1. Cash, Short-term Investments and Accounts Receivable
Chapter 4
Cash, Short-term Investments and Accounts Receivable
Chapter 4

2. The Mechanics Of Double-Entry Accounting
Chapter 3
The Mechanics Of Double-Entry Accounting
Chapter 3

3. Chapter 3 Learning Objectives
Analyze business transactions to determine account effects.
Understand the rules of debit and credit.
Prepare general journal entries.
Post general journal entries to a general ledger.
Prepare a trial balance.
Develop end-of-period adjustments to general ledger account balances.
Prepare an income statement, a statement of stockholders’ equity, and a balance sheet.
Perform the closing process.
Prepare a postclosing trial balance.
Chapter 3

4. Assets = Liabilities + Equity
Every transaction of a business must be recorded in such a way... that the accounting equation for that business remains in balance.
Chapter 3

5. Source Documents Invoices Sales slips Legal contracts Checks
Purchase orders
Chapter 3

6. Rules for Double Entry Accounting
Debits are on the left
Credits are on the right
Debits always equal Credits
The Normal Balance is whichever action increases the account
All financial transactions can be recorded using this method
Chapter 3

7. Rules of Debit and Credit
Chapter 3

8. Review liabilities and assets assets and expenses assets and revenues
Which of the following sets of accounts have normal debit balances?
liabilities and assets
assets and expenses
assets and revenues
revenues and dividends
Chapter 3

9. Review liabilities and assets assets and expenses assets and revenues
Which of the following sets of accounts have normal debit balances?
liabilities and assets
assets and expenses
assets and revenues
revenues and dividends
Chapter 3

10. Review liabilities and assets assets and expenses
Which sets of accounts are increased with credits?
liabilities and assets
assets and expenses
liabilities and revenues
revenues and dividends
Chapter 3

11. Review liabilities and assets assets and expenses
Which sets of accounts are increased with credits?
liabilities and assets
assets and expenses
liabilities and revenues
revenues and dividends
Chapter 3

12. Some other types of accounts fall into the categories
Dividends, Revenues, and Expenses.
Chapter 3

13. Snow Mountain Transactions
Chapter 3

14. Snow Mountain Transactions
Chapter 3

15. Snow Mountain Transactions
Chapter 3

16. Snow Mountain Transactions
Chapter 3

17. Review
The general journal entry to record a cash investment by stockholders into the business includes a:
debit to Common Stock and a credit to Cash
debit to Cash and a credit to Accounts Receivable
debit to Cash and a credit to Common Stock
debit to Accounts Receivable and a credit to Cash
Chapter 3

18. Review
The general journal entry to record a cash investment by stockholders into the business includes a:
debit to Common Stock and a credit to Cash
debit to Cash and a credit to Accounts Receivable
debit to Cash and a credit to Common Stock
debit to Accounts Receivable and a credit to Cash
Chapter 3

19. Review
The general journal entry to record a purchase of supplies on account includes a:
debit to Cash and a credit to Supplies
debit to Accounts Payable and a credit to Supplies
debit to Supplies and a credit to Accounts Receivable
debit to Supplies and a credit to Accounts Payable
Chapter 3

20. Review
The general journal entry to record a purchase of supplies on account includes a:
debit to Cash and a credit to Supplies
debit to Accounts Payable and a credit to Supplies
debit to Supplies and a credit to Accounts Receivable
debit to Supplies and a credit to Accounts Payable
Chapter 3

21. Posting to the General Ledger
For each account listed in a general journal transaction, determine the appropriate general ledger account number in the chart of accounts. Find that account in the general ledger.
In the general ledger account, record the transaction date and a brief description of the transaction as provided in the general journal.
In the posting reference (PR) column of each affected account, indicate the journal and page number from which the amount was posted.
Chapter 3

22. Posting to the General Ledger continued
Enter the transaction amount in the appropriate debit or credit column in the account.
Compute the new balance of each account and enter that amount in the balance column.
After posting each transaction element to the general ledger, return to the general journal and record the general ledger account number to which the debit or credit amount was posted in the PR column.
Chapter 3

23. Review
The general journal entry to record a purchase of supplies on account is posted to the general ledger. This transaction will:
decrease the balance in the Supplies account
increase the balance in the Accounts Payable account
increase the balance in the Cash account
decrease the balance in the Accounts Payable account
Chapter 3

24. Review
The general journal entry to record a purchase of supplies on account is posted to the general ledger. This transaction will:
decrease the balance in the Supplies account
increase the balance in the Accounts Payable account
increase the balance in the Cash account
decrease the balance in the Accounts Payable account
Chapter 3

25. Review
The general journal entry to record the payment of a year’s rent in advance is posted to the general ledger. This transaction will:
increase the balance in the Prepaid Rent account
increase the balance in the Cash account
decrease the balance in the Prepaid Rent account
decrease the balance in the Rent Expense account
Chapter 3

26. Review
The general journal entry to record the payment of a year’s rent in advance is posted to the general ledger. This transaction will:
increase the balance in the Prepaid Rent account
increase the balance in the Cash account
decrease the balance in the Prepaid Rent account
decrease the balance in the Rent Expense account
Chapter 3

27. Cash Account from Snow Mountain Retreat General Ledger
Chapter 3

28. TRIAL BALANCE
Chapter 3

29. Trial Balance
A trial balance is a 2 column listing of the general ledger accounts and their balances.
A trial balance’s purpose is to ensure that the accounting system is “in balance”.
If a trial balance does not balance, there are one or more errors in the accounting records which must be corrected.
Chapter 3

30. Trial Balance Illustrated
Chapter 3

31. Adjusting Entries
Adjusting entries are prepared to ensure that the revenue and expense recognition rules, discussed in Chapter 2, are properly applied each accounting period.
Before developing period-ending adjustments, the concepts of deferrals and accruals must be defined and understood.
A deferred item is one for which the cash has been paid or received, but the expense or revenue has not been recognized.
An accrued item is one for which the cash has not yet been paid or received, but the expense or revenue has already been recognized.
End-of-period adjusting entries may create or affect deferred and accrued items.
Chapter 3

32. Deferrals and Accruals
A deferred expense is an asset that represents a prepayment of an expense item. A deferred expense is originally recorded as an asset, but will eventually be recognized, or written off, as an expense.
A deferred revenue is a liability that represents an amount received by a business for a service or product that will be provided or delivered in the future. A deferred revenue is originally recorded as a liability, but will eventually be recognized as revenue.
An accrued asset is a receivable resulting from revenue that has been earned but has not yet been received in cash.
An accrued liability is an expense that has been incurred but has not yet been paid in cash.
Chapter 3

33. Deferrals and Accruals
Chapter 3

34. Adjusting Deferrals and Accruals
Chapter 3

35. Steps in the Adjusting Process
Adjusting entries must be prepared for all deferrals and accruals at the end of the accounting period.
Adjusting entries are then posted to the general ledger.
A new trial balance is then prepared, referred to as an Adjusted Trial Balance.
Chapter 3

36. Snow Mountain Retreat Adjusting Entries
Chapter 3

37. Review
A company pays $3,000 for 6 months rent on November 1, The adjusting entry on December 31, 2010 will include a:
debit to Rent Expense and a credit for Prepaid Rent for $3,000.
debit to Prepaid Rent and a credit to Rent Expense for $2,000.
debit to Rent Expense and a credit to Prepaid Rent for $1,000.
debit to Rent Expense and a credit to Prepaid Rent for $2,000.
Chapter 3

38. Review
A company pays $3,000 for 6 months rent on November 1, The adjusting entry on December 31, 2010 will include a:
a. debit to Rent Expense and a credit for Prepaid Rent for $3,000.
b. debit to Prepaid Rent and a credit to Rent Expense for $2,000.
c. debit to Rent Expense and a credit to Prepaid Rent for $1,000.
d. debit to Rent Expense and a credit to Prepaid Rent for $2,000.
Chapter 3

39. Review
A company received $2,400 for 4 months rent on October 1, The adjusting entry on December 31, 2010 will include a:
debit to Rental Revenue and a credit for Unearned Rental Revenue for $1,800.
debit to Rental Revenue and a credit to Unearned Rental Revenue for $1,200.
debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,800.
debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,200.
Chapter 3

40. Review
A company received $2,400 for 4 months rent on October 1, The adjusting entry on December 31, 2010 will include a:
debit to Rental Revenue and a credit for Unearned Rental Revenue for $1,800.
b. debit to Rental Revenue and a credit to Unearned Rental Revenue for $1,200.
c. debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,800.
d. debit to Unearned Rental Revenue and a credit to Rental Revenue for $1,200.
Chapter 3

41. Review
A company computes depreciation for the year on equipment to be $2,500. The adjusting entry required on December 31 includes a:
debit to Accumulated Depreciation-Equipment and a credit to Equipment for $2,500.
debit to Depreciation Expense and a credit to Equipment for $2,500.
debit to Depreciation Expense and a credit to Accumulated Depreciation-Equipment for $2,500.
debit to Accumulated Depreciation-Equipment and a credit to Depreciation Expense for $2,500.
Chapter 3

42. Review
A company computes depreciation for the year on equipment to be $2,500. The adjusting entry required on December 31 includes a:
debit to Accumulated Depreciation-Equipment and a credit to Equipment for $2,500.
debit to Depreciation Expense and a credit to Equipment for $2,500.
c. debit to Depreciation Expense and a credit to Accumulated Depreciation-Equipment for $2,500.
d. debit to Accumulated Depreciation-Equipment and a credit to Depreciation Expense for $2,500.
Chapter 3

43. Problem Review
Prepare Dec. 31 adjusting entries based on the following information:
Depreciation expense on equipment for the year is $2,500.
$3,000 of prepaid rent has expired.
$6,000 of unearned rent has been earned by Dec. 31.
Wages incurred by not yet paid on Dec. 31 amount to $1,500.
Chapter 3

44. Problem Review Solution
Dec. 31
Depreciation Expense
2,500
Accum. Depr.-Equipment 31
Rent Expense
3,000
Prepaid Rent
Unearned Rental Revenue
6,000
Rental Revenue
Wages Expense
1,500
Wages Payable
Chapter 3

45. Snow Mountain Retreat Adjusted Trial Balance
Chapter 3

46. Preparation of Financial Statements
After the adjusted trial balance is prepared, the financial statements can be prepared.
Based on Snow Mountain Retreat’s adjusted trial balance, we can prepare:
An income statement
A statement of stockholders’ equity, and
A balance sheet
Chapter 3

47. Income Statement Illustrated
Chapter 3

48. Statement of Stockholders’ Equity Illustrated
Chapter 3

49. Balance Sheet Illustrated
Chapter 3

50. Balance Sheet Illustrated Continued
Chapter 3

51. Closing Entries
The temporary accounts of a business begin each accounting period with a zero balance because the previous period balances in these accounts are transferred to Retained earnings through the use of closing entries.
An account called Income Summary is often used to help close temporary accounts into Retained Earnings each accounting period.
The Income Summary account is also a temporary account.
Chapter 3

52. Record Closing Entries
Following are the four closing entries that businesses make at the end of an accounting period:
Transfer credit balances of income statement accounts to the Income Summary account.
Transfer debit balances of income statement accounts to the Income Summary account.
Transfer the balance of the Income Summary account to the Retained Earnings account.
Transfer the balance of the Dividends account to the Retained Earnings account.
Chapter 3

53. Closing Entry Rules
Chapter 3

54. Snow Mountain Retreat Closing Entries
Chapter 3

55. Review
The entry to close Supplies Expense with a balance of $2,300 includes a:
debit to Supplies Expense and a credit to Supplies for $2,300.
debit to Income Summary and a credit to Supplies Expense for $2,300.
debit to Income Summary and a credit to Supplies for $2,300.
debit to Supplies Expense and a credit to Income Summary for $2,300.
Chapter 3

56. Review
The entry to close Supplies Expense with a balance of $2,300 includes a:
debit to Supplies Expense and a credit to Supplies for $2,300.
b. debit to Income Summary and a credit to Supplies Expense for $2,300.
c. debit to Income Summary and a credit to Supplies for $2,300.
d. debit to Supplies Expense and a credit to Income Summary for $2,300.
Chapter 3

57. Review
The entry to close $5,000 net income to the appropriate account includes a:
debit to Income Summary and a credit to Retained Earnings for $5,000.
debit to Income Summary and a credit to Common Stock for $5,000.
debit to Retained Earnings and a credit to Income Summary for $5,000.
debit to Retained Earnings and a credit to Common Stock for $5,000.
Chapter 3

58. Review
The entry to close $5,000 net income to the appropriate account includes a:
a. debit to Income Summary and a credit to Retained Earnings for $5,000.
b. debit to Income Summary and a credit to Common Stock for $5,000.
c. debit to Retained Earnings and a credit to Income Summary for $5,000.
d. debit to Retained Earnings and a credit to Common Stock for $5,000.
Chapter 3

59. Postclosing Trial Balance
After the closing entries are prepared in the general journal, they are posted to the general ledger.
At this point, all the temporary accounts will have ZERO BALANCES.
A postclosing trial balance is prepared.
The postclosing trial balance will contain only the permanent accounts.
Chapter 3

60. Postclosing Trial Balance Illustrated
Chapter 3

61. Review
Which of the following sets of accounts will appear on a postclosing trial balance?
assets and dividends
expenses and dividends
liabilities and expenses
liabilities and assets
Chapter 3

62. Review
Which of the following sets of accounts will appear on a postclosing trial balance?
assets and dividends
expenses and dividends
liabilities and expenses
liabilities and assets
Chapter 3

63. Problem Review
Based on the following adjusted balances, prepare a post closing trial balance dated Dec. 31, 2010 for Blue’s Company.
Selling and Adm. Exp.
9,050
Common Stock
16,000
Unearned Rental Rev.
2,200
Retained Earnings
Cash
10,500
Office Supplies
350
Sales
9,800
Rental Revenue
3,400
Accounts Payable
2,900
Wages Payable
800
Accounts Receivable
13,500
Interest Expense
500
Prepaid Rent
1,500
Interest Payable
300
Chapter 3

64. Problem Review Solution
Postclosing Trial Balance
Cash
$10,500
Accounts Receivable
13,500
Prepaid Rent
1,500
Office Supplies
350
Accounts Payable
$ 2,900
Unearned Rental Revenue
2,200
Wages Payable
800
Interest Payable
300
Common Stock
16,000
Retained Earnings
________
3,650
Totals
$25,850
Chapter 3

65. THE END!
Chapter 3