CHAPTER. Closing Entries and the Postclosing Trial Balance

Transcription

1 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 121 CHAPTER 6 Closing Entries and the Postclosing Trial Balance Chapter Opener: Students should recognize that financial statements can be used to evaluate Thinking Critically net profit or loss, return on investments, expense trends, or growth in company net assets. The income statement is used to measure net income or loss, while the balance sheet can be used to measure growth in assets or liabilities. Executives and managers would use financial statements to make decisions about expanding business, investing in new ventures, or hiring new employees. Fast Facts Carnival has 80,000 employees world wide. Of the 3 million passengers Carnival serves annually, approximately 1,000,000 are seniors and 500,000 are children. Carnival became a publicly traded company in Carnival Corporation is comprised of distinct brands operating in North and South America, the United Kingdom, Germany, Italy, France, Spain and Australia, which account for nearly 90 percent of cruise passengers worldwide. Carnival Corporation operates 84 ships with 21 new vessels scheduled for delivery between now and Managerial Answers will vary but could include monthly or quarterly. Students should Implications: want financial statements frequently so that trends can be observed and timely Thinking Critically decisions made before the business is negatively impacted. Discussion Questions These questions are designed to check the students understanding of the new terms, concepts, and procedures presented in the chapter. 1. Avoids errors, proves total debits and credits are equal after the closing process. 2. Asset, liability, and owner s capital. 3. Steps to classify, record, and summarize financial data. 4. (1) analyze (2) journalize (3) post (4) prepare worksheet (5) prepare financial statements (6) journalize and post adjusting entries (7) journalize and post closing entries (8) prepare postclosing trial balance (9) interpret financial information. 5. Source document info to general journal, to general ledger, to worksheet, to financial statements. 6. Journalize and post adjusting entries; Journalize and post closing entries; Prepare a postclosing trial balance. 7. Adjustments columns of the worksheet. 8. Transfer results of operations to the owner s capital account; Reduce balances of revenue, expense, and drawing accounts to zero. 9. Balances of revenue and expense accounts are transferred to Income Summary. Next the balance of the Income Summary account is transferred to the owner s equity account. 10. Worksheet. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 121

2 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 122 EXERCISE 6.1 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Depreciation Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Income Summary Hayward Anderson, Capital Hayward Anderson, Capital Hayward Anderson, Drawing EXERCISE Cash 2. Accounts Receivable 3. Supplies 4. Equipment 5. Accumulated Depreciation 6. Accounts Payable 7. Sally Harris, Capital 122 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 123 EXERCISE Analyze transactions. 2. Journalize the transactions. 3. Post the journal entries. 4. Prepare a worksheet. 5. Prepare financial statements. 6. Record adjusting entries. 7. Record closing entries. 8. Prepare a postclosing trial balance. 9. Interpret the financial information. EXERCISE B 2. I 3. B 4. B 5. I 6. B 7. E 8. B 9. I 10. B 11. I, E 12. B, E 13. B 14. I 15. B EXERCISE Total revenue for the period is $46, Total expenses for the period are $30, Net income for the period is $16, Owner s withdrawals for the period are $5,000. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 123

4 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 124 EXERCISE 6.6 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Mar. 31 Fees Income Income Summary Income Summary Depreciation Expense Equipment Insurance Expense Rent Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Income Summary Elizabeth Chavez, Capital Elizabeth Chavez, Capital Elizabeth Chavez, Drawing Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

5 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 125 EXERCISE 6.6 (continued) GENERAL LEDGER Elizabeth Chavez, Capital ACCOUNT NO. 301 REF. Mar. 31 Balance Closing J Closing J Elizabeth Chavez, Drawing ACCOUNT NO. 302 REF. Mar. 31 Balance Closing J Income Summary ACCOUNT NO. 399 REF. Mar. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Mar. 31 Balance Closing J Depreciation Expense Equipment ACCOUNT NO. 510 REF. Mar. 31 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 125

6 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 126 EXERCISE 6.6 (continued) GENERAL LEDGER Insurance Expense ACCOUNT NO. 511 REF. Mar. 31 Balance Closing J Rent Expense ACCOUNT NO. 514 REF. Mar. 31 Balance Closing J Salaries Expense ACCOUNT NO. 517 REF. Mar. 31 Balance Closing J Supplies Expense ACCOUNT NO. 518 REF. Mar. 31 Balance Closing J Telephone Expense ACCOUNT NO. 519 REF. Mar. 31 Balance Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

7 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 127 EXERCISE 6.6 (continued) GENERAL LEDGER Utilities Expense ACCOUNT NO. 523 REF. Mar. 31 Balance Closing J EXERCISE 6.7 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Gladys Zamarripa, Capital Income Summary Gladys Zamarripa, Capital Gladys Zamarripa, Drawing The new balance of Gladys Zamarripa, Capital is $36,000 ($96,000 $54,000 $6,000). Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 127

8 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 128 EXERCISE 6.8 Analyze transactions Journalize transactions Post transactions Prepare a worksheet Prepare financial statements Record adjusting entries Record closing entries Prepare postclosing trial balance Interpret financial information 128 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

9 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 129 PROBLEM 6.1A GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Jan. 31 Supplies Expense Supplies Rent Expense Prepaid Rent Depreciation Expense Office Equipment Accumulated Depreciation Office Equipment GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jan. 31 Fees Income Income Summary Income Summary Depreciation Expense Office Equipment Rent Expense Salaries Expense Supplies Expense Telephone Expense Travel Expense Utilities Expense Income Summary Jeff Sager, Capital Jeff Sager, Capital Jeff Sager, Drawing Analyze: Credit the drawing account; debit the capital account. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 129

10 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 130 PROBLEM 6.2A GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Dec. 31 Supplies Expense Supplies Advertising Expense Prepaid Advertising Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Supplies Expense Advertising Expense Depreciation Expense Equipment Salaries Expense Utilities Expense Income Summary Patonia Bell, Capital Patonia Bell, Capital Patonia Bell, Drawing Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

11 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 131 PROBLEM 6.2A (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance Adjusting J Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance Adjusting J Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J Patonia Bell, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance Closing J Closing J Patonia Bell, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 131

12 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 132 PROBLEM 6.2A (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance Closing J GENERAL LEDGER Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance Closing J Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance Closing J Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

13 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 133 PROBLEM 6.2A (continued) Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J Closing J Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J Closing J Bell Enterprises Postclosing Trial Balance December 31, ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation Equipment Accounts Payable Patonia Bell, Capital Totals Analyze: Fifteen accounts are listed in the Adjusted Trial Balance section. Eight accounts are listed on the postclosing trial balance. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 133

14 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 134 PROBLEM 6.3A GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Advertising Expense Depreciation Expense Equipment Rent Expense Salaries Expense Utilities Expense Income Summary Monica Cavazos, Capital Monica Cavazos, Capital Monica Cavazos, Drawing Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

15 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 135 PROBLEM 6.3A (continued) GENERAL LEDGER Monica Cavazos, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance Closing J Closing J Monica Cavazos, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance Closing J Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 135

16 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 136 PROBLEM 6.3A (continued) GENERAL LEDGER Advertising Expense ACCOUNT NO. 511 REF. Dec. 31 Balance Closing J Depreciation Expense Equipment ACCOUNT NO. 514 REF. Dec. 31 Balance Closing J Rent Expense ACCOUNT NO. 517 REF. Dec. 31 Balance Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

17 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 137 PROBLEM 6.3A (continued) GENERAL LEDGER Salaries Expense ACCOUNT NO. 519 REF. Dec. 31 Balance Closing J Utilities Expense ACCOUNT NO. 523 REF. Dec. 31 Balance Closing J Analyze: The balance in the Salaries Expense account is $0.0 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 137

18 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 138 PROBLEM 6.4A Nationwide Auto Detailing Service Worksheet Month Ended December 31, TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies (a) Prepaid Advertising (b) Equipment Accumulated Depreciation Equipment (c) Accounts Payable Richard Harris, Capital Richard Harris, Drawing Fees Income Supplies Expense (a) Advertising Expense (b) Depreciation Expense Equipment (c) Salaries Expense Utilities Expense Totals Net Income Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

19 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 139 PROBLEM 6.4A (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 139

20 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 140 PROBLEM 6.4A (continued) GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Dec. 31 Supplies Expense Supplies (b) 31 Advertising Expense Prepaid Advertising (c) 31 Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Salaries Expense Utilities Expense Supplies Expense Depreciation Expense Equipment Advertising Expense Income Summary Richard Harris, Capital Richard Harris, Capital Richard Harris, Drawing Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

21 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 141 PROBLEM 6.4A (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance Adjusting J Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance Adjusting J Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J Richard Harris, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance Closing J Closing J Richard Harris, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 141

22 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 142 PROBLEM 6.4A (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance Closing J GENERAL LEDGER Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance Closing J Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance Closing J Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

23 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 143 PROBLEM 6.4A (continued) Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J Closing J Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J Closing J Nationwide Auto Detailing Service Postclosing Trial Balance December 31, ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation Equipment Accounts Payable Richard Harris, Capital Totals Analyze: Total debits of $62,000 were posted to the general ledger to complete the closing entries. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 143

24 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 144 PROBLEM 6.1B GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Jan. 31 Supplies Expense Supplies (b) 31 Insurance Expense Prepaid Insurance (c) 31 Depreciation Expense Machinery Accumulated Depreciation Machinery GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jan. 31 Fees Income Income Summary Income Summary Depreciation Expense Machinery Insurance Expense Rent Expense Salaries Expense Supplies Expense Telephone Expense Utilities Expense Income Summary James Wilson, Capital James Wilson, Capital James Wilson, Drawing Analyze: The adjusting entry for expired insurance created a debit to Insurance Expense, increasing the Insurance Expense account balance to $1, Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

25 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 145 PROBLEM 6.2B GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries (a) Dec. 31 Supplies Expense Supplies (b) 31 Advertising Expense Prepaid Advertising (c) 31 Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Salaries Expense Utilities Expense Supplies Expense Depreciation Expense Equipment Advertising Expense Income Summary James McDonald, Capital James McDonald, Capital James McDonald, Drawing Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 145

26 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 146 PROBLEM 6.2B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance Adjusting J Prepaid Advertising ACCOUNT NO. 131 REF. Dec. 31 Balance Adjusting J Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Adjusting J James McDonald, Capital ACCOUNT NO. 301 REF. Dec. 31 Balance Closing J Closing J James McDonald, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 147 PROBLEM 6.2B (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance Closing J Salaries Expense ACCOUNT NO. 511 REF. Dec. 31 Balance Closing J Utilities Expense ACCOUNT NO. 514 REF. Dec. 31 Balance Closing J Supplies Expense ACCOUNT NO. 517 REF. Dec. 31 Adjusting J Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 147

28 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 148 PROBLEM 6.2B (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 523 REF. Dec. 31 Adjusting J Closing J Advertising Expense ACCOUNT NO. 526 REF. Dec. 31 Adjusting J Closing J Big Valley Nursery and Landscape Postclosing Trial Balance December 31, ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Advertising Equipment Accumulated Depreciation Equipment Accounts Payable James McDonald, Capital Totals Analyze: Total credits of $102,000 were posted to the general ledger to complete the closing entries. 148 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

29 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 149 PROBLEM 6.3B GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Advertising Expense Depreciation Expense Equipment Rent Expense Salaries Expense Utilities Expense Income Summary Patty Slade, Capital Patty Slade, Capital Patty Slade, Drawing Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 149

30 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 150 PROBLEM 6.3B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Dec. 31 Balance Prepaid Rent ACCOUNT NO. 131 REF. Dec. 31 Balance Equipment ACCOUNT NO. 141 REF. Dec. 31 Balance Accumulated Depreciation Equipment ACCOUNT NO. 142 REF. Dec. 31 Balance Patty Slade, Capital ACCOUNT NO. 301 REF. Dec. 1 Balance Closing J Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

31 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 151 PROBLEM 6.3B (continued) GENERAL LEDGER Patty Slade, Drawing ACCOUNT NO. 302 REF. Dec. 31 Balance Closing J Income Summary ACCOUNT NO. 399 REF. Dec. 31 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Dec. 31 Balance Closing J Advertising Expense ACCOUNT NO. 511 REF. Dec. 31 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 151

32 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 152 PROBLEM 6.3B (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 514 REF. Dec. 31 Balance Closing J Rent Expense ACCOUNT NO. 517 REF. Dec. 31 Balance Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

33 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 153 PROBLEM 6.3B (continued) GENERAL LEDGER Salaries Expense ACCOUNT NO. 519 REF. Dec. 31 Balance Closing J Utilities Expense ACCOUNT NO. 523 REF. Dec. 31 Balance Closing J Analyze: Fees Income, Income Summary, Patty Slade Capital, Patty Slade Drawing, Advertising, Depreciation, Rent, Salaries, and Utilities Expense. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 153

34 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 154 PROBLEM 6.4B Scott Wilson, CPA Worksheet Month Ended June 30, TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies (a) Computers Accumulated Depreciation Computers (b) Accounts Payable Scott Wilson, Capital Scott Wilson, Drawing Fees Income Salaries Expense Supplies Expense (a) Depreciation Expense Computers (b) Travel Expense Utilities Expense Totals Net Income Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

35 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 155 PROBLEM 6.4B (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 155

36 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 156 PROBLEM 6.4B (continued) GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Jun. 30 Supplies Expense Supplies Depreciation Expense Computers Accumulated Depreciation Computers GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Jun. 30 Fees Income Income Summary Income Summary Salaries Expense Supplies Expense Depreciation Expense Computers Travel Expense Utilities Expense Income Summary Scott Wilson, Capital Scott Wilson, Capital Scott Wilson, Drawing Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

37 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 157 PROBLEM 6.4B (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF. Jun. 30 Balance Adjusting J Computers ACCOUNT NO. 131 REF. Jun. 30 Balance Accumulated Depreciation Computers ACCOUNT NO. 142 REF. Jun. 30 Balance Adjusting J Scott Wilson, Capital ACCOUNT NO. 301 REF. Jun. 30 Balance Closing J Closing J Scott Wilson, Drawing ACCOUNT NO. 302 REF. Jun. 30 Balance Closing J Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 157

38 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 158 PROBLEM 6.4B (continued) GENERAL LEDGER Income Summary ACCOUNT NO. 309 REF. Jun. 30 Closing J Closing J Closing J Fees Income ACCOUNT NO. 401 REF. Jun. 30 Balance Closing J Salaries Expense ACCOUNT NO. 511 REF. Jun. 30 Balance Closing J Utilities Expense ACCOUNT NO. 514 REF. Jun. 30 Balance Closing J Supplies Expense ACCOUNT NO. 517 REF. Jun. 30 Adjusting J Closing J Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

39 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 159 PROBLEM 6.4B (continued) GENERAL LEDGER Travel Expense ACCOUNT NO. 519 REF. Jun. 30 Balance Closing J Depreciation Expense Computers ACCOUNT NO. 523 REF. Jun. 30 Adjusting J Closing J Scott Wilson, CPA Postclosing Trial Balance June 30, ACCOUNT NAME Cash Accounts Receivable Supplies Computers Accumulated Depreciation Computers Accounts Payable Scott Wilson, Capital Totals Analyze: Net Income for Scott Wilson, CPA for the month of June was $19,185. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 159

40 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 160 CRITICAL THINKING PROBLEM 6.1 The Style Shop Worksheet Month Ended December 31, TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies (a) Prepaid Insurance (b) Machinery Accumulated Depreciation Machinery (c) Accounts Payable Sarah Palmer, Capital Sarah Palmer, Drawing Fees Income Supplies Expense (a) Insurance Expense (b) Salaries Expense Depreciation Expense Machinery (c) Utilities Expense Totals Net Income Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

41 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 161 CRITICAL THINKING PROBLEM 6.1 (continued) ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 161

42 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 162 CRITICAL THINKING PROBLEM 6.1 (continued) The Style Shop Income Statement Month Ended December 31, Revenue Fees Income Expenses Supplies Expense Insurance Expense Salaries Expense Depreciation Expense Machinery Utilities Expense Total Expenses Net Income The Style Shop Statement of Owner s Equity Month Ended December 31, Sarah Palmer, Capital, December 1, Net Income for December Less Withdrawals for December Increase in Capital Sarah Palmer, Capital, December 31, Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

43 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 163 CRITICAL THINKING PROBLEM 6.1 (continued) The Style Shop Balance Sheet December 31, Assets Cash Accounts Receivable Supplies Prepaid Insurance Machinery Accumulated Depreciation Machinery Total Assets Liabilities and Owner s Equity Liabilities Accounts Payable Owner s Equity Sarah Palmer, Capital Total Liabilities and Owner s Equity GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF. Adjusting Entries Dec. 31 Supplies Expense Supplies Insurance Expense Prepaid Insurance Depreciation Expense Machinery Accumulated Depreciation Machinery Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 163

44 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 164 CRITICAL THINKING PROBLEM 6.1 (continued) GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF. Closing Entries Dec. 31 Fees Income Income Summary Income Summary Supplies Expense Insurance Expense Salaries Expense Depreciation Expense Machinery Utilities Expense Income Summary Sarah Palmer, Capital Sarah Palmer, Capital Sarah Palmer, Drawing The Style Shop Postclosing Trial Balance December 31, ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Insurance Machinery Accumulated Depreciation Machinery Accounts Payable Sarah Palmer, Capital Totals Analyze: The net income would be $134, Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

45 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 165 CRITICAL THINKING PROBLEM Reed made the following errors preparing the closing entries: a. Accumulated Depreciation and Accounts Payable are permanent accounts that continue from accounting period to accounting period and, consequently, are not closed. b. The Drawing account is not an expense account to be closed to Income Summary but is a reduction of equity and is closed directly to the Capital account. Wilson Reed closed accounts based on what kind of balance they had (debit/credit) rather than looking at the type of account (permanent/temporary) they were. Only temporary, or nominal, accounts are closed. 2. GENERAL JOURNAL PAGE DATE DESCRIPTION POST. REF. Dec. 31 James Walker, Capital Accumulated Depreciation Accounts Payable To correct errors made in closing entries The proof of this entry is: Fees Income 49,000 Expenses: Salaries Expense 39,000 Supplies Expense 2,500 Depreciation Expense 1,200 42,700 Net Income 6,300 Withdrawals (3,500) Increase in Capital 2,800 Capital, Beginning 25,000 Capital, Ending 27,800 Corrected balance per Reed s entries 48,550 Less debit from correcting entry (20,750) Corrected ending Capital balance 27,800 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 165

46 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 166 CRITICAL THINKING PROBLEM 6.2 (continued) Note: It is not necessary to make an entry to correct the closing of the Drawing account to the Income Summary account. Closing the Drawing account to the Income Summary account, which in turn was closed to the Capital account, results in reducing the Capital account by the amount of the withdrawals. So, while incorrect, Reed s entry with regard to Drawing achieves the correct end result. The balance of the Capital account after closing entries have been posted must agree with the ending Capital balance as shown. Posting the entry closing the Income Summary account increases the Capital account by the amount of the net income (or decreases it by the amount of a net loss), while posting the entry closing the Drawing account decreases the Capital account. These postings reflect the same changes to Capital that are shown on the statement of owner s equity and on the balance sheet, and therefore, the ending Capital amount must be the same for both. Note that the errors Reed made in preparing the closing entries would not be revealed by the postclosing trial balance. Since each entry Reed made had equal debits and credits, the postclosing trial balance would be in balance. The errors would not become evident until the next year when postings were made to the Accumulated Depreciation and Accounts Payable accounts or when the ledger account balances were compared to the balance sheet amounts. Business Connections Managerial Focus: 1. No. A thorough analysis of the components of the income statement would reveal how costs directly impact net income. The balance sheet helps determine the amount of the firm s assets and its liquidity, liabilities, and equity. 2. Current assets compared with current liabilities. 3. Timely preparation of financial statements support future planning, prompt payment of debts, developing effective credit policies. 4. The income statement might help determine the adequacy of profit, how to improve revenue and hold down expenses, how to reduce expenses without decreasing revenue, and how to even out the business operating cycle. Balance sheet data might influence decisions concerning growth of equity, the return on investment, adequacy of the firm s assets, whether collections on accounts receivable should be accelerated, and whether more capital is needed. Ethical Dilemma: You should wait to verify the invoice is an actual invoice. At the end of the year, Miscellaneous Expense will be closed and the $1,000 expense will be in the previous year and not given the verification it so badly needs. 166 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

47 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 167 Streetwise: 1. Answers will vary, but permanent accounts may include Cash and Cash Equivalents, Short-Term Investments, Receivables, etc. Temporary accounts include Sales, Selling and Store Operating Expenses, Interest and Investment Income. 2. Dr. Inc. Summ., $20,110 million; Cr. Selling, General and Administrative, $18,348 million; credit Depreciation and Amortization, $1,762 million. Financial Statement Analysis: 1. Dr. Inc. Summ., $7,440,000,000; Dr. Gain on Insurance Recoveries, $168,000,000; Cr. Labor and Fringe, $2,922,000,000; Cr. Materials, Supplies, and Other $1,889,000; Cr. Conrail Fees, Rents, and Services, $75,000,000; Cr. Inland Trans., $242,000,000; Cr. Depreciation, $856,000,000; Cr. Fuel, $1,112,000,000; Cr. Equipment & Other Rents, $512,000, Dr. Intermodal, $1,412,000,000; Dr. Rail, $8,154,000,000; Cr. Inc. Summ., $9,566,000,000 Analyze Online: Answers will vary depending on the year. Extending the Thought: Answers will vary. Students may suggest that skipping the preparation of the worksheet will increase the chance for errors in the accounting records. Business Communication: Students reports will vary. Students should demonstrate an understanding of the types of accounts that should be closed at the end of an accounting period. Team Work: 1) Analyze transactions, 2) journalize the data about transactions, 3) post the data about transactions, 4) prepare a worksheet, 5) prepare financial statements, 6) record adjusting entries, 7) record closing entries, 8) prepare a postclosing trial balance, and 9) interpret the financial information. Internet Connection: 1. Requirements Experience: At least 2 years full-time experience or the part-time or freelance equivalent. 2. Examination: Candidates must pass a 4-part national examination, including 2 parts given at any Prometric Test Center (there are over 300 nationwide). 3. Code of Ethics: Applicants must sign a Code of Ethics. Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 167

48 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 168 Chapter 6 Practice Test Answer Key Part A True-False 1. F 2. F 3. T 4. F 5. T 6. F 7. T 8. F 9. F 10. T Part B Matching 1. d 2. e 3. c 4. b 5. a 168 Chapter 6 Copyright 2009 The McGraw-Hill Companies, Inc. All rights reserved.

49 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 169 MINI-PRACTICE SET1 Service Business Accounting Cycle GENERAL JOURNAL PAGE 3 DATE DESCRIPTION POST. REF Jan. 2 Supplies Cash Bought supplies for cash, Check Prepaid Insurance Cash Purchased one year of insurance, Check Cash Accounts Receivable Fees Income Performed services for cash and on account Cash Accounts Receivable Received cash on account Advertising Expense Cash Paid for advertising on radio, Check Cash Accounts Receivable Received cash on account Cash Supplies Returned damaged supplies for cash refund Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 169

50 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 170 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. REF Jan. 15 Cash Accounts Receivable Fees Income Performed services for cash and on account Supplies Accounts Payable Bought supplies on account Cash Accounts Receivable Fees Income Performed services for cash and on account Cash Accounts Receivable Received cash on account Maintenance Expense Cash Paid cash for equipment maintenance, Check Advertising Expense Cash Paid cash for newspaper ads, Check Telephone Expense Cash Paid monthly telephone bill, Check Cash Accounts Receivable Received cash on account Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

51 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 171 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 5 DATE DESCRIPTION POST. REF Jan. 27 Accounts Payable Cash Made payment to creditor, Check Utilities Expense Cash Paid monthly utility bill, Check Cash Accounts Receivable Fees Income Performed services for cash and on account Salaries Expense Cash Paid monthly salaries, Checks Carolyn Wells, Drawing Cash Owner withdrew cash for personal use, Check Maintenance Expense Cash Paid for monthly maintenance services, Check Equipment Cash Accounts Payable Bought equipment for cash and on account, Check Cash Accounts Receivable Fees Income Performed services for cash and on account Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 171

52 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 172 MINI-PRACTICE SET 1 (continued) GENERAL JOURNAL PAGE 6 DATE DESCRIPTION POST. REF. Adjusting Entries 2011 Jan. 31 Supplies Expense Supplies Insurance Expense Prepaid Insurance Rent Expense Prepaid Rent Depreciation Expense Equipment Accumulated Depreciation Equipment Closing Entries Fees Income Income Summary Income Summary Salaries Expense Utilities Expense Supplies Expense Rent Expense Depreciation Expense Equipment Advertising Expense Maintenance Expense Telephone Expense Insurance Expense Income Summary Carolyn Wells, Capital Carolyn Wells, Capital Carolyn Wells, Drawing Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

53 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 173 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Cash ACCOUNT NO. 101 REF Jan. 1 Balance J J J J J J J J J J J J J J J J J J J J J J Accounts Receivable ACCOUNT NO. 111 REF Jan. 1 Balance J J J J J J J J J Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 173

54 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 174 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Supplies ACCOUNT NO. 121 REF Jan. 1 Balance J J J Adjusting J Prepaid Insurance ACCOUNT NO. 134 REF Jan. 2 J Adjusting J Prepaid Rent ACCOUNT NO. 137 REF Jan. 1 Balance Adjusting J Equipment ACCOUNT NO. 141 REF Jan. 1 Balance J Accumulated Depreciation Equipment ACCOUNT NO. 142 REF Jan. 1 Balance Adjusting J Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

55 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 175 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Accounts Payable ACCOUNT NO. 202 REF Jan. 1 Balance J J J Carolyn Wells, Capital ACCOUNT NO. 301 REF Jan. 1 Balance Closing J Closing J Carolyn Wells, Drawing ACCOUNT NO. 302 REF Jan. 31 J Closing J Income Summary ACCOUNT NO. 309 REF Jan. 31 Closing J Closing J Closing J Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 175

56 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 176 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Fees Income ACCOUNT NO. 401 REF Jan. 7 J J J J J Closing J Salaries Expense ACCOUNT NO. 511 REF Jan. 31 J Closing J Utilities Expense ACCOUNT NO. 514 REF Jan. 28 J Closing J Supplies Expense ACCOUNT NO. 517 REF Jan. 31 Adjusting J Closing J Rent Expense ACCOUNT NO. 520 REF Jan. 31 Adjusting J Closing J Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.

57 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 177 MINI-PRACTICE SET 1 (continued) GENERAL LEDGER Depreciation Expense Equipment ACCOUNT NO. 523 REF Jan. 31 Adjusting J Closing J Advertising Expense ACCOUNT NO. 526 REF Jan. 12 J J Closing J Maintenance Expense ACCOUNT NO. 529 REF Jan. 21 J J Closing J Telephone Expense ACCOUNT NO. 532 REF Jan. 23 J Closing J Insurance Expense ACCOUNT NO. 535 REF Jan. 31 Adjusting J Closing J Copyright 2009 The McGraw-Hill Companies. All rights reserved. Mini-Practice Set 1 177

58 pri30597_sm_ch06.qxd 8/2/08 1:24 PM Page 178 MINI-PRACTICE SET 1 (continued) Wells Consulting Services Worksheet Month Ended January 31, TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies (a) Prepaid Rent (b) Prepaid Insurance (c) Equipment Accumulated Depreciation Equipment (d) Accounts Payable Carolyn Wells, Capital Carolyn Wells, Drawing Income Summary Fees Income Salaries Expense Utilities Expense Supplies Expense (a) Rent Expense (b) Depreciation Expense Equipment (d) Insurance Expense (c) Advertising Expense Telephone Expense Maintenance Expense Totals Net Income Mini-Practice Set 1 Copyright 2009 The McGraw-Hill Companies. All rights reserved.