly from the work sheet and prepared the income statement for the month ended December 31, 2011. The income statement includes only the revenue and expense accounts. Net income reported by FastForward for the month is $3,785. We will see this amount again on the statement of retained earnings.

Sheet1

FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Operating expenses:
Depr. expense - Equip. $ 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365
Net income $ 3,785
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Sheet3
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Sheet5
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Sheet6
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)Sheet1

Adjusted
Trial Balance
December 31, 2011
Dr. Cr.
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accum. depr. - Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned revenue 2,750
Common Stock 30,000
Retained Earnings - 0
Dividends 600
Consulting revenue 7,850
Rental revenue 300
Depr. expense 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

)Sheet2

)Sheet3
  • Prepare Statement of Retained Earnings

Note that net income from the Income Statement carries to the Statement of Retained Earnings.

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*

The statement of retained earnings adds net income to the beginning balance in the account and subtracts dividends paid of $600. This item is needed to carry over to the balance sheet. That’s why the statement of retained earnings is prepared second. Now let’s prepare the balance sheet for FastForward.

Sheet1

FASTFORWARD
Income Statement
For the Month Ended December 31, 2011
Revenues:
Consulting revenue $ 7,850
Rental revenue 300
Total Revenues 8,150
Operating expenses:
Depr. expense - Equip. $ 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Total expenses 4,365
Net income $ 3,785
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Sheet3
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Sheet6
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Sheet1

FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2011
Retained earnings, 12/1/11 $ -0-
Add: Net income 3,785
Less: Dividends 600
Retained earnings 12/31/11 $ 3,185
- 0
0
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Sheet3
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Sheet4
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Sheet5
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Sheet6
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  • Prepare Balance Sheet

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Our third financial statement that we prepare is the balance sheet. We find all the asset and liability accounts on the worksheet and put them into proper form for the balance sheet. In addition, we bring forward the retained earnings balance that we calculated previously on the statement of retained earnings. The books are in balance because total assets are equal to total liabilities plus owner’s equity. Now, we have completed the adjusting process leading to the preparation of the financial statements of FastForward.

Sheet1

FASTFORWARD
Balance Sheet
December 31, 2011
Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned revenue 2,750
Total liabilities $ 9,160
Equity
Common stock 30,000
Retained earnings 3,185
Total liabilities and equity $ 42,345
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Sheet5
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Sheet6
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]Sheet1

Adjusted
Trial Balance
Dr. Cr.
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accum. depr. - Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned revenue 2,750
Chuck Taylor, Capital 30,000
Chuck Taylor, Withd'l. 600
Consulting revenue 7,850
Rental revenue 300
Depr. expense 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685

]Sheet2

]Sheet3

Sheet1

FASTFORWARD
Statement of Retained Earnings
For the Month Ended December 31, 2011
Retained earnings, 12/1/11 $ -0-
Add: Net income 3,785
Less: Dividends 600
Retained earnings 12/31/11 $ 3,185
- 0
0
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The Closing Process: Temporary and Permanent Accounts

Temporary (nominal) accounts accumulate data related to one accounting period. They include all income statement accounts, the dividends account, and the Income Summary account. These accounts are “closed” at the end of the period to get ready for the next accounting period.

Permanent (real) accounts report activities related to one or more future accounting periods. They carry ending balances to the next accounting period and are not “closed.”

C3

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*

Once the formal financial statements have been prepared, we may begin the process of closing the books and getting ready for the next accounting period.

Income is earned over a period of time. At the end of the time period, we start over and calculate income for the next period. The closing process’s goal is to reset all revenue, expense, and dividends accounts to a zero balance at the end of the period. By doing this, we can start the next accounting period fresh.

We will use a temporary account called Income Summary to facilitate the closing process. The account will never appear on any financial statement and will have a zero balance when the closing process is complete.

All accounts that will be closed are known as temporary accounts. Temporary accounts include revenues, expenses, dividends, and the income summary. These accounts should all have a zero balance at the end of the period.

Permanent accounts include assets, liabilities, and owner’s equity. These accounts are permanent in nature because they are carried forward from one accounting period to the next.

Recording Closing Entries

Close revenue accounts.

Close expense accounts.

Close income summary account.

Close dividends account.

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*

Here are the four steps we always follow in the closing process.

First, we close all revenue accounts to the income summary. We move the balance in all revenue accounts to the Income Summary. This process will cause all revenue accounts to have a zero balance. Remember that revenue accounts normally have a credit balance.

Next, we close all expense accounts to the Income Summary. This will zero out all of our expense accounts. Expense accounts normally have a debit balance.

Next, the Income Summary will show revenues and expenses, or net income. We must close the Income Summary, which contains net income, to retained earnings. This process zeroes out the Income Summary.

The final closing entry will be to close dividends to the Retained Earnings account. This will cause the dividends account to have a zero balance.

Let’s see how this process works. To prevent confusion when you first try to make closing entries, it is an excellent idea to follow these four steps exactly.

Recording Closing Entries

Income Summary

Salaries Expenses

Consulting Revenues

$ 18,100

$ 25,000

Retained Earnings

$ 7,000

Examine the accounts presented.

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*

To illustrate the closing process we will assume that the company has only one expense account and only one revenue account. The beginning credit balance in Retained Earnings is $7,000, and dividends of $2,000 have been paid.

The first step in the closing process is to transfer all revenues to the Income Summary account. Let’s do this now.

$ 25,000

Close revenues with a debit to the revenue account and a credit to Income Summary.

Recording Closing Entries

$ 18,100

Salaries Expenses

Consulting Revenues

Income Summary

P4

3-*

$ 25,000

$ 25,000

*

You can see that the closing entry requires a debit to the revenue account. The revenue account now has a zero balance. The credit portion of the entry is made to Income Summary. Revenues have been transferred from the revenue account to the Income Summary.

The next step is to close all expense accounts.

Let’s get started with that entry.

$ 25,000

$ 25,000

Close expense accounts with a credit to expenses and a debit to Income Summary.

$ 25,000

Recording Closing Entries

$ 18,100

Salaries Expenses

Consulting Revenues

Income Summary

P4

3-*

$ 18,100

$ 18,100

*

We close the expense account with a credit to that account and a debit to the Income Summary. The expense account now has a zero balance and the expenses appear on the debit side of the Income Summary. We know the company had net income because revenues are greater than expenses.

Notice that all revenue and expense accounts now have a zero balance so we accomplished part of our goal.

$ 18,100

$ 25,000

$ 18,100

$ 25,000

$ 25,000

$ 18,100

Determine the balance in the Income Summary account.

Recording Closing Entries

Salaries Expenses

Consulting Revenues

Income Summary

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3-*

$ 6,900

*

Net income for the period is $6,900. This balance must be transferred to the Retained Earnings account.

$ 18,100

$ 25,000

$ 18,100

$ 18,100

$ 7,000

Close the Income Summary to Retained Earnings.

Recording Closing Entries

$ 6,900

Salaries Expenses

Income Summary

Retained Earnings

P4

3-*

$ 6,900

$ 6,900

*

We debit the Income Summary for $6,900 and credit Retained Earnings for the same amount. The balance in the Income Summary account is now zero.

Our last closing entry involves dividends.

Recording Closing Entries

Dividends

$ 2,000

$ 7,000

6,900

Retained Earnings

The dividends account is closed to Retained Earnings.

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3-*

$ 2,000

$ 2,000

*

We close the Dividends account with a credit and debit the Retained Earnings for $2,000. The balance in the dividends account is zero.

Let’s determine the balance in Retained Earnings after all closing entries have been made.

Recording Closing Entries

Dividends

$ 2,000

$ 2,000

$ 2,000

Determine the ending balance in Retained Earnings.

$ 11,900

$ 7,000

6,900

Retained Earnings

The dividends account is closed to Retained Earnings.

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*

Retained Earnings has a balance of $11,900. We arrive at this amount by adding together the beginning balance in the account and net income for the period, and subtracting dividends paid.

We have now finished the closing process and are ready to start the next accounting period.

Post-Closing Trial Balance

  • Trial balance prepared after the closing entries have been posted.
  • The purpose is to ensure that all nominal or temporary accounts have been closed.
  • The only accounts on this trial balance should be assets, liabilities, and equity accounts.

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*

After the closing entries have been posted, then the next step is to prepare the post-closing, or “after-closing,” trial balance. The purpose of this trial balance is to ensure that all the nominal accounts have been closed out. The only accounts that should appear on this trial balance should be the permanent, or real, accounts. These would include asset, liability, and equity accounts. Of course, the purpose of any trial balance is to ensure that debits equal credits. This is one more feature that ensures that the closing process has been successfully completed.

The Accounting Cycle

Start

1. Analyze
transactions

2. Journalize

3. Post

4. Prepare
unadjusted
trial balance

5. Adjust

6. Prepare
adjusted
trial balance

7. Prepare
statements

8. Close

9. Prepare
post-closing
trial balance

C3

10. Reverse

(optional)

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*

This is a schematic of the entire accounting process.

Classified Balance Sheet

Current items are those expected to come due (either collected or owed) within one year or the company’s operating cycle, whichever is longer.

C 4

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A classified balance sheet is the most popular format used by business. On the asset side of the balance sheet, we group assets as current or noncurrent. A current asset is one that is expected to be converted into cash in one year or the company’s normal operating cycle, whichever is longer.

The operating cycle of a service company is the time it takes to acquire resources devoted to providing a service, plus the time it takes to provide that service, and finally, the time it takes to collect the cash from that service provider. For many companies the operating cycle is less than one year. These companies would classify an asset as current as long as that asset is expected to be converted into cash within one year.

Current assets normally include cash, short-term investments, accounts receivable, merchandise inventory, office supplies, and prepaid expenses. Short-term investments are expected to be sold within one year or the normal operating cycle, whichever is longer. Merchandise inventory contains inventory items we expect to sell to customers in the normal course of business. For a service business, like an attorney, we would not expect to find a merchandise inventory account.

The next major section of the classified balance sheet includes long-term investments, meaning those we expect to hold for more than one year. Some common long-term investments includes notes receivable, investments in the stock or bonds of another company, and land that a company is holding for a future plant site. Companies often purchase stock of another company in order to control or own the other company.

Larson

General Ledger
T- Account Barton, Co. Jun. 30 Cash 30,000 Webster, Co. Assets Liabilities and Equity
Partial Balance Sheet Interest Revenue 30,000 Date PR Debit Credit Balance Current assets Current liabilities
December 31, 2004 To record receipt on interest on bonds Jul. 30 3,000 3,000 Noncurrent assets: Noncurrent liabilities
Cash Long-term investments Equity
Accounts receivable $ 278,000 Plant assets
Less: Allowance for doubtful accounts 3,000 $ 275,000 Intangible assets
Inventory
Matrix, Inc.
Date PR Debit Credit Balance
Jul. 16 1,000 1,000
Annual $ 174,000
Investment by Johnson 60,000
Total partnership equity 234,000
Johson's owership percent 20%
Johnson's equity balance $ 46,800
Days in March 31
Minus the date of the note 1
Days remaining in March 30
Days in April 30
Days in May to maturity 30
Period of the note in days 90

Classified Balance Sheet

Plant Assets

Tangible assets that are both long lived and used to produce or sell products or services. Examples include equipment, machinery, buildings, and land that are used to produce or sell products and services.

C 4

Intangible Assets

Long-term resources that benefit business operations. They usually lack physical form and have uncertain benefits. Examples include patents, trademarks, copyrights, franchises, and goodwill.

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*

The third section of the classified balance sheet shows our property, plant, and equipment. This section includes productive assets of the company along with any land containing structures such as buildings.

Productive assets include machinery, equipment, furniture and fixtures, and buildings. Productive assets are normally depreciated over their useful life.

The cost of the asset less any accumulated depreciation is called book value.

We do not depreciate land.

The final category of assets on the classified balance sheet include intangible assets. Intangibles include long-term resources that lack physical form-accounts like patents, copyrights, trademarks, and goodwill. In general, it is very difficult to properly value intangible assets.

In summary, we have current assets and noncurrent assets that are divided among long-term investments, plant assets, and intangible assets.

Obligations due to be paid or settled within one year or the operating cycle, whichever is longer.

C 4

Obligations not due within one year or the operating cycle, whichever is longer.

Liabilities

3-*

Current Liabilities

Long-Term Liabilities

*

Current liabilities normally include accounts payable, wages payable, short-term notes payable, and the current portion of long-term liabilities. Other examples of current liabilities are interest payable and unearned revenues.

Long-term liabilities include long-term notes payable (net of current amounts due), mortgages payable, and bonds payable.

We will look at the accounting for long-term liabilities later in the text.

Classified Balance Sheet

3-*

C 4

*

Let’s take a look at how these accounts would appear on a balance sheet. A classified balance sheet separates the assets into current and long-term assets. It also separates the liabilities into current and long-term liabilities. When the data are presented in a classified format, it makes the calculation of key ratios easier.

Sheet1

FASTFORWARD
Balance Sheet
December 31, 2011
Assets
Current Assets
Cash $ 3,950
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Total Current Assets 16,720
Plant Assets
Equipment 26,000
Less: accum. depr. (375) 25,625
Total assets $ 42,345
Liabilities
Current Liabilities
Accounts payable $ 6,200
Salaries payable 210
Unearned revenue 2,750
Total liabilities $ 9,160
Equity
Common stock 30,000
Retained earnings 3,185
Total liabilities and equity $ 42,345
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Profit Margin

The profit margin ratio measures the company’s net income to net sales.

A2

3-*

Profit

margin

Net income

Net sales

=

*

Profit margin is an important measure in business. It tells us about the relationship between sales and profits or net income. We calculate the ratio by dividing net income for the period by sales revenue. A high profit margin is an indicator of future growth.

Current Ratio

This ratio is an important measure of a company’s ability to pay its short-term obligations.

A3

3-*

Current

ratio

Current assets

Current liabilities

=

*

The current ratio of a company gives us a good indication of the company’s ability to pay its debts when they fall due. The current ratio is calculated by dividing current assets by current liabilities.

Let’s look at a quick example.

Suppose we have a company that has $200,000 in current assets and $100,000 in current liabilities. The current ratio is two to one, that is, $200,000 divided by $100,000. A two to one current ratio means that for each dollar of current liabilities falling due in the next year, we expect to have two dollars of current assets to pay the liabilities.

Chart1

2014 2014
2013 2013
2012 2012
2011 2011
Limited Brands, Inc.
Industry average
Current Ratio
2.9
2.8
1.9
2.9
2.1
3.3
1.8
3.4

RP21

Common Stock 2,000,000
Number of options outstanding 7,000,000 1,125,000 3,125,000
Exercise price per share $ 25.00 62,500 2014 2013 2012 2011
Average market price for the period 72.50 (15,000) Limited Brands, Inc. 2.9 1.9 2.1 1.8
Industry average 2.8 2.9 3.3 3.4
1
4,586,207

RP21
Limited Brands, Inc.
Industry average
Current Ratio

RB22

Ref. Description Debit Credit
c. Work in process - Base Fab 665,000
Work in process - Finishing 405,000
Manufacturing overhead 1,070,000
d. Work in process - Finishing 1,850,000
Work in process - Base Fab 1,850,000
e. Finished goods 3,200,000
Work in process - Finishing 3,200,000

Sheet3

End of Chapter 03

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*

This completes our discussion of Chapter 3.

The process of preparing adjusting entries and closing a company’s books may seem very difficult at first. If adjusting entries or closing entries seem unclear to you, why not review the slides one more time. Of course, you will get to reinforce what we have discussed when doing your homework. Good luck.

Example:

FastForward paid $2,400 for a 24-month insurance

policy beginning December 1, 2011.

JanFebMarApr

-$ -$ -$ -$

MayJunJulAug

-$ -$ -$ -$

SepOctNovDec

-$ -$ -$ 2,400$

Insurance Expense 2011

JanFebMarApr

-$ -$ -$ -$

MayJunJulAug

-$ -$ -$ -$

SepOctNovDec

-$ -$ -$ 100$

JanFebMarApr

100$ 100$ 100$ 100$

MayJunJulAug

100$ 100$ 100$ 100$

SepOctNovDec

100$ 100$ 100$ 100$

JanFebMarApr

100$ 100$ 100$ 100$

MayJunJulAug

100$ 100$ 100$ 100$

SepOctNovDec

100$ 100$ 100$ -$

Insurance Expense 2011

Insurance Expense 2012

Insurance Expense 2013

Dec. 31Supplies Expense12,845

Supplies12,845

To record supplies used during 2011

Dec. 31 12,845

Supplies Expense

Bought 15,500Dec. 31 12,845

Bal. 2,655

Supplies

Dec. 31Depreciation Expense12,000

Accumulated Depreciation - Equipment12,000

To record equipment depreciation

BARTON, INC.

Partial Balance Sheet

At December 31, 2011

Assets

Cash

.

Equipment62,000$

Less: accumulated deprec.(12,000) 50,000

.

.

Total Assets

Oct. 1Cash 100,000

Unearned Revenue100,000

Basketball revenue received in advance

Oct.1 100,000

Unearned Revenue

Dec. 31Unearned Revenue50,000

Basketball Revenue50,000

To recognize 10-games of revenue

Dec. 31 50,000Oct. 1 100,000

Bal. 50,000

Unearned Revenue

Dec. 31 50,000

Basketball Revenue

Dec. 31Salaries Expense47,250

Salaries Payable47,250

To accrue 4-days' salary

Other salaries

657,500

Dec. 31 47,250

Bal. 704,750

Salaries Expense

Dec. 31 47,250

Salaries Payable

Dec. 31Accounts Receivable31,200

Service Revenue31,200

To accrue revenue earned

Other receivables

1,325,268

Dec. 31 31,200

Bal. 1,356,468

Accounts Receivable

Other revenues

6,589,500

Dec. 31 31,200

Bal . 6,620,700

Service Revenue

Type

Balance Sheet

Account

Income

Statement

Account

Adjusting Entry

PrepaidAsset OverstatedExpenseDr. Expense

ExpensesEquity OverstatedUnderstated Cr. Asset

UnearnedLiability OverstatedRevenueDr. Liability

RevenuesEquity UnderstatedUnderstated Cr. Revenue

AccruedLiability UnderstatedExpenseDr. Expense

ExpensesEquity OverstatedUnderstated Cr. Liability

AccruedAsset UnderstatedRevenueDr. Asset

RevenuesEquity UnderstatedUnderstated Cr. Revenue

Before Adjustment

Summary of Adjustments and Financial Statement Links

Adjusted

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

Cash3,950

Accounts receivable-

Supplies9,720

Prepaid insurance2,400

Equipment26,000

Accum. depr. - Equip.-

Accounts payable6,200

Salaries payable-

Unearned revenue3,000

Common Stock30,000

Retained Earnings0

Dividends600

Consulting revenue5,800

Rental revenue300

Depr. expense-

Salaries expense1,400

Insurance expense-

Rent expense1,000

Supplies expense-

Utilities expense230

Totals45,300 45,300

Trial BalanceAdjustmentsTrial Balance

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

Cash3,950

Accounts receivable- f1,800

Supplies9,720 b1,050

Prepaid insurance2,400 a100

Equipment26,000

Accum. depr. - Equip.- c375

Accounts payable6,200

Salaries payable- e210

Unearned revenue3,000 d250

Common Stock30,000

Retained Earnings0

Dividends600

Consulting revenue5,800 d 250

f 1,800

Rental revenue300

Depr. expense- c375

Salaries expense1,400 e210

Insurance expense- a100

Rent expense1,000

Supplies expense- b1,050

Utilities expense230

Totals$45,300$45,300$3,785$3,785

Adjusted

Trial BalanceAdjustments

Unadjusted

Trial Balance

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

Cash3,950 3,950

Accounts receivable- f1,800 1,800

Supplies9,720 b1,050 8,670

Prepaid insurance2,400 a100 2,300

Equipment26,000 26,000

Accum. depr. - Equip.- c375 375

Accounts payable6,200 6,200

Salaries payable- e210 210

Unearned revenue3,000 d250 2,750

Common Stock30,000 - 30,000

Retained Earnings- -

Dividends600 600

Consulting revenue5,800 d 250 7,850

f 1,800

Rental revenue300 300

Depr. expense- c375 375

Salaries expense1,400 e210 1,610

Insurance expense- a100 100

Rent expense1,000 1,000

Supplies expense- b1,050 1,050

Utilities expense230 230

Totals$45,300$45,300$3,785$3,785$47,685$47,685

Adjusted

Trial BalanceAdjustments

Unadjusted

Trial Balance

FASTFORWARD

Income Statement

For the Month Ended December 31, 2011

Revenues:

Consulting revenue7,850$

Rental revenue300

Operating expenses:

Depr. expense - Equip.375$

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Total expenses4,365

Net income3,785$

Dr.Cr.

Cash

3,950$

Accounts receivable

1,800

Supplies

8,670

Prepaid insurance

2,300

Equipment

26,000

Accum. depr. - Equip.

375$

Accounts payable

6,200

Salaries payable

210

Unearned revenue

2,750

Common Stock

30,000

Retained Earnings

-

Dividends

600

Consulting revenue

7,850

Rental revenue

300

Depr. expense

375

Salaries expense

1,610

Insurance expense

100

Rent expense

1,000

Supplies expense

1,050

Utilities expense

230

Totals

47,685$ 47,685$

Adjusted

December 31, 2011

Trial Balance

FASTFORWARD

Income Statement

For the Month Ended December 31, 2011

Revenues:

Consulting revenue7,850$

Rental revenue300

Total Revenues8,150

Operating expenses:

Depr. expense - Equip.375$

Salaries expense1,610

Insurance expense100

Rent expense1,000

Supplies expense1,050

Utilities expense230

Total expenses4,365

Net income3,785$

FASTFORWARD

Statement of Retained Earnings

For the Month Ended December 31, 2011

Retained earnings, 12/1/11$ -0-

Add: Net income3,785

Less: Dividends600

Retained earnings 12/31/113,185$

FASTFORWARD

Balance Sheet

December 31, 2011

Assets

Cash3,950$

Accounts receivable1,800

Supplies8,670

Prepaid insurance2,300

Equipment26,000

Less: accum. depr.(375) 25,625

Total assets42,345$

Liabilities

Accounts payable6,200$

Salaries payable210

Unearned revenue2,750

Total liabilities9,160$

Equity

Common stock30,000

Retained earnings3,185

Total liabilities and equity42,345$

Dr.Cr.

Cash

3,950$

Accounts receivable

1,800

Supplies

8,670

Prepaid insurance

2,300

Equipment

26,000

Accum. depr. - Equip.

375$

Accounts payable

6,200

Salaries payable

210

Unearned revenue

2,750

Chuck Taylor, Capital

30,000

Chuck Taylor, Withd'l.

600

Consulting revenue

7,850

Rental revenue

300

Depr. expense

375

Salaries expense

1,610

Insurance expense

100

Rent expense

1,000

Supplies expense

1,050

Utilities expense

230

Totals

47,685$ 47,685$

Adjusted

Trial Balance

FASTFORWARD

Statement of Retained Earnings

For the Month Ended December 31, 2011

Retained earnings, 12/1/11$ -0-

Add: Net income3,785

Less: Dividends600

Retained earnings 12/31/113,185$

Assets Liabilities and Equity

Current assetsCurrent liabilities

Noncurrent assets:Noncurrent liabilities

Long-term investmentsEquity

Plant assets

Intangible assets

FASTFORWARD

Balance Sheet

December 31, 2011

Assets

Current Assets

Cash3,950$

Accounts receivable1,800

Supplies8,670

Prepaid insurance2,300

Total Current Assets16,720

Plant Assets

Equipment26,000

Less: accum. depr.(375) 25,625

Total assets42,345$

Liabilities

Current Liabilities

Accounts payable6,200$

Salaries payable210

Unearned revenue2,750

Total liabilities9,160$

Equity

Common stock30,000

Retained earnings3,185

Total liabilities and equity42,345$