1. Journalize transactions. Post entries to the ledger accounts. Prepare trial balance. Make end-of- year adjustments. Prepare adjusted trial balance. Recall from the accounting cycle discussed in Chapter 3, that after the adjusting entries are made, an adjusted trial balance is prepared. Effects of the Adjusting Entries 1

2. End of Chapter 4 2

3. Chapter 5 THE ACCOUNTING CYCLE: Adjusted Trial Balance 3

4. This is the Adjusted Trial Balance for JJ’s. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. 4

5. Net income also appears on the Statement of Owner’s Equity. 5

6. Business Earnings Dividends Business Losses This statement summarizes the increases and decreases in Retained Earnings during the period. Statement of Retained Earnings 6

7. Now, let’s prepare the Balance Sheet. 7

8. Next, let’s prepare the Statement of Cash Flows for JJ’s Lawn Care Service for May. 8

9. 9

10. Notes to the Financial Statements Examples of Items Disclosed  Lawsuits pending  Scheduled plant closings  Governmental investigations  Significant events occurring after the balance sheet date  Specific customers that account for a large portion of revenue  Unusual transactions and related party transactions Examples of Items Disclosed  Lawsuits pending  Scheduled plant closings  Governmental investigations  Significant events occurring after the balance sheet date  Specific customers that account for a large portion of revenue  Unusual transactions and related party transactions Drafting Notes to the Financial Statements 10

11. Adjusted Trial Balance of “Net Solution” 11

12. NetSolutions’ Adjusted Trial Balance for December 31, 2005 12

13. NetSolutions Adjusted Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 720 00 Supplies760 00 Prepaid Insurance2 300 00 Land20 000 00 Office Equipment1 800 00 Accumulated Depreciation50 00 Accounts Payable900 00 Wages Payable250 00 Unearned Rent240 00 Capital Stock25 000 00 Dividends4 000 00 Fees Earned16 840 00 Rent Revenue120 00 Wages Expense4 525 00 Rent Expense1 600 00 Utilities Expense985 00 Continued 13

14. NetSolutions Trial Balance December 31, 2005 Cash2 065 00 Accounts Receivable2 720 00 Supplies760 00 Prepaid Insurance2 300 00 Land20 000 00 Office Equipment1 800 00 Utilities Expense985 00 Supplies Expense2 040 00 Insurance Expense100 00 Miscellaneous Expense455 0043 400 00 14

15. Work Sheet 15

16. The Work Sheet Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, stockholders’ equity, revenues, and expenses. 16

17. Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered. Adjustments are entered here. Two possibilities: 1. Deferrals – Existing balances are changed. 2. Accruals – New information is entered. Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB The Work Sheet 17

18. The Work Sheet Adjustments are combined with the trial balance. Account balances are now adjusted. Trial Balance AccountsDrCrDrCrDrCr AdjustmentsAdjusted TB 18

19. Cash2,065 Accounts Receivable2,220 Supplies2,000 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 The Unadjusted Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 19

20. (a) The Supplies account has a debit of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used during the two-month period. 20

21. Cash2,065 Accounts Receivable2,220 Supplies2,000 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 (a) 1,240 21

22. (b)The Prepaid Insurance account has a debit balance of $2,400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2,400 ÷ 24). 22

23. Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 Accounts are added as needed. (b) 100 23

24. (c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months’ rent beginning with December 1. Thus, the rent revenue for December is $120. FOR RENT 24

25. Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 (c) 120 Rent Revenue(c) 120 25

26. (d) Wages accrued but not paid at the end of December total $250. 26

27. Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 (d) 250 27

28. (e) Fees accrued at the end of December, but not recorded, total $500. 28

29. Cash2,065 Accounts Receivable2,220 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 (e) 500 29

30. (f) Depreciation of the office equipment is $50 for December. 30

31. Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 50 31

32. Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance NetSolutions Work Sheet For the Two Months Ended December 31, 2005 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 50 To make more space, let’s remove the heading. 32

33. Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,260 Summed and ruled 33

34. Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance. 34

35. Cash2,065 Accounts Receivable2,220(e) 500 Supplies2,000(a) 1,240 Prepaid Insurance2,400(b) 100 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent360(c) 120 Capital Stock25,000 Dividends4,000 Fees Earned16,340(e) 500 Wages Expense4,275(d) 250 Rent Expense1,600 Utilities Expense985 Supplies Expense800(a) 1,240 Miscellaneous Expense45542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 100 Rent Revenue (c) 120 Wages Payable(d) 250 Depreciation Expense(f) 50 Accum. Depreciation(f) 502,260 35

36. Cash2,0652,065 Accounts Receivable2,220(e) 5002,720 Supplies2,000(a) 1,240760 Prepaid Insurance2,400(b) 1002,300 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent360(c) 120240 Capital Stock25,00025,000 Dividends4,0004,000 Fees Earned16,340(e) 50016,840 Wages Expense4,275(d) 2504,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense800(a) 1,2402,040 Miscellaneous Expense45545542,600 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Adjustments Trial Balance 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense(b) 100 100 Rent Revenue (c) 120120 Wages Payable(d) 250250 Depreciation Expense(f) 5050 Accum. Depreciation(f) 5050 2,2602,26043,40043,400 36

37. Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet The Work Sheet 37

38. Asset, liability, and stockholders’ equity balances in the Adjusted Trial Balance column are extended to the Balance Sheet column. Adjusted TB AccountsDrCrDrCrDrCr Income State.Balance Sheet The Work Sheet 38

39. To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed. 39

40. Cash2,065 Accounts Receivable2,720 Supplies760 Prepaid Insurance2,300 Land20,000 Office Equipment1,800 Accounts Payable900 Unearned Rent240 Capital Stock25,000 Dividends4,000 Fees Earned16,840 Wages Expense4,525 Rent Expense1,600 Utilities Expense985 Supplies Expense2,040 Miscellaneous Expense455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense100 Rent Revenue 120 Wages Payable250 Depreciation Expense50 Accum. Depreciation50 43,40043,400 40

41. Now, let’s extend the balances from the Adjusted Trial Balance column. 41

42. Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,3002,300 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Capital Stock25,00025,000 Dividends4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense100100 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,400 42

43. These four columns are summed. 43

44. Cash2,0652,065 Accounts Receivable2,7202,720 Supplies760760 Prepaid Insurance2,3002,300 Land20,00020,000 Office Equipment1,8001,800 Accounts Payable900900 Unearned Rent240240 Capital Stock25,00025,000 Dividends4,0004,000 Fees Earned16,84016,840 Wages Expense4,5254,525 Rent Expense1,6001,600 Utilities Expense985985 Supplies Expense2,0402,040 Miscellaneous Expense455455 Account TitleDebitCreditDebitCreditDebitCredit Adjusted Trial Balance Income Statement Balance Sheet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Insurance Expense100100 Rent Revenue 120120 Wages Payable250250 Depreciation Expense5050 Accum. Depreciation5050 43,40043,4009,75516,96033,64526,440 44

45. The difference between the Income Statement column totals is the net income (or net loss) for the period. 45

46. The difference between the Balance Sheet column totals is also the income (or net loss) for the period. 46

47. 9,75516,96033,64526,4407,205 16,96016,96033,64533,645 Income Statement Balance Sheet Net Income 47

48. NetSolutions Income Statement For Two Months Ended December 31, 2005 Fees earned$16,840 Rent revenue120 Total revenues$16,960 Expenses: Wages expense$ 4,525 Supplies expense2,040 Rent expense1,600 Utilities expense985 Insurance expense100 Depreciation expense50 Miscellaneous expense455 Total expenses 9,755 Net income $ 7,205 Every amount on this income statement was taken from the Income Statement column of the work sheet. 48

49. NetSolutions Retained Earnings Statement For the Two Months Ended December 31, 2005 Net income for November and December 7,205 Less dividends 4,000 Retained earnings, December 31, 2005$3,205 Either from the income statement or the work sheet. From the Balance Sheet debit column of the work sheet. 49

50. NetSolutions Balance Sheet December 31, 2005 Assets Liabilities Current assets: Current liabilities: Cash$ 2,065Accounts payable$900 Accounts receivable2,720Wages payable250 Supplies 760Unearned rent240 Prepaid insurance 2,300Total liabilities$ 1,390 Total current assets$ 7,845 Property, plant, and equipment: Land$20,000 Office equip.$1,800 Less accum. depreciation 50 1,750Capital stock$25,000 Total property, plant Retained earnings 3,205 28,205 and equipment 21,750Total liabilities and Total assets$29,595stockholders’ equity$29,595 Assets Liabilities Current assets: Current liabilities: Cash$ 2,065Accounts payable$900 Accounts receivable2,720Wages payable250 Supplies 760Unearned rent240 Prepaid insurance 2,300Total liabilities$ 1,390 Total current assets$ 7,845 Property, plant, and equipment: Land$20,000 Office equip.$1,800 Less accum. depreciation 50 1,750Capital stock$25,000 Total property, plant Retained earnings 3,205 28,205 and equipment 21,750Total liabilities and Total assets$29,595stockholders’ equity$29,595 Stockholders’ Equity From the Retained Earnings Statement 50

51. End of Today’s Session 51