ACC-1A Lecture Notes - Lecture 7: Accrual, Matching Principle, Income Statement

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11 Sep 2020

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Document Summary

Assets, liabilities and shareholders" equity are permanent accounts. Their balance is carried forward to the next accounting period. Closing entries are made in the following order: Balance in p&l summary transferred to retained profits. Closing entries involve closing off temporary accounts (revenues and expenses): Transfer all to profit & loss summary and then to retained profits. Thus post-closing trial balance will only involve permanent accounts (accounts on the balance sheet). Now we construct our balance sheet and income statement for the new accounting period. There often is a timing difference between a significant economic event (revenue/expense being earned/incurred) and its related cash flow. Provides a more complete picture of economic performance, particularly in the short term. Accrual profit is not the same as cash profit. Recall that revenues are recognised when earned; expenses are recognised when incurred. Adjusting entries at the end of an accounting period are to record all revenues and expenses for that period.

Related Questions

Chandler, Inc. is owned by Roscoe Chandler and providesappraisal services to individuals and companies wishing to purchaseand sell fine art. Chandler, Inc. began business on January 1,2016, and is just completing its first year of business. Roscoeasks for your help in completing the accounting cycle for thecompany by assisting with the closing process.

Before the closing entries are made, you begin with an adjustedtrial balance. The closing entries are essentially the link fromthe adjusted trial balance to the post-closing trial balance.

Chandler, Inc.

ADJUSTED TRIAL BALANCE

December 31, 2016

	ACCOUNTTITLE	DEBIT	CREDIT
1	Cash	76,000.00
2	Accounts Receivable	29,000.00
3	Prepaid Insurance	16,000.00
4	Equipment	60,000.00
5	Accumulated Depreciation-Equipment		40,000.00
6	Accounts Payable		6,000.00
7	Salaries Payable		8,000.00
8	Income Taxes Payable		4,000.00
9	Common Stock		2,000.00
10	Retained Earnings		18,000.00
11	Dividends	5,000.00
12	Income Summary
13	Fees Earned		175,600.00
14	Rent Revenue		92,000.00
15	Interest Revenue		17,200.00
16	Salaries Expense	71,000.00
17	Selling Expense	25,600.00
18	Income Taxes Expense	15,000.00
19	Depreciation Expense-Equipment	47,200.00
20	Insurance Expense	17,000.00
21	Miscellaneous Expense	1,000.00
22	Totals	362,800.00	362,800.00

The final step of the accounting cycle is the closing process.The main goal of this stage of the cycle is to ensure that thebalance of each temporary account is returned to zero and that netincome is transferred to the retained earnings account. The firststep in successfully undertaking the closing process is tounderstand the difference between a temporary account and apermanent account. Roscoe has some questions about the process.

Answer questions (1) - (3) below.

1. If a temporary account has an ending balance of $57,000, whatis its beginning balance for the following accounting period?

2. If a permanent account has an ending balance of $57,000, whatis its beginning balance for the following accounting period?

3. Roscoe will be preparing his yearly financial statementsafter completing Chandler, Inc.âs closing process, and is asomewhat confused about the characteristics of the accounts on hisChart of Accounts. He has started by creating the chart below, andasks for your help in completing it. For each account or type ofaccount listed, choose all descriptions that apply.

Temporary Account

Permanent Account

Closed to Income SummaryAccount

Yes

Revenues

Asset accounts

Retained Earnings account

Expenses

Liability accounts

Dividends account

Roscoe has attempted to prepare the closing entries forChandler, Inc. on this panel. Heâs not sure if heâs entered thejournal entries correctly, and asks you to review them. You findthat two of the entries are correct, but two are incorrect.

Determine which entries are incorrect, and enter all four of theclosing entries for Chandler, Inc. as of Dec. 31 on the Journalpanel.

PAGE 25

JOURNAL

	DATE	DESCRIPTION	DEBIT	CREDIT
1		Closing Entries
2	Dec. 31	Income Summary	284,800.00
3		Fees Earned		175,600.00
4		Rent Revenue		92,000.00
5		Interest Revenue		17,200.00
6	31	Income Summary	176,800.00
7		Salaries Expense		71,000.00
8		Selling Expense		25,600.00
9		Income Taxes Expense		15,000.00
10		Depreciation Expense-Equipment		47,200.00
11		Insurance Expense		17,000.00
12		Miscellaneous Expense		1,000.00
13	31	Retained Earnings	461,600.00
14		Income Summary		461,600.00
15	31	Retained Earnings	5,000.00
16		Dividends		5,000.00

purpleporcupine232

The unadjusted trial balance of PS Music as of July 31, 2016, alongwith the adjustment data for the two months ended July 31, 2016,are shown in Chapter 3. Based upon the adjustment data, thefollowing adjusted trial balance was prepared:
PS Music
ADJUSTED TRIAL BALANCE
July 31, 2016

ACCOUNT TITLE DEBIT CREDIT
1
Cash
9,945.00

2
Accounts Receivable
4,150.00

3
Supplies
275.00

4
Prepaid Insurance
2,475.00

5
Office Equipment
7,500.00

6
Accumulated Depreciation-Office Equipment

50.00
7
Accounts Payable

8,350.00
8
Wages Payable

140.00
9
Unearned Revenue

3,600.00
10
Common Stock

9,000.00
11
Retained Earnings

12
Dividends
1,750.00

13
Income Summary

14
Fees Earned

21,200.00
15
Wages Expense
2,940.00

16
Office Rent Expense
2,550.00

17
Equipment Rent Expense
1,375.00

18
Utilities Expense
1,215.00

19
Music Expense
3,610.00

20
Advertising Expense
1,500.00

21
Supplies Expense
925.00

22
Insurance Expense
225.00

23
Depreciation Expense
50.00

24
Miscellaneous Expense
1,855.00

25
Totals
42,340.00
42,340.00

Required:

1. (Optional) Using the data from Chapter 3, prepare anend-of-period spreadsheet on a sheet of paper or using spreadsheetsoftware.
2. Prepare an income statement, a retained earnings statement, anda balance sheet.*
3.

A. Journalize the closing entries. Refer to the Chart ofAccounts for exact wording of account titles.
B. Post the closing entries. The income summary account is #34 inthe ledger of PS Music. Indicate closed accounts by inserting a 0(zero) in either of the Balance columns opposite the closing entry.No entry is required in the Item column.

4. Prepare a post-closing trial balance.

* For guidance in completing the financial statements, be sureto read the instructions above each statement carefully.

CHART OF ACCOUNTSPS MusicGeneral Ledger

ASSETS
11 Cash
12 Accounts Receivable
14 Supplies
15 Prepaid Insurance
17 Office Equipment
18 Accumulated Depreciation-Office Equipment

LIABILITIES
21 Accounts Payable
22 Wages Payable
23 Unearned Revenue

EQUITY
31 Common Stock
32 Retained Earnings
33 Dividends
34 Income Summary

REVENUE
41 Fees Earned

EXPENSES
50 Wages Expense
51 Office Rent Expense
52 Equipment Rent Expense
53 Utilities Expense
54 Music Expense
55 Advertising Expense
56 Supplies Expense
57 Insurance Expense
58 Depreciation Expense
59 Miscellaneous Expense

LabelsCash flows from financing activitiesCash flows frominvesting activitiesCash flows from operating activitiesCurrentassetsCurrent liabilitiesExpensesFor the Two Months Ended July 31,2016July 31, 2016Property, plant, and equipmentAmountDescriptionsAdd dividendsDecrease in retained earningsIncrease inretained earningsNet decrease in cash during June and JulyNetincrease in cash during June and JulyLess dividendsNet incomeNetlossRetained earnings, June 1, 2016Retained earnings, July 31,2016Total assetsTotal current assetsTotal expensesTotalliabilitiesTotal liabilities and stockholdersâ equityTotalproperty, plant, and equipmentTotal stockholdersâ equity