Chapter 5 Completion of the Accounting Cycle

5-1 Work Sheet Form and Procedure Trial Balance AdjustmentsAdjusted Trial Balance Income Statement Balance Sheet Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr. Work Sheet Account Titles (Ledger account titles) (Additional account titles for adjustments) 1. Prepare a trial balance on the work sheet. 2. Enter adjustment data. 3. Enter adjusted balances. 4. Extend adjusted balances to appropriate statement columns. 5. Total the statement columns, compute net income, (or net loss), and complete work sheet.

5-2 Step 1: Prepare a Trial Balance on the Work Sheet INTERNATIONAL TRAVEL AGENCY, INC. Work Sheet For Month Ended March 31, 2008 Trial Balance Account TitlesDr.Cr. Cash15 Accounts Receivable5 Prepaid Insurance4 Office Equipment20 Accumulated Depreciation Accounts Payable4 Common Stock10 Dividends220 Travel Service Revenue26 Depreciation Expense2 Rent Expense2 Salaries Expense10 Totals60 Trial balance amounts are taken directly from ledger accounts. Step 1

INTERNATIONAL TRAVEL AGENCY, INC. Work Sheet For Month Ended March 31, Step 2: Enter the Adjustments in the Adjustments Column Trial BalanceAdjustments Account TitlesDr.Cr.Dr.Cr. Cash15 Accounts Receivable5 Prepaid Insurance4(a) 1 Office Equipment20 Accumulated Depreciation4(b) 2 Accounts Payable10 Common Stock20 Dividends2 Travel Service Revenue26 Depreciation Expense2(b) 2 Rent Expense2 Salaries Expense10(c) 5 Totals60 Insurance Expense(a) 1 Salaries Payable(c) 5 Totals88 Step 2 Enter adjustment amounts in appropriate columns, total adjustments columns and check for equality. ADJUSTMENT DATA: (a)Prepaid Insurance expired during March, $1. (b)Depreciation expense on office equipment for March, $2. (c)Salaries expense incurred at the end of March but not yet paid, $5.

5-4 Step 3: Enter the Adjusted Balances in the Adjusted Trial Balance Trial BalanceAdjustmentsAdjusted Trail Balance Account TitlesDr.Cr.Dr.Cr.Dr.Cr. Cash15 Accounts Receivable55 Prepaid Insurance4(a) 13 Office Equipment20 Accumulated Depreciation 4(b) 26 Accounts Payable10 Common Stock20 Dividends22 Travel Service Revenue26 Depreciation Expense2(b) 24 Rent Expense22 Salaries Expense10(c) 515 Totals60 Insurance Expense(a) 11 Salaries Payable(c) 5 5 Totals8867 INTERNATIONAL TRAVEL AGENCY, INC. Work Sheet For Month Ended March 31, 2008 Step 3 Combine trial balance amounts with adjustment amounts to obtain the adjusted trail balance.

5-5 Step 4: Extend the Adjusted Trial Balance to the Appropriate Financial Statements Trial BalanceAdjustments Adjusted Trail Balance Income Statement Balance Sheet Account TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr. Cash15 Accounts Receivable555 Prepaid Insurance4(a) 133 Office Equipment20 Accumulated Depreciation4(b) 266 Accounts Payable10 Common Stock20 Dividends222 Travel Service Revenue26 Depreciation Expense2(b) 244 Rent Expense222 Salaries Expense10(c) 515 Totals60 Insurance Expense(a) 111 Salaries Payable(c) 5 55 Totals INTERNATIONAL TRAVEL AGENCY, INC. Work Sheet For Month Ended March 31, 2008

5-6 Step 5: Total the Statement Columns, Compute Net Income, and Complete the Work Sheet Trial BalanceAdjustmentsAdjusted Trail BalanceIncome StatementBalance Sheet Account TitlesDr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr. Cash15 Accounts Receivable555 Prepaid Insurance4(a) 133 Office Equipment20 Accumulated Depreciation4(b) 266 Accounts Payable10 Common Stock20 Dividends222 Travel Service Revenue26 Depreciation Expense2(b) 244 Rent Expense222 Salaries Expense10(c) 515 Totals60 Insurance Expense(a) 111 Salaries Payable(c) 5 55 Totals Net Income44 Totals26 45 INTERNATIONAL TRAVEL AGENCY, INC. Work Sheet For Month Ended March 31, 2008 Step 5 Net Income is extended to the credit column of the balance sheet columns. (Net loss would be extended to the debit column.)

5-7 Financial Statements INTERNATIONAL TRAVEL AGENCY Income Statement For the Month Ended March 31, 2008 Revenue Travel service revenue$26 Expenses Salaries expense$15 Depreciation expense4 Rent expense2 Insurance expense1 Total expenses22 Net Income $ 4 INTERNATIONAL TRAVEL AGENCY Retained Earnings Statement For the Month Ended March 31, 2008 Retained earnings, March 1$ 0 Add: Net Income4 4 Less: Dividends2 Retained Earnings, March 31 $ 2 INTERNATIONAL TRAVEL AGENCY Balance Sheet March 31, 2008 Assets Cash$ 15 Accounts receivable5 Prepaid insurance3 Office Equipment$ 20 Less: Accumulated depreciation614 Total assets37 Liabilities and Stockholders’ Equity Liabilities Accounts payable$ 10 Salaries payable5 Total liabilities$15 Stockholders’ equity Common Stock20 Retained earnings2 Total liabilities and stockholders’ equity $ 37

5-8 Closing Process (Individual) Expenses Dr. Bal.To Income Summary (Individual) Revenues To Income Summary Cr. Bal. Dividends Dr. Bal.To Retained Earnings Income Summary Expenses Net Income to Retained Earnings Revenues Net Loss to Retained Earnings Retained Earnings Net Loss Dividends Net Income PermanentAccounts TemporaryAccounts

5-9 Closing Entries DateAccount Titles and ExplanationRef.DebitCredit Closing Entries March31 (1) Travel Service Revenue Income Summary (To close revenue account) 26 March31 (2) Income Summary Depreciation Expense Rent Expense Salaries Expense Insurance Expense (To close expense accounts) (3) Income Summary Retained Earnings (To close net income to retained earnings) (4) Retained Earnings Dividends (To close dividends to retained earnings) 2 2 GENERAL JOURNAL Page 4

5-10 Accounting Cycle (1) Analyze business transactions (2) Journalize the transactions (3) Post to ledger accounts (4) Prepare a trial balance (5) Journalize and post adjusting entries: Prepayments/Accruals (6) Prepare an adjusted trial balance (7) Prepare financial statements: Income statement Retained earnings statement Balance sheet (8) Journalize and post closing entries (9) Prepare a post-closing trial balance Work sheet Optional Steps in the Accounting Cycle (The steps in the accounting cycle are performed in sequence and are repeated in each accounting period.)

5-11 Standard Classifications CLASSIFIED BALANCE SHEET CLASSIFIED BALANCE SHEET LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES 1.Notes Payable 2.Account Payable 3.Unearned Revenue 4.Salaries Payable 5.Taxes Payable LONG-TERM LIABILITIES 1.Long-term Notes Payable 2.Mortgage Payable 3.Bonds Payable STOCKHOLDERS’ EQUITY 1.Common Stock 2.Retained Earnings ASSETS CURRENT ASSETS INTANGIBLE ASSETS PROPERTY, PLANT, AND EQUIPMENT LONG-TERM ASSETS 1.Cash 2.Short-term Investments 3.Receivables 4.Prepaid Expenses 1.Stocks 2.Bonds 1.Land 2.Buildings 3.Equipment 4.Furniture 1.Patents 2.Copyrights 3.Trademarks > Less: Accumulated Depreciation