Chapter 6: Closing Entries and the Postclosing Trial Balance

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 1987. 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 www.greatplains.com, www.peachtree.com, and www.microsoft.com. 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

Exercises Exercise 6.1 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 85,000 Income Summary............................ 85,000 31 Income Summary.............................. 45,800 Salaries Expense............................ 28,000 Utilities Expense............................. 7,200 Supplies Expense............................ 4,000 Telephone Expense.......................... 3,600 Depreciation Expense........................ 3,000 31 Income Summary.............................. 39,200 Eugene Henderson, Capital.................... 39,200 31 Eugene Henderson, Capital...................... 24,000 Eugene Henderson, Drawing................... 24,000 Exercise 6.2 1. 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 6.3 1. Cash 2. Accounts Receivable 3. Supplies 4. Equipment 5. Accumulated Depreciation 6. Accounts Payable 7. Jane Nelson, Capital Exercise 6.4 1. 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 6.5 1. Total revenue for the period is $23,250. 2. Total expenses for the period are $15,150. 3. Net income for the period is $8,100. 4. Owner s withdrawals for the period are $3,000. 94 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Exercise 6.6 GENERAL JOURNAL PAGE 4 Closing Entries Mar. 31 Fees Income................................. 401 138,000 Income Summary............................ 399 138,000 31 Income Summary.............................. 399 103,290 Depreciation Expense Equipment.............. 510 5,040 Insurance Expense........................... 511 4,800 Rent Expense............................... 514 14,400 Salaries Expense............................ 517 70,800 Supplies Expense............................ 518 1,950 Telephone Expense.......................... 519 2,700 Utilities Expense............................. 523 3,600 31 Income Summary.............................. 399 34,710 Dennis Ortiz, Capital......................... 301 34,710 31 Dennis Ortiz, Capital........................... 301 3,000 Dennis Ortiz, Drawing........................ 302 3,000 GENERAL LEDGER ACCOUNT Dennis Ortiz, Capital ACCOUNT NO. 301 Mar. 31 58,800 31 Closing J4 34,710 93,510 31 Closing J4 3,000 90,510 ACCOUNT Dennis Ortiz, Drawing ACCOUNT NO. 302 Mar. 31 3,000 31 Closing J4 3,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Mar. 31 Closing J4 138,000 138,000 31 Closing J4 103,290 34,710 31 Closing J4 34,710 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 95

ACCOUNT Fees Income ACCOUNT NO. 401 Mar. 31 138,000 31 Closing J4 138,000 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 510 Mar. 31 5,040 31 Closing J4 5,040 0 ACCOUNT Insurance Expense ACCOUNT NO. 511 Mar. 31 4,800 31 Closing J4 4,800 0 ACCOUNT Rent Expense ACCOUNT NO. 514 Mar. 31 14,400 31 Closing J4 14,400 0 ACCOUNT Salaries Expense ACCOUNT NO. 517 Mar. 31 70,800 31 Closing J4 70,800 0 ACCOUNT Supplies Expense ACCOUNT NO. 518 Mar. 31 1,950 31 Closing J4 1,950 0 96 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Telephone Expense ACCOUNT NO. 519 Mar. 31 2,700 31 Closing J4 2,700 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Mar. 31 3,600 31 Closing J4 3,600 0 Exercise 6.7 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Herman Victoria, Capital........................ 27,000 Income Summary............................ 27,000 31 Herman Victoria, Capital........................ 3,000 Herman Victoria, Drawing...................... 3,000 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

Problems Problem 6.1A GENERAL JOURNAL PAGE 3 Adjusting Entries Jan. 31 Supplies Expense............................. 560 Supplies................................... 560 31 Rent Expense................................ 3,000 Prepaid Rent............................... 3,000 31 Depreciation Expense Office Equipment........... 1,120 Accumulated Depreciation Office Equipment..... 1,120 GENERAL JOURNAL PAGE 4 Closing Entries Jan. 31 Fees Income................................. 77,000 Income Summary............................ 77,000 31 Income Summary.............................. 56,200 Salaries Expense............................ 41,200 Utilities Expense............................. 460 Telephone Expense.......................... 940 Travel Expense.............................. 8,920 Supplies Expense............................ 560 Rent Expense............................... 3,000 Depreciation Expense Office Equipment......... 1,120 31 Income Summary.............................. 20,800 Lou Pelton, Capital........................... 20,800 31 Lou Pelton, Capital............................. 4,800 Lou Pelton, Drawing.......................... 4,800 Analyze: Credit the drawing account; debit the capital account. 98 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Problem 6.2A GENERAL JOURNAL PAGE 3 Adjusting Entries Dec. 31 Supplies Expense............................. 517 600 Supplies................................... 121 600 31 Advertising Expense........................... 526 750 Prepaid Advertising.......................... 131 750 31 Depreciation Expense Equipment................ 523 600 Accumulated Depreciation Equipment........... 142 600 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 401 18,750 Income Summary............................ 399 18,750 31 Income Summary.............................. 399 6,000 Salaries Expense............................ 511 3,600 Utilities Expense............................. 514 450 Supplies Expense............................ 517 600 Depreciation Expense Equipment.............. 523 600 Advertising Expense.......................... 526 750 31 Income Summary.............................. 399 12,750 Connie Youngblood, Capital.................... 301 12,750 31 Connie Youngblood, Capital...................... 301 2,100 Connie Youngblood, Drawing................... 302 2,100 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 1,500 31 Adjusting J3 600 900 ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 6,000 31 Adjusting J3 750 5,250 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 99

ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J3 600 600 ACCOUNT Connie Youngblood, Capital ACCOUNT NO. 301 Dec. 31 33,000 31 Closing J4 12,750 45,750 31 Closing J4 2,100 43,650 ACCOUNT Connie Youngblood, Drawing ACCOUNT NO. 302 Dec. 31 2,100 31 Closing J4 2,100 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 18,750 18,750 31 Closing J4 6,000 12,750 31 Closing J4 12,750 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec. 31 18,750 31 Closing J4 18,750 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 3,600 31 Closing J4 3,600 0 100 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec. 31 450 31 Closing J4 450 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J3 600 600 31 Closing J4 600 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J3 600 600 31 Closing J4 600 0 ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J3 750 750 31 Closing J4 750 0 YOUNGBLOOD ENTERPRISES Postclosing Trial December 31, Account Name Debit Credit Cash.............................. 23,100 Accounts Receivable................. 3,000 Supplies........................... 900 Prepaid Advertising................... 5,250 Equipment......................... 15,000 Accumulated Depreciation Equipment... 600 Accounts Payable.................... 3,000 Connie Youngblood, Capital............ 43,650 Totals............................. 47,250 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

Problem 6.3A GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 401 69,000 Income Summary............................ 399 69,000 31 Income Summary.............................. 399 22,410 Advertising Expense.......................... 511 2,400 Depreciation Expense Equipment.............. 514 450 Rent Expense............................... 517 1,800 Salaries Expense............................ 519 14,400 Utilities Expense............................. 523 3,360 31 Income Summary.............................. 399 46,590 Melissa Vinzant, Capital....................... 301 46,590 31 Melissa Vinzant, Capital......................... 301 3,600 Melissa Vinzant, Drawing...................... 302 3,600 GENERAL LEDGER ACCOUNT Melissa Vinzant, Capital ACCOUNT NO. 301 Dec. 1 27,810 31 Closing J4 46,590 74,400 31 Closing J4 3,600 70,800 ACCOUNT Melissa Vinzant, Drawing ACCOUNT NO. 302 Dec. 31 3,600 31 Closing J4 3,600 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 69,000 69,000 31 Closing J4 22,410 46,590 31 Closing J4 46,590 0 102 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Fees Income ACCOUNT NO. 401 Dec. 31 69,000 31 Closing J4 69,000 0 ACCOUNT Advertising Expense ACCOUNT NO. 511 Dec. 31 2,400 31 Closing J4 2,400 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 514 Dec. 31 450 31 Closing J4 450 0 ACCOUNT Rent Expense ACCOUNT NO. 517 Dec. 31 1,800 31 Closing J4 1,800 0 ACCOUNT Salaries Expense ACCOUNT NO. 519 Dec. 31 14,400 31 Closing J4 14,400 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Dec. 31 3,360 31 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

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) 960 960 960 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) 960 960 960 Totals 141,000 141,000 6,960 6,960 141,960 141,960 17,960 60,000 124,000 81,960 Net Income 42,040 42,040 60,000 60,000 124,000 124,000 104 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Dec. 31 Supplies Expense............................. 517 3,200 Supplies................................... 121 3,200 (b) 31 Advertising Expense........................... 526 2,800 Prepaid Advertising.......................... 131 2,800 (c) 31 Depreciation Expense Equipment................ 523 960 Accumulated Depreciation Equipment........... 142 960 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 401 60,000 Income Summary............................ 399 60,000 31 Income Summary.............................. 399 17,960 Salaries Expense............................ 511 9,600 Utilities Expense............................. 514 1,400 Supplies Expense............................ 517 3,200 Depreciation Expense Equipment.............. 523 960 Advertising Expense.......................... 526 2,800 31 Income Summary.............................. 399 42,040 Clifton Davis, Capital......................... 301 42,040 31 Clifton Davis, Capital........................... 301 4,000 Clifton Davis, Drawing........................ 302 4,000 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 8,000 31 Adjusting J3 3,200 4,800 ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 6,000 31 Adjusting J3 2,800 3,200 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 105

ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J3 960 960 ACCOUNT Clifton Davis, Capital ACCOUNT NO. 301 Dec. 31 71,000 31 Closing J4 42,040 113,040 31 Closing J4 4,000 109,040 ACCOUNT Clifton Davis, Drawing ACCOUNT NO. 302 Dec. 31 4,000 31 Closing J4 4,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 60,000 60,000 31 Closing J4 17,960 42,040 31 Closing J4 42,040 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec. 31 60,000 31 Closing J4 60,000 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 9,600 31 Closing J4 9,600 0 106 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec. 31 1,400 31 Closing J4 1,400 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J3 3,200 3,200 31 Closing J4 3,200 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J3 960 960 31 Closing J4 960 0 ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J3 2,800 2,800 31 Closing J4 2,800 0 CLIFTON AUTO DETAILING SERVICE Postclosing Trial December 31, Account Name Debit Credit Cash.............................. 62,100 Accounts Receivable................. 9,900 Supplies........................... 4,800 Prepaid Advertising................... 3,200 Equipment......................... 40,000 Accumulated Depreciation Equipment... 960 Accounts Payable.................... 10,000 Clifton Davis, Capital................. 109,040 Totals............................. 120,000 120,000 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

Problem 6.1B GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Jan. 31 Supplies Expense............................. 523 5,720 Supplies................................... 121 5,720 (b) 31 Insurance Expense............................ 514 740 Prepaid Insurance........................... 131 740 (c) 31 Depreciation Expense Machinery................ 511 2,240 Accumulated Depreciation Machinery........... 142 2,240 GENERAL JOURNAL PAGE 4 Closing Entries Jan. 31 Fees Income................................. 401 65,600 Income Summary............................ 399 65,600 31 Income Summary.............................. 399 48,400 Depreciation Expense Machinery.............. 511 2,240 Insurance Expense........................... 514 740 Rent Expense............................... 517 6,000 Salaries Expense............................ 520 32,000 Supplies Expense............................ 523 5,720 Telephone Expense.......................... 526 420 Utilities Expense............................. 529 1,280 31 Income Summary.............................. 399 17,200 Marvel Zimwalt, Capital....................... 301 17,200 31 Marvel Zimwalt, Capital......................... 301 4,800 Marvel Zimwalt, Drawing...................... 302 4,800 Analyze: The adjusting entry for expired insurance created a debit to Insurance Expense, increasing the Insurance Expense account balance to $740. 108 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

Problem 6.2B GENERAL JOURNAL PAGE 3 Adjusting Entries (a) Dec. 31 Supplies Expense............................. 517 1,000 Supplies................................... 121 1,000 (b) 31 Advertising Expense........................... 526 400 Prepaid Advertising.......................... 131 400 (c) 31 Depreciation Expense Equipment................ 523 500 Accumulated Depreciation Equipment........... 142 500 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 401 15,600 Income Summary............................ 399 15,600 31 Income Summary.............................. 399 7,300 Salaries Expense............................ 511 4,800 Utilities Expense............................. 514 600 Supplies Expense............................ 517 1,000 Depreciation Expense Equipment.............. 523 500 Advertising Expense.......................... 526 400 31 Income Summary.............................. 399 8,300 Randall Marshall, Capital...................... 301 8,300 31 Randall Marshall, Capital........................ 301 2,800 Randall Marshall, Drawing..................... 302 2,800 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 2,000 31 Adjusting J3 1,000 1,000 ACCOUNT Prepaid Advertising ACCOUNT NO. 131 Dec. 31 3,000 31 Adjusting J3 400 2,600 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 109

ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 Adjusting J3 500 500 ACCOUNT Randall Marshall, Capital ACCOUNT NO. 301 Dec. 31 27,400 31 Closing J4 8,300 35,700 31 Closing J4 2,800 32,900 ACCOUNT Randall Marshall, Drawing ACCOUNT NO. 302 Dec. 31 2,800 31 Closing J4 2,800 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 15,600 15,600 31 Closing J4 7,300 8,300 31 Closing J4 8,300 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec. 31 15,600 31 Closing J4 15,600 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Dec. 31 4,800 31 Closing J4 4,800 0 110 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Utilities Expense ACCOUNT NO. 514 Dec. 31 600 31 Closing J4 600 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Dec. 31 Adjusting J3 1,000 1,000 31 Closing J4 1,000 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Dec. 31 Adjusting J3 500 500 31 Closing J4 500 0 ACCOUNT Advertising Expense ACCOUNT NO. 526 Dec. 31 Adjusting J3 400 400 31 Closing J4 400 0 CEDAR CANYON NURSERY AND LAWN Postclosing Trial December 31, Account Name Debit Credit Cash.............................. 10,800 Accounts Receivable................. 2,000 Supplies........................... 1,000 Prepaid Advertising................... 2,600 Equipment......................... 20,000 Accumulated Depreciation Equipment... 500 Accounts Payable.................... 3,000 Randall Marshall, Capital.............. 32,900 Totals............................. 36,400 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

Problem 6.3B GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 401 54,000 Income Summary............................ 399 54,000 31 Income Summary.............................. 399 20,700 Advertising Expense.......................... 511 3,300 Depreciation Expense Equipment.............. 514 900 Rent Expense............................... 517 2,100 Salaries Expense............................ 519 10,800 Utilities Expense............................. 523 3,600 31 Income Summary.............................. 399 33,300 Shawn McGowan, Capital..................... 301 33,300 31 Shawn McGowan, Capital....................... 301 3,600 Shawn McGowan, Drawing.................... 302 3,600 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Dec. 31 3,000 ACCOUNT Prepaid Rent ACCOUNT NO. 131 Dec. 31 23,100 ACCOUNT Equipment ACCOUNT NO. 141 Dec. 31 36,000 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Dec. 31 900 112 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Shawn McGowan, Capital ACCOUNT NO. 301 Dec. 1 57,450 31 Closing J4 33,300 90,750 31 Closing J4 3,600 87,150 ACCOUNT Shawn McGowan, Drawing ACCOUNT NO. 302 Dec. 31 3,600 31 Closing J4 3,600 0 ACCOUNT Income Summary ACCOUNT NO. 399 Dec. 31 Closing J4 54,000 54,000 31 Closing J4 20,700 33,300 31 Closing J4 33,300 0 ACCOUNT Fees Income ACCOUNT NO. 401 Dec. 31 54,000 31 Closing J4 54,000 0 ACCOUNT Advertising Expense ACCOUNT NO. 511 Dec. 31 3,300 31 Closing J4 3,300 0 ACCOUNT Depreciation Expense Equip. ACCOUNT NO. 514 Dec. 31 900 31 Closing J4 900 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 113

ACCOUNT Rent Expense ACCOUNT NO. 517 Dec. 31 2,100 31 Closing J4 2,100 0 ACCOUNT Salaries Expense ACCOUNT NO. 519 Dec. 31 10,800 31 Closing J4 10,800 0 ACCOUNT Utilities Expense ACCOUNT NO. 523 Dec. 31 3,600 31 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.

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) 900 900 900 Depreciation Expense Computers (b) 80 80 80 Travel Expense 1,800 1,800 1,800 Utilities Expense 900 900 900 Totals 48,555 48,555 980 980 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

GENERAL JOURNAL PAGE 3 Adjusting Entries Jun. 30 Supplies Expense............................. 900 Supplies................................... 900 30 Depreciation Expense Computers................ 80 Accumulated Depreciation Computers.......... 80 GENERAL JOURNAL PAGE 4 Closing Entries Jun. 30 Fees Income................................. 401 22,650 Income Summary............................ 399 22,650 30 Income Summary.............................. 399 16,255 Salaries Expense............................ 511 12,575 Supplies Expense............................ 517 900 Depreciation Expense Computers.............. 523 80 Travel Expense.............................. 519 1,800 Utilities Expense............................. 514 900 30 Income Summary.............................. 399 6,395 Finley Graves, Capital........................ 301 6,395 30 Finley Graves, Capital.......................... 301 4,000 Finley Graves, Drawing....................... 302 4,000 GENERAL LEDGER ACCOUNT Supplies ACCOUNT NO. 121 Jun. 30 5,250 30 Adjusting J3 900 4,350 ACCOUNT Computers ACCOUNT NO. 131 Jun. 30 9,600 116 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Accumulated Depreciation Computers ACCOUNT NO. 142 Jun. 30 960 30 Adjusting J3 80 1,040 ACCOUNT Finley Graves, Capital ACCOUNT NO. 301 Jun. 30 20,745 30 Closing J4 6,395 27,140 30 Closing J4 4,000 23,140 ACCOUNT Finley Graves, Drawing ACCOUNT NO. 302 Jun. 30 4,000 30 Closing J4 4,000 0 ACCOUNT Income Summary ACCOUNT NO. 399 Jun. 30 Closing J4 22,650 22,650 30 Closing J4 16,255 6,395 30 Closing J4 6,395 0 ACCOUNT Fees Income ACCOUNT NO. 401 Jun. 30 22,650 30 Closing J4 22,650 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Jun. 30 12,575 30 Closing J4 12,575 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 117

ACCOUNT Utilities Expense ACCOUNT NO. 514 Jun. 30 900 30 Closing J4 900 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Jun. 30 Adjusting J3 900 900 30 Closing J4 900 0 ACCOUNT Travel Expense ACCOUNT NO. 519 Jun. 30 1,800 30 Closing J4 1,800 0 ACCOUNT Depreciation Expense Computers ACCOUNT NO. 523 Jun. 30 Adjusting J3 80 80 30 Closing J4 80 0 FINLEY GRAVES, CPA Postclosing Trial June 30, Account Name Debit Credit Cash.............................. 10,650 Accounts Receivable................. 3,780 Supplies........................... 4,350 Computers......................... 9,600 Accumulated Depreciation Computers.. 1,040 Accounts Payable.................... 4,200 Finley Graves, Capital................ 23,140 Totals............................. 28,380 28,380 Analyze: Net Income for Finley Graves, CPA for the month of June was $6,395. 118 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

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 170,580 170,580 7,200 7,200 171,780 171,780 19,980 82,500 151,800 89,280 Net Income 62,520 62,520 82,500 82,500 151,800 151,800 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 119

THE BARBER SHOP Income Statement Month Ended December 31, Revenue Fees Income...................... 82,500 Expenses Supplies Expense.................. 3,600 Insurance Expense................. 2,400 Salaries Expense.................. 11,100 Depreciation Expense Machinery..... 1,200 Utilities Expense................... 1,680 Total Expenses.................. 19,980 Net Income......................... 62,520 THE BARBER SHOP Statement of Owner s Equity Month Ended December 31, Tommy Brooks, Capital, December 1, 74,580 Net Income for December............. 62,520 Less Withdrawals for December......... 6,000 Increase in Capital................... 56,520 Tommy Brooks, Capital, December 31, 131,100 THE BARBER SHOP Sheet December 31, Assets Cash.............................. 40,800 Accounts Receivable................. 9,000 Supplies........................... 3,600 Prepaid Insurance................... 8,400 Machinery.......................... 84,000 Accumulated Depreciation Machinery... 1,200 82,800 Total Assets........................ 144,600 Liabilities and Owner s Equity Liabilities Accounts Payable.................. 13,500 Owner s Equity Tommy Brooks, Capital.............. 131,100 Total Liabilities and Owner s Equity...... 144,600 120 Chapter 6 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL PAGE 3 Adjusting Entries Dec. 31 Supplies Expense............................. 3,600 Supplies................................... 3,600 31 Insurance Expense............................ 2,400 Prepaid Insurance........................... 2,400 31 Depreciation Expense Machinery................ 1,200 Accumulated Depreciation Machinery........... 1,200 GENERAL JOURNAL PAGE 4 Closing Entries Dec. 31 Fees Income................................. 82,500 Income Summary............................ 82,500 31 Income Summary.............................. 19,980 Supplies Expense............................ 3,600 Insurance Expense........................... 2,400 Salaries Expense............................ 11,100 Depreciation Expense Machinery.............. 1,200 Utilities Expense............................. 1,680 31 Income Summary.............................. 62,520 Tommy Brooks, Capital....................... 62,520 31 Tommy Brooks, Capital......................... 6,000 Tommy Brooks, Drawing...................... 6,000 THE BARBER SHOP Postclosing Trial December 31, Account Name Debit Credit Cash.............................. 40,800 Accounts Receivable................. 9,000 Supplies........................... 3,600 Prepaid Insurance................... 8,400 Machinery.......................... 84,000 Accumulated Depreciation Machinery... 1,200 Accounts Payable.................... 13,500 Tommy Brooks, Capital................ 131,100 Totals............................. 145,800 145,800 Analyze: The net income would be $67,320. Copyright The McGraw-Hill Companies, Inc. All rights reserved. Chapter 6 121

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.......................... 41,500 Accumulated Depreciation..................... 8,500 Accounts Payable............................ 33,000 To correct errors made in closing entries The proof of this entry is: Fees Income..................... 98,000 Expenses: Salaries Expense................ 78,000 Supplies Expense................ 5,000 Depreciation Expense............ 2,400 85,400 Net Income....................... 12,600 Withdrawals...................... (7,000) Increase in Capital................. 5,600 Capital, Beginning................. 50,000 Capital, Ending.................... 55,600 Capital balance per Strutton s entries.. 97,100 Less debit from correcting entry....... (41,500) Corrected ending Capital balance..... 55,600 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.

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, $581,000,000 2. 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

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.

Mini-Practice Set 1: Service Business Accounting Cycle GENERAL JOURNAL PAGE 3 Jan. 2 Supplies..................................... 121 2,500 Cash...................................... 101 2,500 Bought supplies for cash, Check 1015 2 Prepaid Insurance............................. 134 3,600 Cash...................................... 101 3,600 Purchased one year of insurance, Check 1016 7 Cash........................................ 101 12,800 Accounts Receivable........................... 111 1,575 Fees Income................................ 401 14,375 Performed services for cash and on account 12 Cash........................................ 101 950 Accounts Receivable......................... 111 950 Received cash on account 12 Advertising Expense........................... 526 1,850 Cash...................................... 101 1,850 Paid for advertising on radio, Check 1017 13 Cash........................................ 101 2,000 Accounts Receivable......................... 111 2,000 Received cash on account 14 Cash........................................ 101 178 Supplies................................... 121 178 Returned damaged supplies for cash refund 15 Cash........................................ 101 16,050 Accounts Receivable........................... 111 1,590 Fees Income................................ 401 17,640 Performed services for cash & on account Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 125

GENERAL JOURNAL PAGE 4 Jan. 20 Supplies..................................... 121 1,700 Accounts Payable............................ 202 1,700 Bought supplies on account 20 Cash........................................ 101 8,950 Accounts Receivable........................... 111 4,670 Fees Income................................ 401 13,620 Performed services for cash & on account 20 Cash........................................ 101 1,450 Accounts Receivable......................... 111 1,450 Received cash on account 21 Maintenance Expense.......................... 529 3,275 Cash...................................... 101 3,275 Paid cash for equipment maintenance, Check 1018 22 Advertising Expense........................... 526 1,568 Cash...................................... 101 1,568 Paid cash for newspaper ads, Check 1019 23 Telephone Expense............................ 532 390 Cash...................................... 101 390 Paid monthly telephone bill, Check 1020 26 Cash........................................ 101 3,690 Accounts Receivable......................... 111 3,690 Received cash on account 27 Accounts Payable............................. 202 6,000 Cash...................................... 101 6,000 Made payment to creditor, Check 1021 28 Utilities Expense.............................. 514 560 Cash...................................... 101 560 Paid monthly utility bill, Check 1022 126 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

GENERAL JOURNAL PAGE 5 Jan. 29 Cash........................................ 101 13,870 Accounts Receivable........................... 111 1,530 Fees Income................................ 401 15,400 Performed services for cash & on account 31 Salaries Expense.............................. 511 12,500 Cash...................................... 101 12,500 Paid monthly salaries, Checks 1023 1027 31 Jason Taylor, Drawing.......................... 302 3,000 Cash...................................... 101 3,000 Owner withdrew cash for personal use, Check 1028 31 Maintenance Expense.......................... 529 980 Cash...................................... 101 980 Paid for monthly maintenance services, Check 1029 31 Equipment................................... 141 15,000 Cash...................................... 101 3,500 Accounts Payable............................ 202 11,500 Bought equipment for cash and on account, Check 1030 31 Cash........................................ 101 2,350 Accounts Receivable........................... 111 1,300 Fees Income................................ 401 3,650 Performed services for cash and on account Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 127

GENERAL JOURNAL PAGE 6 Adjusting Entries Jan. 31 Supplies Expense............................. 517 4,172 Supplies................................... 121 4,172 31 Insurance Expense............................ 535 300 Prepaid insurance........................... 134 300 31 Rent Expense................................ 520 3,500 Prepaid Rent............................... 137 3,500 31 Depreciation Expense Equipment................ 523 367 Accumulated Depreciation Equipment........... 142 367 Closing Entries 31 Fees Income................................. 401 64,685 Income Summary............................ 309 64,685 31 Income Summary.............................. 309 29,462 Salaries Expense............................ 511 12,500 Utilities Expense............................. 514 560 Supplies Expense............................ 517 4,172 Rent Expense............................... 520 3,500 Depreciation Expense Equipment.............. 523 367 Advertising Expense.......................... 526 3,418 Maintenance Expense........................ 529 4,255 Telephone Expense.......................... 532 390 Insurance Expense........................... 535 300 31 Income Summary.............................. 309 35,223 Jason Taylor, Capital......................... 301 35,223 31 Jason Taylor, Capital........................... 301 3,000 Jason Taylor, Drawing........................ 302 3,000 128 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

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 90,200 12 J3 950 91,150 12 J3 1,850 89,300 13 J3 2,000 91,300 14 J3 178 91,478 15 J3 16,050 107,528 20 J4 8,950 116,478 20 J4 1,450 117,928 21 J4 3,275 114,653 22 J4 1,568 113,085 23 J4 390 112,695 26 J4 3,690 116,385 27 J4 6,000 110,385 28 J4 560 109,825 29 J5 13,870 123,695 31 J5 12,500 111,195 31 J5 3,000 108,195 31 J5 980 107,215 31 J5 3,500 103,715 31 J5 2,350 106,065 ACCOUNT Accounts Receivable ACCOUNT NO. 111 Jan. 1 5,000 7 J3 1,575 6,575 12 J3 950 5,625 13 J3 2,000 3,625 15 J3 1,590 5,215 20 J4 4,670 9,885 20 J4 1,450 8,435 26 J4 3,690 4,745 29 J5 1,530 6,275 31 J5 1,300 7,575 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 129

ACCOUNT Supplies ACCOUNT NO. 121 Jan. 1 2,000 2 J3 2,500 4,500 14 J3 178 4,322 20 J4 1,700 6,022 31 Adjusting J6 4,172 1,850 ACCOUNT Prepaid Insurance ACCOUNT NO. 134 Jan. 2 J3 3,600 3,600 31 Adjusting J6 300 3,300 ACCOUNT Prepaid Rent ACCOUNT NO. 137 Jan. 1 3,500 31 Adjusting J6 3,500 0 ACCOUNT Equipment ACCOUNT NO. 141 Jan. 1 22,000 31 J5 15,000 37,000 ACCOUNT Accumulated Depreciation Equipment ACCOUNT NO. 142 Jan. 1 367 31 Adjusting J6 367 734 ACCOUNT Accounts Payable ACCOUNT NO. 202 Jan. 1 7,000 20 J4 1,700 8,700 27 J4 6,000 2,700 31 J5 11,500 14,200 130 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Jason Taylor, Capital ACCOUNT NO. 301 Jan. 1 108,633 31 Closing J6 35,223 143,856 31 Closing J6 3,000 140,856 ACCOUNT Jason Taylor, Drawing ACCOUNT NO. 302 Jan. 31 J5 3,000 3,000 31 Closing J6 3,000 0 ACCOUNT Income Summary ACCOUNT NO. 309 Jan. 31 Closing J6 64,685 64,685 31 Closing J6 29,462 35,223 31 Closing J6 35,223 0 ACCOUNT Fees Income ACCOUNT NO. 401 Jan. 7 J3 14,375 14,375 15 J3 17,640 32,015 20 J4 13,620 45,635 29 J5 15,400 61,035 31 J5 3,650 64,685 31 Closing J6 64,685 0 ACCOUNT Salaries Expense ACCOUNT NO. 511 Jan. 31 J5 12,500 12,500 31 Closing J6 12,500 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 131

ACCOUNT Utilities Expense ACCOUNT NO. 514 Jan. 28 J4 560 560 31 Closing J6 560 0 ACCOUNT Supplies Expense ACCOUNT NO. 517 Jan. 31 Adjusting J6 4,172 4,172 31 Closing J6 4,172 0 ACCOUNT Rent Expense ACCOUNT NO. 520 Jan. 31 Adjusting J5 3,500 3,500 31 Closing J6 3,500 0 ACCOUNT Depreciation Expense Equipment ACCOUNT NO. 523 Jan. 31 Adjusting J6 367 367 31 Closing J6 367 0 ACCOUNT Advertising Expense ACCOUNT NO. 526 Jan. 12 J3 1,850 1,850 22 J4 1,568 3,418 31 Closing J6 3,418 0 132 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

ACCOUNT Maintenance Expense ACCOUNT NO. 529 Jan. 21 J4 3,275 3,275 31 J5 980 4,255 31 Closing J6 4,255 0 ACCOUNT Telephone Expense ACCOUNT NO. 532 Jan. 23 J4 390 390 31 Closing J6 390 0 ACCOUNT Insurance Expense ACCOUNT NO. 535 Jan. 31 Adjusting J6 300 300 31 Closing J6 300 0 Copyright The McGraw-Hill Companies, Inc. All rights reserved. Mini-Practice Set 1 133

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 106,065 106,065 106,065 Accounts Receivable 7,575 7,575 7,575 Supplies 6,022 (a) 4,172 1,850 1,850 Prepaid Rent 3,500 (b) 3,500 0 0 Prepaid Insurance 3,600 (c) 300 3,300 3,300 Equipment 37,000 37,000 37,000 Accumulated Deprec. Equip. 367 (d) 367 734 734 Accounts Payable 14,200 14,200 14,200 Jason Taylor, Capital 108,633 108,633 108,633 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 560 560 560 Supplies Expense (a) 4,172 4,172 4,172 Rent Expense (b) 3,500 3,500 3,500 Depreciation Expense Equip. (d) 367 367 367 Insurance Expense (c) 300 300 300 Advertising Expense 3,418 3,418 3,418 Telephone Expense 390 390 390 Maintenance Expense 4,255 4,255 4,255 Totals 187,885 187,885 8,339 8,339 188,252 188,252 29,462 64,685 158,790 123,567 Net Income 35,223 35,223 64,685 64,685 158,790 158,790 134 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.

JT S CONSULTING SERVICES Income Statement Month Ended January 31, Revenue Fees Income...................... 64,685 Expenses Salaries Expense.................. 12,500 Utilities Expense................... 560 Supplies Expense.................. 4,172 Rent Expense..................... 3,500 Depreciation Expense Equipment.... 367 Insurance Expense................. 300 Advertising Expense................ 3,418 Telephone Expense................ 390 Maintenance Expense.............. 4,255 Total Expenses.................. 29,462 Net Income......................... 35,223 JT S CONSULTING SERVICES Statement of Owner s Equity Month Ended January 31, Jason Taylor, Capital, January 1,.... 108,633 Net Income for January............... 35,223 Less Withdrawals for January.......... 3,000 Increase in Capital for January.......... 32,223 Jason Taylor, Capital, January 31,... 140,856 JT S CONSULTING SERVICES Postclosing Trial January 31, Account Name Debit Credit Cash.............................. 106,065 Accounts Receivable................. 7,575 Supplies........................... 1,850 Prepaid Insurance................... 3,300 Equipment......................... 37,000 Accumulated Depreciation Equipment... 734 Accounts Payable.................... 14,200 Jason Taylor, Capital................. 140,856 Totals............................. 155,790 155,790 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

JT S CONSULTING SERVICES Sheet January 31, Assets Cash................................. 106,065 Accounts Receivable.................... 7,575 Supplies.............................. 1,850 Prepaid Insurance....................... 3,300 Equipment............................. 37,000 Less Accumulated Depreciation Equipment.. 734 36,266 Total Assets............................ 155,056 Liabilities & Owner s Equity Liabilities Accounts Payable..................... 14,200 Owner s Equity Jason Taylor, Capital................... 140,856 Total Liabilities & Owner s Equity........... 155,056 136 Mini-Practice Set 1 Copyright The McGraw-Hill Companies, Inc. All rights reserved.