Chapter 6: Closing Entries and the Postclosing Trial Balance

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1 Chapter 6: Closing Entries and the Postclosing Trial Chapter Opener: Thinking Critically Students should recognize that financial statements can be used to evaluate 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 27,000 employees, 24,000 of these employees work on board the company s fleet of 20 cruise ships. 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 In 2003, Carnival Corporation merged with P & O Princess Cruises PLC, creating a global vacation leader with 12 brands encompassing 66 ships and more than 100,000 lower berths, making it one of the largest leisure travel companies in the world. Accounting on the Job: Thinking Critically Students responses will vary. A strong understanding of accounting procedures and tasks would be beneficial to this professional. A computer science degree, along with several years of programming experience, good communication skills, and excellent problem-solving abilities would also be helpful. Accounting on the Job: Internet Application Students can go to and Job opportunities selected by students will vary. Answers should include the job title, job description, education, and skill requirements. Managerial Implications Answers will vary but could include monthly or quarterly. Students should want financial statements frequently so that trends can be observed and timely 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. Worksheet 2. s 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. 3. Transfer results of operations to the owner s capital account; Reduce balances of revenue, expense, and drawing accounts to zero 4. Adjustments columns of the worksheet 5. Journalize and post adjusting entries; Journalize and post closing entries; Prepare a postclosing trial balance 6. Source document info to general journal, to general ledger, to worksheet, to financial statements 7. (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. 8. Steps to classify, record, and summarize financial data 9. Asset, liability, and owner s capital 10. Avoids errors, proves total debits and credits are equal after the closing process. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 93

2 Exercises Exercise 6.1 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,800 Salaries Expense ,000 Utilities Expense ,200 Supplies Expense ,000 Telephone Expense ,600 Depreciation Expense , Income Summary ,200 Eugene Henderson, Capital , Eugene Henderson, Capital ,000 Eugene Henderson, Drawing ,000 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 Cash 2. Accounts Receivable 3. Supplies 4. Equipment 5. Accumulated Depreciation 6. Accounts Payable 7. Jane Nelson, Capital Exercise E 2. B 3. I 4. B 5. B 6. I 7. B 8. B 9. I 10. B 11. B, E 12. I, E 13. B 14. I 15. B Exercise Total revenue for the period is $23, Total expenses for the period are $15, Net income for the period is $8, Owner s withdrawals for the period are $3, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

3 Exercise 6.6 GENERAL JOURNAL PAGE 4 Closing Entries Mar. 31 Fees Income ,000 Income Summary , Income Summary ,290 Depreciation Expense Equipment ,040 Insurance Expense ,800 Rent Expense ,400 Salaries Expense ,800 Supplies Expense ,950 Telephone Expense ,700 Utilities Expense , Income Summary ,710 Dennis Ortiz, Capital , Dennis Ortiz, Capital ,000 Dennis Ortiz, Drawing ,000 GENERAL LEDGER ACCOUNT Dennis Ortiz, Capital ACCOUNT NO. 301 Mar , Closing J4 34,710 93, Closing J4 3,000 90,510 ACCOUNT Dennis Ortiz, Drawing ACCOUNT NO. 302 Mar. 31 3, Closing J4 3,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Mar. 31 Closing J4 138, , Closing J4 103,290 34, Closing J4 34,710 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 95

4 ACCOUNT Fees Income ACCOUNT NO. 401 Mar , Closing J4 138,000 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 510 Mar. 31 5, Closing J4 5,040 0 ACCOUNT Insurance Expense ACCOUNT NO. 511 Mar. 31 4, Closing J4 4,800 0 ACCOUNT Rent Expense ACCOUNT NO. 514 Mar , Closing J4 14,400 0 ACCOUNT Salaries Expense ACCOUNT NO. 517 Mar , Closing J4 70,800 0 ACCOUNT Supplies Expense ACCOUNT NO. 518 Mar. 31 1, Closing J4 1, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

5 ACCOUNT Telephone Expense ACCOUNT NO. 519 Mar. 31 2, Closing J4 2,700 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Mar. 31 3, Closing J4 3,600 0 Exercise 6.7 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Herman Victoria, Capital ,000 Income Summary , Herman Victoria, Capital ,000 Herman Victoria, Drawing ,000 The new balance of Herman Victoria, Capital is $54,000. ($84,000 $27,000 $3,000) Exercise 6.8 Analyze Transactions Journalize Transactions Post Transactions Prepare a Worksheet Prepare Financial Statements Record Adjusting Entries Record Closing Entries Prepare Postclosing Trial Interpret Financial Information Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 97

6 Problems Problem 6.1A GENERAL JOURNAL PAGE 3 Adjusting Entries Jan. 31 Supplies Expense Supplies Rent Expense ,000 Prepaid Rent , Depreciation Expense Office Equipment ,120 Accumulated Depreciation Office Equipment ,120 GENERAL JOURNAL PAGE 4 Closing Entries Jan. 31 Fees Income ,000 Income Summary , Income Summary ,200 Salaries Expense ,200 Utilities Expense Telephone Expense Travel Expense ,920 Supplies Expense Rent Expense ,000 Depreciation Expense Office Equipment , Income Summary ,800 Lou Pelton, Capital , Lou Pelton, Capital ,800 Lou Pelton, Drawing ,800 Analyze: Credit the drawing account; debit the capital account. 98 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

7 Problem 6.2A GENERAL JOURNAL PAGE 3 Adjusting Entries Dec. 31 Supplies Expense Supplies Advertising Expense Prepaid Advertising Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,750 Income Summary , Income Summary ,000 Salaries Expense ,600 Utilities Expense Supplies Expense Depreciation Expense Equipment Advertising Expense Income Summary ,750 Connie Youngblood, Capital , Connie Youngblood, Capital ,100 Connie Youngblood, Drawing ,100 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 1, Adjusting J ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 6, Adjusting J ,250 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 99

8 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J ACCOUNT Connie Youngblood, Capital ACCOUNT NO. 301 Dec , Closing J4 12,750 45, Closing J4 2,100 43,650 ACCOUNT Connie Youngblood, Drawing ACCOUNT NO. 302 Dec. 31 2, Closing J4 2,100 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 18,750 18, Closing J4 6,000 12, Closing J4 12,750 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec , Closing J4 18,750 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 3, Closing J4 3, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

9 ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec Closing J ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J Closing J ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J Closing J ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J Closing J YOUNGBLOOD ENTERPRISES Postclosing Trial December 31, Account Name Debit Credit Cash ,100 Accounts Receivable ,000 Supplies Prepaid Advertising ,250 Equipment ,000 Accumulated Depreciation Equipment Accounts Payable ,000 Connie Youngblood, Capital ,650 Totals ,250 47,250 Analyze: Fifteen accounts are listed in the Adjusted Trial section. Eight accounts are listed on the Postclosing Trial. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 101

10 Problem 6.3A GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,410 Advertising Expense ,400 Depreciation Expense Equipment Rent Expense ,800 Salaries Expense ,400 Utilities Expense , Income Summary ,590 Melissa Vinzant, Capital , Melissa Vinzant, Capital ,600 Melissa Vinzant, Drawing ,600 GENERAL LEDGER ACCOUNT Melissa Vinzant, Capital ACCOUNT NO. 301 Dec. 1 27, Closing J4 46,590 74, Closing J4 3,600 70,800 ACCOUNT Melissa Vinzant, Drawing ACCOUNT NO. 302 Dec. 31 3, Closing J4 3,600 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 69,000 69, Closing J4 22,410 46, Closing J4 46, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

11 ACCOUNT Fees Income ACCOUNT NO. 401 Dec , Closing J4 69,000 0 ACCOUNT Advertising Expense ACCOUNT NO. 511 Dec. 31 2, Closing J4 2,400 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 514 Dec Closing J ACCOUNT Rent Expense ACCOUNT NO. 517 Dec. 31 1, Closing J4 1,800 0 ACCOUNT Salaries Expense ACCOUNT NO. 519 Dec , Closing J4 14,400 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Dec. 31 3, Closing J4 3,360 0 Analyze: The balance in the Salaries Expense account is $0. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 103

12 Problem 6.4A CLIFTON AUTO DETAILING SERVICE Worksheet Month Ended December 31, Adjusted Income Trial Adjustments Trial Statement Sheet Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 62,100 62,100 62,100 Accounts Receivable 9,900 9,900 9,900 Supplies 8,000 (a) 3,200 4,800 4,800 Prepaid Advertising 6,000 (b) 2,800 3,200 3,200 Equipment 40,000 40,000 40,000 Accumulated Depreciation Equip. (c) Accounts Payable 10,000 10,000 10,000 Clifton Davis, Capital 71,000 71,000 71,000 Clifton Davis, Drawing 4,000 4,000 4,000 Fees Income 60,000 60,000 60,000 Salaries Expense 9,600 9,600 9,600 Utilities Expense 1,400 1,400 1,400 Supplies Expense (a) 3,200 3,200 3,200 Advertising Expense (b) 2,800 2,800 2,800 Depreciation Expense Equip. (c) Totals 141, ,000 6,960 6, , ,960 17,960 60, ,000 81,960 Net Income 42,040 42,040 60,000 60, , , Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

13 GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Dec. 31 Supplies Expense ,200 Supplies ,200 (b) 31 Advertising Expense ,800 Prepaid Advertising ,800 (c) 31 Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,960 Salaries Expense ,600 Utilities Expense ,400 Supplies Expense ,200 Depreciation Expense Equipment Advertising Expense , Income Summary ,040 Clifton Davis, Capital , Clifton Davis, Capital ,000 Clifton Davis, Drawing ,000 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 8, Adjusting J3 3,200 4,800 ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 6, Adjusting J3 2,800 3,200 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 105

14 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J ACCOUNT Clifton Davis, Capital ACCOUNT NO. 301 Dec , Closing J4 42, , Closing J4 4, ,040 ACCOUNT Clifton Davis, Drawing ACCOUNT NO. 302 Dec. 31 4, Closing J4 4,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 60,000 60, Closing J4 17,960 42, Closing J4 42,040 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec , Closing J4 60,000 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 9, Closing J4 9, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

15 ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec. 31 1, Closing J4 1,400 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J3 3,200 3, Closing J4 3,200 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J Closing J ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J3 2,800 2, Closing J4 2,800 0 CLIFTON AUTO DETAILING SERVICE Postclosing Trial December 31, Account Name Debit Credit Cash ,100 Accounts Receivable ,900 Supplies ,800 Prepaid Advertising ,200 Equipment ,000 Accumulated Depreciation Equipment Accounts Payable ,000 Clifton Davis, Capital ,040 Totals , ,000 Analyze: Total debits of $124,000 were posted to the general ledger to complete the closing entries. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 107

16 Problem 6.1B GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Jan. 31 Supplies Expense ,720 Supplies ,720 (b) 31 Insurance Expense Prepaid Insurance (c) 31 Depreciation Expense Machinery ,240 Accumulated Depreciation Machinery ,240 GENERAL JOURNAL PAGE 4 Closing Entries Jan. 31 Fees Income ,600 Income Summary , Income Summary ,400 Depreciation Expense Machinery ,240 Insurance Expense Rent Expense ,000 Salaries Expense ,000 Supplies Expense ,720 Telephone Expense Utilities Expense , Income Summary ,200 Marvel Zimwalt, Capital , Marvel Zimwalt, Capital ,800 Marvel Zimwalt, Drawing ,800 Analyze: The adjusting entry for expired insurance created a debit to Insurance Expense, increasing the Insurance Expense account balance to $ Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

17 Problem 6.2B GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Dec. 31 Supplies Expense ,000 Supplies ,000 (b) 31 Advertising Expense Prepaid Advertising (c) 31 Depreciation Expense Equipment Accumulated Depreciation Equipment GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,600 Income Summary , Income Summary ,300 Salaries Expense ,800 Utilities Expense Supplies Expense ,000 Depreciation Expense Equipment Advertising Expense Income Summary ,300 Randall Marshall, Capital , Randall Marshall, Capital ,800 Randall Marshall, Drawing ,800 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 2, Adjusting J3 1,000 1,000 ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 3, Adjusting J ,600 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 109

18 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J ACCOUNT Randall Marshall, Capital ACCOUNT NO. 301 Dec , Closing J4 8,300 35, Closing J4 2,800 32,900 ACCOUNT Randall Marshall, Drawing ACCOUNT NO. 302 Dec. 31 2, Closing J4 2,800 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 15,600 15, Closing J4 7,300 8, Closing J4 8,300 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec , Closing J4 15,600 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 4, Closing J4 4, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

19 ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec Closing J ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J3 1,000 1, Closing J4 1,000 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J Closing J ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J Closing J CEDAR CANYON NURSERY AND LAWN Postclosing Trial December 31, Account Name Debit Credit Cash ,800 Accounts Receivable ,000 Supplies ,000 Prepaid Advertising ,600 Equipment ,000 Accumulated Depreciation Equipment Accounts Payable ,000 Randall Marshall, Capital ,900 Totals ,400 36,400 Analyze: Total credits of $34,000 were posted to the general ledger to complete the closing entries. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 111

20 Problem 6.3B GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,700 Advertising Expense ,300 Depreciation Expense Equipment Rent Expense ,100 Salaries Expense ,800 Utilities Expense , Income Summary ,300 Shawn McGowan, Capital , Shawn McGowan, Capital ,600 Shawn McGowan, Drawing ,600 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 3,000 ACCOUNT Prepaid Rent ACCOUNT NO. 131 Dec ,100 ACCOUNT Equipment ACCOUNT NO. 141 Dec ,000 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

21 ACCOUNT Shawn McGowan, Capital ACCOUNT NO. 301 Dec. 1 57, Closing J4 33,300 90, Closing J4 3,600 87,150 ACCOUNT Shawn McGowan, Drawing ACCOUNT NO. 302 Dec. 31 3, Closing J4 3,600 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 54,000 54, Closing J4 20,700 33, Closing J4 33,300 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec , Closing J4 54,000 0 ACCOUNT Advertising Expense ACCOUNT NO. 511 Dec. 31 3, Closing J4 3,300 0 ACCOUNT Depreciation Expense Equip. ACCOUNT NO. 514 Dec Closing J Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 113

22 ACCOUNT Rent Expense ACCOUNT NO. 517 Dec. 31 2, Closing J4 2,100 0 ACCOUNT Salaries Expense ACCOUNT NO. 519 Dec , Closing J4 10,800 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Dec. 31 3, Closing J4 3,600 0 Analyze: Fees Income, Income Summary, Shawn McGowan Capital, Shawn McGowan Drawing, Advertising, Depreciation, Rent, Salaries, and Utilities Expense. 114 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

23 Problem 6.4B FINLEY GRAVES, CPA Worksheet Month Ended June 30, Adjusted Income Trial Adjustments Trial Statement Sheet Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 10,650 10,650 10,650 Accounts Receivable 3,780 3,780 3,780 Supplies 5,250 (a) 900 4,350 4,350 Computers 9,600 9,600 9,600 Accumulated Depreciation Computers 960 (b) 80 1,040 1,040 Accounts Payable 4,200 4,200 4,200 Finley Graves, Capital 20,745 20,745 20,745 Finley Graves, Drawing 4,000 4,000 4,000 Pees Income 22,650 22,650 22,650 Salaries Expense 12,575 12,575 12,575 Supplies Expense (a) Depreciation Expense Computers (b) Travel Expense 1,800 1,800 1,800 Utilities Expense Totals 48,555 48, ,635 48,635 16,255 22,650 32,380 25,985 6,395 6,395 Net Income 22,650 22,650 32,380 32,380 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 115

24 GENERAL JOURNAL PAGE 3 Adjusting Entries Jun. 30 Supplies Expense Supplies Depreciation Expense Computers Accumulated Depreciation Computers GENERAL JOURNAL PAGE 4 Closing Entries Jun. 30 Fees Income ,650 Income Summary , Income Summary ,255 Salaries Expense ,575 Supplies Expense Depreciation Expense Computers Travel Expense ,800 Utilities Expense Income Summary ,395 Finley Graves, Capital , Finley Graves, Capital ,000 Finley Graves, Drawing ,000 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Jun. 30 5, Adjusting J ,350 ACCOUNT Computers ACCOUNT NO. 131 Jun. 30 9, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

25 ACCOUNT Accumulated Depreciation Computers ACCOUNT NO. 142 Jun Adjusting J3 80 1,040 ACCOUNT Finley Graves, Capital ACCOUNT NO. 301 Jun , Closing J4 6,395 27, Closing J4 4,000 23,140 ACCOUNT Finley Graves, Drawing ACCOUNT NO. 302 Jun. 30 4, Closing J4 4,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Jun. 30 Closing J4 22,650 22, Closing J4 16,255 6, Closing J4 6,395 0 ACCOUNT Fees Income ACCOUNT NO. 401 Jun , Closing J4 22,650 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Jun , Closing J4 12,575 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 117

26 ACCOUNT Utilities Expense ACCOUNT NO. 514 Jun Closing J ACCOUNT Supplies Expense ACCOUNT NO. 517 Jun. 30 Adjusting J Closing J ACCOUNT Travel Expense ACCOUNT NO. 519 Jun. 30 1, Closing J4 1,800 0 ACCOUNT Depreciation Expense Computers ACCOUNT NO. 523 Jun. 30 Adjusting J Closing J FINLEY GRAVES, CPA Postclosing Trial June 30, Account Name Debit Credit Cash ,650 Accounts Receivable ,780 Supplies ,350 Computers ,600 Accumulated Depreciation Computers.. 1,040 Accounts Payable ,200 Finley Graves, Capital ,140 Totals ,380 28,380 Analyze: Net Income for Finley Graves, CPA for the month of June was $6, Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

27 Challenge Problem THE BARBER SHOP Worksheet Month Ended December 31, Adjusted Income Trial Adjustments Trial Statement Sheet Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 40,800 40,800 40,800 Accounts Receivable 9,000 9,000 9,000 Supplies 7,200 (a) 3,600 3,600 3,600 Prepaid Insurance 10,800 (b) 2,400 8,400 8,400 Machinery 84,000 84,000 84,000 Accumulated Depreciation Machinery (c) 1,200 1,200 1,200 Accounts Payable 13,500 13,500 13,500 Tommy Brooks, Capital 74,580 74,580 74,580 Tommy Brooks, Drawing 6,000 6,000 6,000 Fees Income 82,500 82,500 82,500 Supplies Expense (a) 3,600 3,600 3,600 Insurance Expense (b) 2,400 2,400 2,400 Salaries Expense 11,100 11,100 11,100 Depreciation Expense Machinery (c) 1,200 1,200 1,200 Utilities Expense 1,680 1,680 1,680 Totals 170, ,580 7,200 7, , ,780 19,980 82, ,800 89,280 Net Income 62,520 62,520 82,500 82, , ,800 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 119

28 THE BARBER SHOP Income Statement Month Ended December 31, Revenue Fees Income ,500 Expenses Supplies Expense ,600 Insurance Expense ,400 Salaries Expense ,100 Depreciation Expense Machinery ,200 Utilities Expense ,680 Total Expenses ,980 Net Income ,520 THE BARBER SHOP Statement of Owner s Equity Month Ended December 31, Tommy Brooks, Capital, December 1, 74,580 Net Income for December ,520 Less Withdrawals for December ,000 Increase in Capital ,520 Tommy Brooks, Capital, December 31, 131,100 THE BARBER SHOP Sheet December 31, Assets Cash ,800 Accounts Receivable ,000 Supplies ,600 Prepaid Insurance ,400 Machinery ,000 Accumulated Depreciation Machinery... 1,200 82,800 Total Assets ,600 Liabilities and Owner s Equity Liabilities Accounts Payable ,500 Owner s Equity Tommy Brooks, Capital ,100 Total Liabilities and Owner s Equity , Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

29 GENERAL JOURNAL PAGE 3 Adjusting Entries Dec. 31 Supplies Expense ,600 Supplies , Insurance Expense ,400 Prepaid Insurance , Depreciation Expense Machinery ,200 Accumulated Depreciation Machinery ,200 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income ,500 Income Summary , Income Summary ,980 Supplies Expense ,600 Insurance Expense ,400 Salaries Expense ,100 Depreciation Expense Machinery ,200 Utilities Expense , Income Summary ,520 Tommy Brooks, Capital , Tommy Brooks, Capital ,000 Tommy Brooks, Drawing ,000 THE BARBER SHOP Postclosing Trial December 31, Account Name Debit Credit Cash ,800 Accounts Receivable ,000 Supplies ,600 Prepaid Insurance ,400 Machinery ,000 Accumulated Depreciation Machinery... 1,200 Accounts Payable ,500 Tommy Brooks, Capital ,100 Totals , ,800 Analyze: The net income would be $67,320. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 121

30 Critical Thinking Problem 1. Strutton 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. 2. GENERAL JOURNAL PAGE 15 Dec. 31 Brenda Powell, Capital ,500 Accumulated Depreciation ,500 Accounts Payable ,000 To correct errors made in closing entries The proof of this entry is: Fees Income ,000 Expenses: Salaries Expense ,000 Supplies Expense ,000 Depreciation Expense ,400 85,400 Net Income ,600 Withdrawals (7,000) Increase in Capital ,600 Capital, Beginning ,000 Capital, Ending ,600 Capital balance per Strutton s entries.. 97,100 Less debit from correcting entry (41,500) Corrected ending Capital balance ,600 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, Strutton s entry with regard to Drawing achieves the correct end result. 3. The balance of the Capital account after closing entries have been posted must agree with the ending Capital balance as shown on the statement of owner s equity. 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 James made in preparing the closing entries would not be revealed by the postclosing trial balance. Since each entry Strutton 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. 122 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

31 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, 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. 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. 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., $16,504 million; Cr. Selling and Store Operating, $15,105 million; credit General and Administrative, $1,399 million. Financial Statement Analysis 1. Dr. Inc. Summ., $6,805,000,000; Cr. Labor and Fringe, $2,740,000,000; Cr. Materials, $1,627,000,000; Cr. Conrail Fees, Rents, and Services, $342,000,000; Cr. Building and Equipment, Rent, $566,000,000; Cr. Inland Trans., $320,000,000; Cr. Depreciation, $629,000,000; Cr. Rent, $581,000, Dr. Surface Transportation Revenue, $7,439,000,000; Dr. International Terminals, $226,000,000; Dr. Other, $128,000,000; Cr. Inc. Summ., $7,793,000,000 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 Two years full time experience, pass a national exam, and sign a Code of Ethics. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 123

32 Practice Test Answer Key Part A 1. T 2. F 3. F 4. T 5. F 6. T 7. F 8. T 9. F 10. F Part B 1. a 2. b 3. e 4. c 5. d True False Matching 124 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

33 Mini-Practice Set 1: Service Business Accounting Cycle GENERAL JOURNAL PAGE 3 Jan. 2 Supplies ,500 Cash ,500 Bought supplies for cash, Check Prepaid Insurance ,600 Cash ,600 Purchased one year of insurance, Check Cash ,800 Accounts Receivable ,575 Fees Income ,375 Performed services for cash and on account 12 Cash Accounts Receivable Received cash on account 12 Advertising Expense ,850 Cash ,850 Paid for advertising on radio, Check Cash ,000 Accounts Receivable ,000 Received cash on account 14 Cash Supplies Returned damaged supplies for cash refund 15 Cash ,050 Accounts Receivable ,590 Fees Income ,640 Performed services for cash & on account Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 125

34 GENERAL JOURNAL PAGE 4 Jan. 20 Supplies ,700 Accounts Payable ,700 Bought supplies on account 20 Cash ,950 Accounts Receivable ,670 Fees Income ,620 Performed services for cash & on account 20 Cash ,450 Accounts Receivable ,450 Received cash on account 21 Maintenance Expense ,275 Cash ,275 Paid cash for equipment maintenance, Check Advertising Expense ,568 Cash ,568 Paid cash for newspaper ads, Check Telephone Expense Cash Paid monthly telephone bill, Check Cash ,690 Accounts Receivable ,690 Received cash on account 27 Accounts Payable ,000 Cash ,000 Made payment to creditor, Check Utilities Expense Cash Paid monthly utility bill, Check Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

35 GENERAL JOURNAL PAGE 5 Jan. 29 Cash ,870 Accounts Receivable ,530 Fees Income ,400 Performed services for cash & on account 31 Salaries Expense ,500 Cash ,500 Paid monthly salaries, Checks Jason Taylor, Drawing ,000 Cash ,000 Owner withdrew cash for personal use, Check Maintenance Expense Cash Paid for monthly maintenance services, Check Equipment ,000 Cash ,500 Accounts Payable ,500 Bought equipment for cash and on account, Check Cash ,350 Accounts Receivable ,300 Fees Income ,650 Performed services for cash and on account Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 127

36 GENERAL JOURNAL PAGE 6 Adjusting Entries Jan. 31 Supplies Expense ,172 Supplies , Insurance Expense Prepaid insurance Rent Expense ,500 Prepaid Rent , Depreciation Expense Equipment Accumulated Depreciation Equipment Closing Entries 31 Fees Income ,685 Income Summary , Income Summary ,462 Salaries Expense ,500 Utilities Expense Supplies Expense ,172 Rent Expense ,500 Depreciation Expense Equipment Advertising Expense ,418 Maintenance Expense ,255 Telephone Expense Insurance Expense Income Summary ,223 Jason Taylor, Capital , Jason Taylor, Capital ,000 Jason Taylor, Drawing , Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

37 ACCOUNT Cash ACCOUNT NO. 101 Jan. 1 83,500 2 J3 2,500 81,000 2 J3 3,600 77,400 7 J3 12,800 90, J , J3 1,850 89, J3 2,000 91, J , J3 16, , J4 8, , J4 1, , J4 3, , J4 1, , J , J4 3, , J4 6, , J , J5 13, , J5 12, , J5 3, , J , J5 3, , J5 2, ,065 ACCOUNT Accounts Receivable ACCOUNT NO. 111 Jan. 1 5,000 7 J3 1,575 6, J , J3 2,000 3, J3 1,590 5, J4 4,670 9, J4 1,450 8, J4 3,690 4, J5 1,530 6, J5 1,300 7,575 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 129

38 ACCOUNT Supplies ACCOUNT NO. 121 Jan. 1 2,000 2 J3 2,500 4, J , J4 1,700 6, Adjusting J6 4,172 1,850 ACCOUNT Prepaid Insurance ACCOUNT NO. 134 Jan. 2 J3 3,600 3, Adjusting J ,300 ACCOUNT Prepaid Rent ACCOUNT NO. 137 Jan. 1 3, Adjusting J6 3,500 0 ACCOUNT Equipment ACCOUNT NO. 141 Jan. 1 22, J5 15,000 37,000 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Jan Adjusting J ACCOUNT Accounts Payable ACCOUNT NO. 202 Jan. 1 7, J4 1,700 8, J4 6,000 2, J5 11,500 14, Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

39 ACCOUNT Jason Taylor, Capital ACCOUNT NO. 301 Jan , Closing J6 35, , Closing J6 3, ,856 ACCOUNT Jason Taylor, Drawing ACCOUNT NO. 302 Jan. 31 J5 3,000 3, Closing J6 3,000 0 ACCOUNT Income Summary ACCOUNT NO. 309 Jan. 31 Closing J6 64,685 64, Closing J6 29,462 35, Closing J6 35,223 0 ACCOUNT Fees Income ACCOUNT NO. 401 Jan. 7 J3 14,375 14, J3 17,640 32, J4 13,620 45, J5 15,400 61, J5 3,650 64, Closing J6 64,685 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Jan. 31 J5 12,500 12, Closing J6 12,500 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 131

40 ACCOUNT Utilities Expense ACCOUNT NO. 514 Jan. 28 J Closing J ACCOUNT Supplies Expense ACCOUNT NO. 517 Jan. 31 Adjusting J6 4,172 4, Closing J6 4,172 0 ACCOUNT Rent Expense ACCOUNT NO. 520 Jan. 31 Adjusting J5 3,500 3, Closing J6 3,500 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Jan. 31 Adjusting J Closing J ACCOUNT Advertising Expense ACCOUNT NO. 526 Jan. 12 J3 1,850 1, J4 1,568 3, Closing J6 3, Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

41 ACCOUNT Maintenance Expense ACCOUNT NO. 529 Jan. 21 J4 3,275 3, J , Closing J6 4,255 0 ACCOUNT Telephone Expense ACCOUNT NO. 532 Jan. 23 J Closing J ACCOUNT Insurance Expense ACCOUNT NO. 535 Jan. 31 Adjusting J Closing J Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 133

42 JT S CONSULTING SERVICES Worksheet Month Ended January 31, Adjusted Income Trial Adjustments Trial Statement Sheet Account Name Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 106, , ,065 Accounts Receivable 7,575 7,575 7,575 Supplies 6,022 (a) 4,172 1,850 1,850 Prepaid Rent 3,500 (b) 3, Prepaid Insurance 3,600 (c) 300 3,300 3,300 Equipment 37,000 37,000 37,000 Accumulated Deprec. Equip. 367 (d) Accounts Payable 14,200 14,200 14,200 Jason Taylor, Capital 108, , ,633 Jason Taylor, Drawing 3,000 3,000 3,000 Income Summary Fees Income 64,685 64,685 64,685 Salaries Expense 12,500 12,500 12,500 Utilities Expense Supplies Expense (a) 4,172 4,172 4,172 Rent Expense (b) 3,500 3,500 3,500 Depreciation Expense Equip. (d) Insurance Expense (c) Advertising Expense 3,418 3,418 3,418 Telephone Expense Maintenance Expense 4,255 4,255 4,255 Totals 187, ,885 8,339 8, , ,252 29,462 64, , ,567 Net Income 35,223 35,223 64,685 64, , , Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

43 JT S CONSULTING SERVICES Income Statement Month Ended January 31, Revenue Fees Income ,685 Expenses Salaries Expense ,500 Utilities Expense Supplies Expense ,172 Rent Expense ,500 Depreciation Expense Equipment Insurance Expense Advertising Expense ,418 Telephone Expense Maintenance Expense ,255 Total Expenses ,462 Net Income ,223 JT S CONSULTING SERVICES Statement of Owner s Equity Month Ended January 31, Jason Taylor, Capital, January 1, ,633 Net Income for January ,223 Less Withdrawals for January ,000 Increase in Capital for January ,223 Jason Taylor, Capital, January 31, ,856 JT S CONSULTING SERVICES Postclosing Trial January 31, Account Name Debit Credit Cash ,065 Accounts Receivable ,575 Supplies ,850 Prepaid Insurance ,300 Equipment ,000 Accumulated Depreciation Equipment Accounts Payable ,200 Jason Taylor, Capital ,856 Totals , ,790 Analyze: Part A: Total assets increased by $39,423 ($155,056 $115,633). Total liabilities increased by $7,200 ($14,200 $7,000). Owner s capital increased by $32,223 ($140,856 $108,633). Part B: The balance of Cash increased by $22,565 ($106,065 $83,500). The balance of Accounts Receivable increased by $2,575 ($7,575 $5,000). Part C: Yes, the firm s financial position improved through the increases in capital of $32,223 ($140,856 $108,633). Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 135

44 JT S CONSULTING SERVICES Sheet January 31, Assets Cash ,065 Accounts Receivable ,575 Supplies ,850 Prepaid Insurance ,300 Equipment ,000 Less Accumulated Depreciation Equipment ,266 Total Assets ,056 Liabilities & Owner s Equity Liabilities Accounts Payable ,200 Owner s Equity Jason Taylor, Capital ,856 Total Liabilities & Owner s Equity , Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

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