1

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Completing the
Accounting
Cycle
1

tothis
edit
Master
title
style
After Click
completing
chapter,
you should
be able
to:
1. The Matching Concept
2. Nature of the Adjusting Process
3. Recording Adjusting Entries
4. Summary of Adjustment Process
5. Prepare the Financial Statement
6. Prepare the Closing Entries

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3-1

Reporting Revenue and Expense

TWO METHODS
Cash Basis of Accounting
Accrual Basis of Accounting

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3-1

Cash Basis of Accounting

Revenue reported when cash is received

Expense reported when cash is paid

Does not properly match revenues and

expenses

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3-1

Accrual Basis of Accounting

Revenue reported when earned

Expense reported when incurred

Properly matches revenues and expenses

in determining net income

Requires adjusting entries at end of period

It just sounds mean it really isnt

Click to edit Master title style

3-1

The
The Matching
Matching Concept
Concept
Debits = Credits

Liabilities
Assets

Owners
Equity

Expenses

Revenues
6

The
The Matching
Matching Concept
Concept

Click to edit Master title style

3-1

Debits = Credits

Liabilities
Assets

Owners
Equity
Net
Income

Expenses

Revenues

ClickThetoMatching
edit Master
title
style
Concept

3-1

The Matching Concept

Debits = Credits

Liabilities
Assets

Owners
Equity
Net
Income

Expenses

Revenues
matching

Net income is determined by properly

matching expenses and revenues.

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title
style
NetSolutions

3-1

Unadjusted Trial Balance

December 31, 2002

Assets

11
12
14
15
17
18

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment

2,065
2,220
2,000
2,400
20,000
1,800

10

Click to edit Master title style

3-1

NetSolutions
Unadjusted Trial Balance
December 31, 2002

Liabilities

11
12
14
15
17
18
21
23

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent

2,065
2,220
2,000
2,400
20,000
1,800
900
360

10

11

Click to edit Master

title
style
NetSolutions

3-1

Unadjusted Trial Balance

December 31, 2002

Owners
Equity

11
12
14
15
17
18
21
23
31
32

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing

2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000

11

12

Click to edit Master

title
style
NetSolutions

3-1

Unadjusted Trial Balance

December 31, 2002

Revenue

11
12
14
15
17
18
21
23
31
32
41

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned

2,065
2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340

12

13

NetSolutions
Unadjusted Trial Balance
December 31, 2002

Click11toCashedit Master title

style
2,065

Expenses

12
14
15
17
18
21
23
31
32
41
51
52
54
55
59

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

3-1

2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600

42,600

13

14

NetSolutions
Unadjusted Trial Balance
December 31, 2002

Click11toCashedit Master title

style
2,065
12
14
15
17
18
21
23
31
32
41
51
52
54
55
59

Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accounts Payable
Unearned Rent
Chris Clark, Capital
Chris Clark, Drawing
Fees Earned
Wages Expense
Rent Expense
Utilities Expense
Supplies Expense
Miscellaneous Expense

3-1

2,220
2,000
2,400
20,000
1,800
900
360
25,000
4,000
16,340
4,275
1,600
985
800
455
42,600

42,600

14

15

NetSolutions
Expanded Chart of Accounts

Click
to
edit
Master
title
style
Balance Sheet
Income Statement
1.
11
12
14
15
17
18
19

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation

2.
21
22
23

Liabilities
Accounts Payable
Wages Payable
Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

3-1

4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense

15

16

NetSolutions
Expanded Chart of Accounts

Click
to
edit
Master
title
style
Balance Sheet
Income Statement
1.
11
12
14
15
17
18
19

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation

2.
21
22
23

Liabilities
Accounts Payable
Wages Payable
Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

3-1

4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense

16

17

NetSolutions
Expanded Chart of Accounts

Click
to
edit
Master
title
style
Balance Sheet
Income Statement
1.
11
12
14
15
17
18
19

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation

2.
21
22
23

Liabilities
Accounts Payable
Wages Payable
Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

3-1

4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense

17

18

NetSolutions
Expanded Chart of Accounts

Click
to
edit
Master
title
style
Balance Sheet
Income Statement
1.
11
12
14
15
17
18
19

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation

2.
21
22
23

Liabilities
Accounts Payable
Wages Payable
Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

3-1

4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense

18

19

NetSolutions
Expanded Chart of Accounts

Click
to
edit
Master
title
style
Balance Sheet
Income Statement
1.
11
12
14
15
17
18
19

Assets
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation

2.
21
22
23

Liabilities
Accounts Payable
Wages Payable
Unearned Rent

3. Owners Equity
31 Chris Clark, Capital
32 Chris Clark, Drawing

3-1

4. Revenue
41 Fees Earned
42 Rent Revenue
5.
51
52
53
54
55
56
59

Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Supplies Expense
Insurance Expense
Miscellaneous Expense

19

20

Click to edit Master title style

3-1

Adjustments
Adjustments Deferrals
Deferrals and
and Accruals
Accruals
Revenues

Current Period

Future Period

Deferrals

Cash Received

Revenue Recorded

20

21

Click to edit Master title style

3-1

Adjustments
Adjustments Deferrals
Deferrals and
and Accruals
Accruals
Revenues

Current Period

Future Period

Deferrals

Cash Received

Revenue Recorded

Accruals

Revenue Recorded

Cash Received

21

22

Click
to
edit
Master
title
style
Adjustments Deferrals and Accruals

3-1

Adjustments Deferrals and Accruals

Revenues

Current Period

Future Period

Deferrals

Cash Received

Revenue Recorded

Accruals

Revenue Recorded

Cash Received

Current Period

Future Period

Expenses
Deferrals

Cash Paid

Expense Recorded
22

23

Click
to
edit
Master
title
style
Adjustments Deferrals and Accruals

3-1

Adjustments Deferrals and Accruals

Revenues

Current Period

Future Period

Deferrals

Cash Received

Revenue Recorded

Accruals

Revenue Recorded

Cash Received

Current Period

Future Period

Expenses
Deferrals
Accruals

Cash Paid
Expense Recorded

Expense Recorded
Cash Paid
23

24

Adjustments
Adjustments Deferred
Deferred Expense
Expense

Click to edit Master title style

3-1

On December 1, NetSolutions purchased insurance

for 24 months at a cost of $2,400.

Example P1 Purchase initially recorded as an asset.

Cash
P1..... 2,400

Prepaid Insurance
P1..... 2,400

Adjustment A1 Record
insurance used for
December, $100.
Assets

Insurance Expense
Expenses

24

25

Adjustments
Adjustments Deferred
Deferred Expense
Expense

Click to edit Master title style

3-1

On December 1, NetSolutions purchased insurance

for 24 months at a cost of $2,400.

Example P1 Purchase initially recorded as an asset.

Adjustment A1 Record
insurance used for
December, $100.

Cash
P1..... 2,400

Prepaid Insurance
P1..... 2,400

Assets

A1..... 100

A1

Insurance Expense
A1.....100

A1

Expenses

25

26

Adjustments Deferred Expense

Click to edit Master title style

3-1

On December 1, NetSolutions purchased insurance

for 24 months at a cost of $2,400.

Example P2 Purchase initially recorded as an expense.

Cash
P2..... 2,400

Prepaid Insurance

Adjustment A2 Record
insurance unused as of
December 31.
Assets

Insurance Expense
P2..... 2,400

Expenses

26

27

Adjustments Deferred Expense

Click to edit Master title style

3-1

On December 1, NetSolutions purchased insurance

for 24 months at a cost of $2,400.

Example P2 Purchase initially recorded as an expense.

Adjustment A2 Record
insurance unused as of
December 31.

Cash
P2..... 2,400

Prepaid Insurance

Assets

A2..... 2,300
A2

A2

Insurance Expense
P2..... 2,400 A2.....2,300

Expenses

27

28

Adjustments Deferred Revenue

Click to edit Master title style

3-1

On December 1, NetSolutions received cash of $360 for

three months rent beginning December 1.
Example S1 Sale initially recorded as a liability.
Cash
S1..... 360

Unearned Rent
S1..... 360

Adjustment A3 Record rent

earned for December.

Liabilities

Rent Revenue
Revenues

28

29

Adjustments Deferred Revenue

Click to edit Master title style

3-1

On December 1, NetSolutions received cash of $360 for

three months rent beginning December 1.
Example S1 Sale initially recorded as a liability.
Cash
S1..... 360

Unearned Rent
A3..... 120
A3

S1..... 360

Adjustment A3 Record rent

earned for December.

Liabilities
A3

Rent Revenue
A3.....120

Revenues

29

30

Adjustments Deferred Revenue

Click to edit Master title style

3-1

On December 1, NetSolutions received cash of $360 for

three months rent beginning December 1.
Example S2 Sale initially recorded as revenue.
Cash
S2..... 360

Unearned Rent

Adjustment A4 Record rent

unearned as of December 31.

Liabilities

Rent Revenue
S2.....360

Revenues

30

31

Adjustments Deferred Revenue

Click to edit Master title style

3-1

On December 1, NetSolutions received cash of $360 for

three months rent beginning December 1.
Example S2 Sale initially recorded as revenue.
Cash
S2..... 360

Unearned Rent

Adjustment A4 Record rent

unearned as of December 31.

Liabilities

A4..... 240
A4

A4

Rent Revenue
A4..... 240

S2.....360

Revenues

31

32

Adjustments Accrued Expense

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3-1

NetSolutions received employee services for the last two

days of December amounting to $250, to be paid later.
Adjustment A5 Record accrued wages of $250.

Wages Payable

Liabilities

Wages Expense
Bal.....4,275

Expenses

32

33

Adjustments Accrued Expense

Click to edit Master title style

3-1

NetSolutions received employee services for the last two

days of December amounting to $250, to be paid later.
Adjustment A5 Record accrued wages of $250.

Wages Payable

Liabilities

A5..... 250
A5

Wages Expense
Bal.....4,275
A5.....250

A5

Expenses

33

34

Adjustments Accrued Revenue

Click to edit Master title style

As of December 31, NetSolutions provided 25 hours of
services at $20 per hour to be billed next month.
Adjustment A6 Record accrued fees earned of $500.

Accounts Receivable
Bal.....2,220

Assets

Fees Earned
Bal....16,340

Revenues

34

35

Adjustments Accrued Revenue

Click to edit Master title style

3-1

As of December 31, NetSolutions provided 25 hours of

services at $20 per hour to be billed next month.
Adjustment A6 Record accrued fees earned of $500.

Accounts Receivable

Assets

Bal.....2,220
A6..... 500

A6

Fees Earned
Bal....16,340
A6.....500

A6

Revenues

35

36

Summary of Adjustments

Click to edit Master title style

3-1

Buying Side

Deferred
Expenses
Assets
A1

A2

Expenses
Rearranging
the Debits

36

37

Summary of Adjustments

Click to edit Master title style

Buying Side

Selling Side

Deferred
Expenses

Deferred
Revenues

Assets

Liabilities

A1

A2

3-1

A3

A4

Expenses

Revenues

Rearranging
the Debits

Rearranging
the Credits

37

38

Summary of Adjustments

Click to edit Master title style

Buying Side

3-1

Selling Side

Accrued
Expenses
Liabilities
A5

Expenses
Adding a New
Transaction

38

39

Summary of Adjustments

Click to edit Master title style

Buying Side

3-1

Selling Side

Accrued
Expenses

Accrued
Revenues

Liabilities

Assets

A5

A6

Expenses

Revenues

Adding a New
Transaction

Adding a New
Transaction

39

40

Summary of Adjustments

Click to edit Master title style

Buying Side

Selling Side

Deferred
Expenses

Accrued
Expenses

Deferred
Revenues

Accrued
Revenues

Assets

Liabilities

Liabilities

Assets

A1

A2

Expenses

A5

Expenses

Rearranging Adding a New

the Debits
Transaction

3-1

A3

A4

Revenues

A6

Revenues

Rearranging Adding a New

the Credits
Transaction

40

41

NetSolutions
Income Statement
For Two Months Ended December 31, 2002

Click to edit Master title style

Fees earned
Rent revenue
Total revenues
Expenses:
Wages expense
Supplies expense
Rent expense
Utilities expense
Insurance expense
Depreciation expense
Miscellaneous expense
Total expenses
Net income

3-1

$16,840
120
$16,960
$ 4,525
2,040
1,600
985
100
50
455
9,755
$ 7,205

41

42

Click to edit Master title style

NetSolutions
Statement of Owners Equity
For Two Months Ended December 31, 2002

Chris Clark, capital, November 1, 2002

Investment on November 1, 2002
Net income for November and December
Less withdrawals
Increase in owners equity
Chris Clark, capital, December 31, 2002

3-1

$15,000
7,205
$22,205
4,000
18,205
$18,205

42

43

NetSolutions
Balance Sheet
December 31, 2002
ASSETS
Current assets:
Cash
$ 2,065
Accounts receivable
2,720
Supplies
760
Prepaid insurance
2,300
Total current assets
$ 7,845
Property, plant, and
equipment:
Land
$20,000
Office equipment
1,800
Less accum. depr.
(50)
Total property, plant,
and equipment
11,750
Total assets
$29,595

Click to edit Master title style

3-1

43

44

NetSolutions
Balance Sheet
December 31, 2002

Click to edit Master title style

LIABILITIES
Current liabilities:
Accounts payable
Wages payable
Unearned rent
Total liabilities
OWNERS EQUITY
Chris Clark, capital
Total liabilities and
owners equity

3-1

$ 900
250
240
$ 1,390
28,205
$29,595
44

45

The Closing Process

3-1

Click to edit Master title style

Fees Earned

Wages Expense
Bal.
4,525
Rent Expense
Bal.
1,600
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
985
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Miscellaneous Expense
Bal.
455

Income Summary

Bal.
16,840
Rent Revenue
Bal.
120

Chris Clark, Capital

Bal.
15,000

Chris Clark, Drawing

Bal.
4,000

Note: The balances

shown are adjusted
balances before closing.
The following sequence
demonstrates the closing
process.

45

46

The Closing Process

Click to edit Master title style

Fees Earned

Wages Expense

Bal.
4,525
Rent Expense
Bal.
1,600
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
985
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Miscellaneous Expense
Bal.
455

3-1

Income Summary
16,960
Total
Revenues

Chris Clark, Capital

Bal.
16,840
Rent Revenue

16,840

120

Bal.
120

Close Revenues

Bal.
25,000

Chris Clark, Drawing

Bal.
4,000

46

47

The Closing Process

Click to edit Master title style

Fees Earned

Wages Expense

Bal.
4,525
4,525
Rent Expense
Bal.
1,600
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455

3-1

Income Summary
9,755
Total
Expenses

16,960
Total
Revenues

Chris Clark, Capital

Bal.
25,000

Bal.
16,840
Rent Revenue

16,840

120

Bal.
120

Close Revenues
Close Expenses

Chris Clark, Drawing

Bal.
4,000

47

48

The Closing Process

Click to edit Master title style

Fees Earned

Wages Expense

Bal.
4,525
4,525
Rent Expense
Bal.
1,600
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455

3-1

Income Summary
9,755

16,960

7,205

120

Closed

Chris Clark, Capital

Bal.
15,000
7,205
Net Income
Chris Clark, Drawing
Bal.
4,000

Bal.
16,840
Rent Income

16,840

Bal.
120

Close Revenues
Close Expenses
Close Income Summary

48

49

The Closing Process

Click to edit Master title style

Fees Earned

Wages Expense

Bal.
4,525
4,525
Rent Expense
Bal.
1,600
1,600
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455

3-1

Income Summary
9,755

16,960

7,205

120

Closed

Chris Clark, Capital

4,000
Drawing

Bal.
16,840
Rent Income

16,840

Bal.
15,000
7,205
Net Income

Bal.
120

Close Revenues
Close Expenses
Close Income Summary
Close Drawing

Chris Clark, Drawing

Bal.
4,000
4,000
Closed

49

50

The Closing Process

Click to edit Master title style

3-1

Fees Earned

Wages Expense

Income Summary
Rent Expense

Rent Income

Depreciation Expense
Utilities Expense
Chris Clark, Capital
Supplies Expense
Insurance Expense
Miscellaneous Expense

4,000

Bal.
15,000
7,205
Bal.
18,205

Chris Clark, Drawing

Drawing
Net Income
All temporary accounts
now have zero balances
and are ready for the50
next accounting period.

51

Click to edit Master

title
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NetSolutions

3-1

Post-Closing Trial Balance

December 31, 2002

Assets

11
12
14
15
17
18
19
21
22
23
31

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital

2,065
2,720
760
2,300
20,000
1,800

29,645

50
900
250
240
28,205
29,645

51

52

Click to edit Master

title
style
NetSolutions

3-1

Post-Closing Trial Balance

December 31, 2002

Liabilities

11
12
14
15
17
18
19
21
22
23
31

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital

2,065
2,720
760
2,300
20,000
1,800

29,645

50
900
250
240
28,205
19,645

52

53

Click to edit Master

title
style
NetSolutions

3-1

Post-Closing Trial Balance

December 31, 2002

Owners
Equity

11
12
14
15
17
18
19
21
22
23
31

Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital

2,065
2,720
760
2,300
20,000
1,800

29,645

50
900
250
240
28,205
29,645

53

54

Click3
Chapter

to editPower
Master
title style
Notes

3-1

Analyzing Transactions

This is the last slide in Chapter 3.

54