Carter: Financial Accounting 60



Carter: Financial Accounting 60.201 Class #13

 

Chapter 5: Closing Process

Steps in the accounting process (so far):

 

1. Organize the data to be reported by using a chart of accounts and a general ledger.

 

2. Analyze business events, or transactions, and convert them into debits and credits through the preparation of journal entries.

 

3. Post the journal entries to the general ledger.

 

4. Prepare an unadjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger. If debits equal credits, the accounting equation will balance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Review the data in the unadjusted trial balance for reasonableness and prepare necessary adjusting journal entries to correct any unreasonable account balances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. Post the adjusting journal entries to the general ledger.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7. Prepare an adjusted trial balance to verify that the total dollar amount of debits equals the total dollar amount of credits in the general ledger. If debits equal credits, the accounting equation will balance. If the accounting equation balances, the financial statements will tie together.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8. Prepare financial statements: income statement, statement of retained earnings, and balance sheet.

 

 

Needed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a process to keep income effects of different time periods separate from one another.

 

 

 

 

 

 

 

 

 

 

 

|Fees Revenue  |  |

|  |700 |   December 7 |

|  |1,100 |   December 12 |

|  |600 |   December 21 |

|  |800 |   December 27 |

|  |175 |   December 31 |

|  |500 |   January 6 |

|  |1,600 |   January 13 |

|  |900 |   January 20 |

|  |6,375 |  |

  

The Guitar Lessons Corporation's January fees revenue is

 

 

 

 

 

 

 

 

 

|Fees Revenue  |  |

|  |700 |   December 7 |

|  |1,100 |   December 12 |

|  |600 |   December 21 |

|  |800 |   December 27 |

|  |175 |   December 31 |

|  |500 |   January 6 |

|  |1,600 |   January 13 |

|  |900 |   January 20 |

|  |6,375 |  |

 

The Guitar Lessons Corporation's January fees revenue is $3,000.

  

** You now have the background to do text exercises 5.1 and 5.2.

 

 

 

 

 

|Guitar Lessons Corporation  |

|Adjusted Trial Balance  |

|December 31 |

|Acct. No. |Account |Debits |Credits |

|111  |Cash |$9,750 |  |

|112  |Notes Receivable |3,000 |  |

|113  |Accounts Receivable |1,200 |  |

|114  |Interest Receivable |20 |  |

|115  |Supplies |200 |  |

|119  |Prepaid Insurance |750 |  |

|211  |Accounts Payable |  |$1,350 |

|213  |Unearned Fees Revenue |  |625 |

|214  |Wages Payable |  |500 |

|215  |Income Taxes Payable |  |425 |

|311  |Common Stock |  |7,000 |

|313  |Retained Earnings |  |4,250 |

|315  |Dividends |150 |  |

|411  |Fees Revenue |  |3,375 |

|412  |Interest Revenue |  |20 |

|511  |Supplies Expense |400 |  |

|517  |Wages Expense |1,400 |  |

|521  |Insurance Expense |250 |  |

|523  |Income Taxes Expense |425 |  |

|  |Totals |$17,545 |$17,545 |

 

 

 

 

 

Closing the December revenue accounts:

 

|Date  |Descr|Post.  |Debit|Credits  |

| |iptio|Ref.  |s  | |

| |n  | | | |

|$14,920 |= |$2,900 |+ |$7,000 |

|$14,920 |= |$2,900 |

|$425 |  | |

|$425 |$425 | |$2,47|$3,395 |

| | | |5 | |

|$14,920 |= |$2,900 |+ |$7,000 |

|$14,920 |

|Acct. No. |Account |Debits |Credits |

|111  |Cash |$8,000 |  |

|113  |Accounts Receivable |2,000 |  |

|115  |Supplies |1,000 |  |

|211 |Accounts Payable |  |$2,500 |

|215  |Income Taxes Payable |  |500 |

|311  |Common Stock |  |4,000 |

|313  |Retained Earnings |  |3,000 |

|315  |Dividends |300 |  |

|411  |Fees Revenue |  |6,000 |

|511  |Supplies Expense |600 |  |

|517  |Wages Expense |3,400 |  |

|523  |Income Taxes Expense |700 |  |

|  |Totals |$16,000 |$16,000 |

 

Calculate the balance in the company's income summary account after the revenue and expense closing entries were prepared and posted to the general ledger.

A.  $0            B.  $6,000 credit balance           C.  $4,700 debit balance            D.  $1,300 credit balance

 

 

 

 

 

 

D.  The revenue closing entry brings the fees revenue account to $0 by debiting fees revenue and crediting income summary ($6,000). The expenses closing entry brings the expense accounts to $0 by crediting expenses and debiting income summary ($4,700). Thus, the balance in the company's income summary account after the revenue and expenses closing entries were prepared and posted to the general ledger is a credit balance of $1,300. This $1,300 income summary credit balance means that the company's September net income has been transferred to income summary. Thus, the income summary balance is the same as the company's net income as calculated in part 1.

 

 

 

 

 

 

 

Closing the December income summary account:

 

|Date  |Des|Post.  |

| |cri|Ref.  |

| |pti| |

| |on | |

|  |$4,| |

| |250| |

|  |$4,25| |$2,47|$3,395 |

| |0 | |5 | |

|$14,920 |= |$2,900 |+ |$7,000 |

|$14,920 |

|Balance, December 1 |$4,250 |

|Plus: Net Income for December |920 |

|Subtotal |$5,170 |

|Less: Dividends in December |150 |

|Balance, December 31 |$5,020 |

 

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