Concept explainers
Accounting cycle;
• LO2–3, LO2–5 through LO2–7
Refer to P 2–3 and complete the following steps:
1. Enter the unadjusted balances from the trial balance into T-accounts.
2. Post the adjusting entries prepared in P 2–3 to the accounts.
3. Prepare an adjusted trial balance.
4. Prepare an income statement and a statement of shareholders’ equity for the year ended December 31, 2018, and a classified balance sheet as of December 31, 2018. Assume that no common stock was issued during the year and that $4,000 in cash dividends were paid to shareholders during the year. The $4,000 reduction in cash and in
5. Prepare closing
6. Prepare a post-closing trial balance.
1.
Accounting Cycle:
Accounting cycle refers to the process of recording a business transaction in the books of accounts. This cycle concludes when the financial statements are prepared.
T-account:
- T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.
- The components of the T-account are as follows:
-
- a) The title of the account
- b) The left or debit side
- c) The right or credit side
Adjusted Trial Balance:
An adjusted trial balance refers to the final trial balance resulting after posting the adjusting entries at the end of the period.
Closing Entries:
Closing entries are those journal entries which are passed to transfer the balances of temporary accounts to the permanent accounts. These are passed at the end of the period, to transfer the final balance.
Post-closing trial balance:
After passing all the journal entries and the closing entries of the permanent accounts and then further posting them to each of the respective accounts, a post-closing trial balance is prepared which consists of a list of all the permanent accounts. A post-closing trial balance serves as an evidence to prove that the balance of the permanent accounts is equal.
Income statement
This is the financial statement of a company which shows all the revenues earned and expenses incurred by the company over a period of time. It is prepared to find out the net income of an organization.
Balance sheet
Balance sheet is a financial position statement which represents all the assets, liabilities, and stockholders’ equity of a concern on a particular date. The balance sheet displays that on a particular date all the assets of a concern must be equal to the sum of liabilities and stockholders’ equity.
To Enter: The unadjusted balances from the trial balance into T-accounts.
Explanation of Solution
Prepare T-accounts for balance sheet accounts from the unadjusted trial balance:
Cash Account:
Cash Account
December 31 | $30,000 | ||||
December 31 | $30,000 |
Accounts Receivable:
Accounts Receivable Account
December 31 | $40,000 | ||||
December 31 | $40,000 |
Prepaid Rent:
Prepaid Rent Account
December 31 | $2,000 | ||||
December 31 | $2,000 |
Prepaid Insurance:
Prepaid Insurance Account
December 31 | 0 | ||||
December 31 |
0 |
Supplies:
Supplies Account
December 31 | $1,500 | ||||
December 31 | $1,500 |
Inventory:
Inventory Account
December 31 | $60,000 | ||||
December 31 | $60,000 |
Note receivable:
Note receivable Account
December 31 | $20,000 | ||||
December 31 | $20,000 |
Office Equipment:
Office Equipment Account
December 31 | $80,000 | ||||
December 31 | $80,000 |
Interest Receivable:
Interest Receivable Account
December 31 | 0 | ||||
December 31 | 0 |
Accumulated Depreciation:
Accumulated Depreciation Account
December 31 | $30,000 | ||||
December 31 | $30,000 |
Accounts Payable:
Accounts Payable Account
December 31 | $31,000 | ||||
December 31 | $31,000 |
Salaries and Wages Payable:
Salaries and Wages Payable Account
December 31 | 0 | ||||
December 31 | 0 |
Note Payable:
Note Payable Account
December 31 | $50,000 | ||||
December 31 | $50,000 |
Interest Payable:
Interest Payable Account
December 31 | 0 | ||||
December 31 | 0 |
Deferred Revenue:
Deferred Revenue Account
December 31 | 0 | ||||
December 31 | 0 |
Common Stock:
Common Stock Account
December 31 | $60,000 | ||||
December 31 | $60,000 |
Retained Earnings:
Retained Earnings Account
December 31 | $24,500 | ||||
December 31 | $24,500 |
Prepare T-accounts for income statement accounts from the unadjusted trial balance:
Sales Revenue:
Sales Revenue Account
December 31 | $148,000 | ||||
December 31 | $148,000 |
Interest Revenue:
Interest Revenue Account
December 31 | 0 | ||||
December 31 | 0 |
Cost of Goods Sold:
Cost of Goods Sold Account
December 31 | $70,000 | ||||
December 31 | $70,000 |
Salaries and Wages expense:
Salaries and Wages expense Account
December 31 | $18,900 | ||||
December 31 | $18,900 |
Rent Expense:
Rent Expense Account
December 31 | $11,000 | ||||
December 31 | $11,000 |
Depreciation Expense:
Depreciation Expense Account
December 31 | 0 | ||||
December 31 | 0 |
Interest Expense:
Interest Expense Account
December 31 | 0 | ||||
December 31 | 0 |
Supplies Expense:
Supplies Expense Account
December 31 | $1,100 | ||||
December 31 | $1,100 |
Insurance Expense:
Insurance Expense Account
December 31 | $6,000 | ||||
December 31 | $6,000 |
Advertising Expense:
Advertising Expense Account
December 31 | $3,000 | ||||
December 31 | $3,000 |
2.
To Post: The adjusting entries to the T-accounts.
Explanation of Solution
Post the adjusting entries in T-accounts for balance sheets accounts as follows:
Cash Account:
Cash Account
December 31 | $30,000 | ||||
December 31 | $30,000 |
Accounts Receivable:
Accounts Receivable Account
December 31 | $40,000 | ||||
December 31 | $40,000 |
Prepaid Rent:
Prepaid Rent Account
December 31 | $2,000 | ||||
8. | $1,000 | ||||
December 31 | $1,000 |
Prepaid Insurance:
Prepaid Insurance Account
December 31 | 0 | ||||
5 | $3,750 | ||||
December 31 |
$3,750 |
Supplies:
Supplies Account
December 31 | $1,500 | ||||
6. | $700 | ||||
December 31 | $800 |
Inventory:
Inventory Account
December 31 | $60,000 | ||||
December 31 | $60,000 |
Note receivable:
Note receivable Account
December 31 | $20,000 | ||||
December 31 | $20,000 |
Office Equipment:
Office Equipment Account
December 31 | $80,000 | ||||
December 31 | $80,000 |
Interest Receivable:
Interest Receivable Account
December 31 | 0 | ||||
4. | $1,333 | ||||
December 31 | $1,333 |
Accumulated Depreciation:
Accumulated Depreciation Account
December 31 | $30,000 | ||||
1 | $10,000 | ||||
December 31 | $40,000 |
Accounts Payable:
Accounts Payable Account
December 31 | $31,000 | ||||
December 31 | $31,000 |
Salaries and Wages Payable:
Salaries and Wages Payable Account
December 31 | 0 | ||||
2 | $1,500 | ||||
December 31 | $1,500 |
Note Payable:
Note Payable Account
December 31 | $50,000 | ||||
December 31 | $50,000 |
Interest Payable:
Interest Payable Account
December 31 | 0 | ||||
3 | $1,500 | ||||
December 31 | $1,500 |
Deferred Revenue:
Deferred Revenue Account
December 31 | 0 | ||||
7 | $2,000 | ||||
December 31 | $2,000 |
Common Stock:
Common Stock Account
December 31 | $60,000 | ||||
December 31 | $60,000 |
Retained Earnings:
Retained Earnings Account
December 31 | $24,500 | ||||
December 31 | $24,500 |
Prepare T-accounts for income statement accounts from the unadjusted trial balance:
Sales Revenue:
Sales Revenue Account
December 31 | $148,000 | ||||
7. | $2,000 | ||||
December 31 | $146,000 |
Interest Revenue:
Interest Revenue Account
December 31 | 0 | ||||
4. | $1,333 | ||||
December 31 | $1,333 |
Cost of Goods Sold:
Cost of Goods Sold Account
December 31 | $70,000 | ||||
December 31 | $70,000 |
Salaries and Wages expense:
Salaries and Wages expense Account
December 31 | $18,900 | ||||
2. | $1,500 | ||||
December 31 | $20,400 |
Rent Expense:
Rent Expense Account
December 31 | $11,000 | ||||
8. | $1,000 | ||||
December 31 | $12,000 |
Depreciation Expense:
Depreciation Expense Account
December 31 | 0 | ||||
1. | $10,000 | ||||
December 31 | $10,000 |
Interest Expense:
Interest Expense Account
December 31 | 0 | ||||
3. | $1,500 | ||||
December 31 | $1,500 |
Supplies Expense:
Supplies Expense Account
December 31 | $1,100 | ||||
6. | $700 | ||||
December 31 | $1,800 |
Insurance Expense:
Insurance Expense Account
December 31 | $6,000 | ||||
5. | $3,750 | ||||
December 31 | $2,250 |
Advertising Expense:
Advertising Expense Account
December 31 | $3,000 | ||||
December 31 | $3,000 |
3.
To Prepare: An adjusted trial balance.
Explanation of Solution
Prepare an adjusted trial balance:
Account Title | Debit ($) | Credit ($) |
Cash | 30,000 | |
Accounts Receivable | 40,000 | |
Prepaid rent | 1,000 | |
Prepaid insurance | 3,750 | |
Supplies | 800 | |
Inventory | 60,000 | |
Note receivable | 20,000 | |
Interest receivable | 1,333 | |
Office equipment | 80,000 | |
Accumulated depreciation – office equipment | 40,000 | |
Accounts payable | 31,000 | |
Salaries and wages payable | 1,500 | |
Note payable | 50,000 | |
Interest payable | 1,500 | |
Deferred revenue | 2,000 | |
Common stock | 60,000 | |
Retained earnings | 24,500 | |
Sales revenue | 146,000 | |
Interest revenue | 1,333 | |
Cost of goods sold | 70,000 | |
Salaries and wages expense | 20,400 | |
Rent expense | 12,000 | |
Depreciation expense | 10,000 | |
Interest expense | 1,500 | |
Supplies expense | 1,800 | |
Insurance expense | 2,250 | |
Advertising expense | 3,000 | |
Totals | $357,833 | $357,833 |
Table (1)
4.
To Prepare: An income statement, a statement of shareholder’s equity for the year ended December 31, 2018, and a classified balance sheet.
Explanation of Solution
Prepare income statement for P Company for the year ended December 31, 2018.
P Company Income Statement For the Year Ended December 31, 2018 |
||
Particulars | Amount | Amount |
Sales revenue | 146,000 | |
Less: Cost of goods sold | 70,000 | |
Gross Profit | 76,000 | |
Less: Operating Expenses: | ||
Salaries and wages expense | 20,400 | |
Rent expense | 12,000 | |
Depreciation expense | 10,000 | |
Supplies expense | 1,800 | |
Insurance expense | 2,250 | |
Advertising expense | 3,000 | |
Total operating expenses | 49,450 | |
Operating income | $26,550 | |
Other income (expense): | ||
Interest revenue | 1,333 | |
Less: Interest expense | (1,500) | (167) |
Net Income | $26,383 |
Table (2)
Prepare statement of shareholders’ equity for P Company for the year ended December 31, 2018.
P Company | |||
Statement of shareholders’ equity | |||
For the year ended December 31, 2018 | |||
Particulars | Common stock ($) | Retained earnings ($) | Total shareholders’ equity ($) |
Beginning at January 1, 2018 | 60,000 | 28,500 | 88,500 |
Issue of common stock | 0 | 0 | 0 |
Net income for 2018 | 26,383 | 26,383 | |
Less: Dividends | 0 | (4,000) | (4,000) |
Balance at December 31, 2018 | $60,000 | $50,883 | $110,883 |
Table (3)
Prepare a classified balance sheet for P Company at December 31, 2018 as follows;
P Company | ||
Balance Sheet | ||
December 31, 2018 | ||
Assets | ||
Current assets: | Amount ($) | Amount ($) |
Current assets: | ||
Cash | 30,000 | |
Accounts receivables | 40,000 | |
Supplies | 800 | |
Inventory | 60,000 | |
Note receivable | 20,000 | |
Interest receivable | 1,333 | |
Prepaid rent | 1,000 | |
Prepaid insurance | 3,750 | |
Total current assets | 156,883 | |
Property, plant and equipment: | ||
Office equipment | 80,000 | |
Less: Accumulated depreciation | (40,000) | |
Net property, plant and equipment | 40,000 | |
Total assets | $196,883 | |
Liabilities and shareholders’ Equity | ||
Current liabilities: | ||
Accounts payable | 31,000 | |
Salaries and wages payable | 1,500 | |
Note payable | 50,000 | |
Interest payable | 1,500 | |
Deferred revenue | 2,000 | |
Total current liabilities | 86,000 | |
Shareholders’ equity: | ||
Common stock | 60,000 | |
Retained earnings | 50,883 | |
Total shareholders’ equity | 110,883 | |
Total liabilities and shareholders’ equity | $196,883 |
Table (4)
5.
To Prepare: The closing entries, and also post the closing entries.
Explanation of Solution
Prepare closing entries for the month ended December 31, 2018.
Date | Accounts title and explanation | Post Ref. | Debit ($) |
Credit ($) |
December 31 2018 | Sales Revenue (SE-) | 146,000 | ||
Interest Revenue (SE-) | 1,333 | |||
Income Summary (SE+) | 147,333 | |||
(To close the revenue accounts) | ||||
December 31 2018 | Income Summary (SE-) | 120,950 | ||
Cost of Goods Sold (SE+) | 70,000 | |||
Salaries and Wages Expense (SE+) | 20,400 | |||
Rent Expense (SE+) | 12,000 | |||
Depreciation Expense (SE+) | 10,000 | |||
Interest Expense (SE+) | 1,500 | |||
Supplies Expense (SE+) | 1,800 | |||
Insurance Expense (SE+) | 2,250 | |||
Advertising Expense (SE+) | 3,000 | |||
(To close the expense accounts) | ||||
December 31 2018 | Income Summary (SE-) | 26,383 | ||
Retained Earnings (SE+) | 26,383 | |||
(To close the income summary account) |
Table (5)
To Post: The closing entries in T-accounts.
Sales Revenue:
Sales Revenue Account
December 31 | $148,000 | ||||
7. | $2,000 | ||||
December 31 | $146,000 (Closing) | ||||
December 31 | 0 |
Interest Revenue:
Interest Revenue Account
December 31 | 0 | ||||
4. | $1,333 | ||||
December 31 | $1,333 (Closing) | ||||
December 31 | 0 |
Cost of Goods Sold:
Cost of Goods Sold Account
December 31 | $70,000 | ||||
December 31 | $70,000 (Closing) | ||||
December 31 | 0 |
Salaries and Wages expense:
Salaries and Wages expense Account
December 31 | $18,900 | ||||
2. | $1,500 | ||||
December 31 | $20,400 (Closing) | ||||
December 31 | 0 |
Rent Expense:
Rent Expense Account
December 31 | $11,000 | ||||
8. | $1,000 | ||||
December 31 | $12,000 (Closing) | ||||
December 31 | 0 |
Depreciation Expense:
Depreciation Expense Account
December 31 | 0 | ||||
1. | $10,000 | ||||
December 31 | $10,000 (Closing) | ||||
December 31 | 0 |
Interest Expense:
Interest Expense Account
December 31 | 0 | ||||
3. | $1,500 | ||||
December 31 | $1,500 (Closing) | ||||
December 31 | 0 |
Supplies Expense:
Supplies Expense Account
December 31 | $1,100 | ||||
6. | $700 | ||||
December 31 | $1,800 (Closing) | ||||
December 31 | 0 |
Insurance Expense:
Insurance Expense Account
December 31 | $6,000 | ||||
5. | $3,750 | ||||
December 31 | $2,250 (Closing) | ||||
December 31 | 0 |
Advertising Expense:
Advertising Expense Account
December 31 | $3,000 | ||||
December 31 | $3,000 (Closing) | ||||
December 31 | 0 |
Income Summary:
Income Summary Account
December 31 | 0 | ||||
December 31 | $120,950 (Closing) | December 31 | $147,333 (Closing) | ||
December 31 | $26,383 (Closing) | ||||
December 31 | 0 |
Retained Earnings:
Retained Earnings Account
December 31 | $24,500 | ||||
December 31 | 26,383 (Closing) | ||||
December 31 | $50,883 |
6.
To Prepare: A post-closing trial balance.
Explanation of Solution
Prepare a post closing trial balance for P Company at December 31, 2018.
Account title | Debit ($) | Credit ($) |
Cash | 30,000 | |
Accounts receivable | 40,000 | |
Prepaid rent | 1,000 | |
Prepaid insurance | 3,750 | |
Supplies | 800 | |
Inventory | 60,000 | |
Note receivable | 20,000 | |
Interest receivable | 1,333 | |
Office equipment | 80,000 | |
Accumulated depreciation – office equipment | 40,000 | |
Accounts payable | 31,000 | |
Salaries and wages payable | 1,500 | |
Note payable | 50,000 | |
Interest payable | 1,500 | |
Deferred revenue | 2,000 | |
Common stock | 60,000 | |
Retained earnings | 50,883 | |
Totals | $236,883 | $236,883 |
Table (5)
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