Accounting Cycle

Accounting cycle is the financial process starting with recording business transactions and
leading up to the preparation of financial statements. This process demonstrates the purpose of
financial accounting--to create useful financial information in the form of general-purpose
financial statements. In other words, the sole purpose of recording transactions and keeping track
of expenses and revenues is turn this data into meaning financial information by presenting it in
the form of a balance sheet, income statement, statement of owner's equity, and statement of cash
flows.
The accounting cycle is a set of steps that are repeated in the same order every period. The
culmination of these steps is the preparation of financial statements. Some companies prepare
financial statements on a quarterly basis whereas other companies prepare them annually. This
means that quarterly companies complete one entire accounting cycle every three months while
annual companies only complete one accounting cycle per year.
Accounting Cycle Steps
This cycle starts with a business event. Bookkeepers analyze the transaction and record it in the
general journal with a journal entry. The debits and credits from the journal are then posted to the
general ledger where an unadjusted trial balance can be prepared.
After accountants and management analyze the balances on the unadjusted trial balance, they can
then make end of period adjustments like depreciation expense and expense accruals. These
adjusted journal entries are posted to the trial balance turning it into an adjusted trial balance.
Now that all the end of the year adjustments are made and the adjusted trial balance matches the
subsidiary accounts, financial statements can be prepared. After financial statements are
published and released to the public, the company can close its books for the period. Closing
entries are made and posted to the post closing trial balance.
At the start of the next accounting period, occasionally reversing journal entries are made to
cancel out the accrual entries made in the previous period. After the reversing entries are posted,
the accounting cycle starts all over again with the occurrence of a new business transaction.
Here is a simplified summary of the steps in a traditional accounting cycle. Some textbooks list
more steps than this, but I like to simplify them and combine as many steps as possible.
-- Identify business events, analyze these transactions, and record them as journal entries
-- Post journal entries to applicable T-accounts or ledger accounts
-- Prepare an unadjusted trial balance from the general ledger
-- Analyze the trial balance and make end of period adjusting entries
-- Post adjusting journal entries and prepare the adjusted trial balance
-- Use the adjusted trial balance to prepare financial statements
-- Close all temporary income statement accounts with closing entries
-- Prepare the post closing trial balance for the next accounting period
-- Prepare reversing entries to cancel temporary adjusting entries if applicable

Flow Chart
After this cycle is complete, it starts over at the beginning. Here is an accounting cycle flow
chart.

As you can see, the cycle keeps revolving every period. Note that some steps are repeated more
than once during a period. Obviously, business transactions occur and numerous journal entries
are recording during one period. Only one set of financial statements is prepared however.
Throughout this section, we'll be looking at the business events and transactions that happen to
Paul's Guitar Shop, Inc. over the course of its first year in business. Let's take a look at how Paul
starts his accounting cycle below.


Journal Entries
T-Accounts
Unadjusted Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Accounting Worksheet
Closing Entries
Income Summary Account
Post Closing Trial Balance
Reversing Entries





Adjusting Entries for Accrued Expenses
inShare
Accrued expenses refer to those that are already incurred but have not yet been paid. At the end
of period, accountants should make sure that they are recognized as expenses.
Here's the rule. If a company incurred, used, or consumed all or part of an expsense, that expense
of part of it should be properly recognized even if it has not yet been paid.
If such has not been recognized, then an adjusting entry is necessary.
Pro-Forma Entry
The pro-forma entry for accrued expense is:
mmm dd Expense account* x,xxx.xx
Liability account** x,xxx.xx
*Appropriate expense account such as Utilities Expense, Rent Expense, Interest Expense...
**Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable, Account
Payable, etc.)
For Example
For the month of December 2013, Gray Network Services used a total of $1,800 worth of
electricity and water. The company received the bills on January 10, 2014. When should the
expense be recorded, December 2013 or January 2014?
Answer -- in December 2013. According to the expense recognition principle, expenses are
recognized when incurred regardless of when paid. The amount above pertains to utilities used in
December. Therefore, if no entry was made for this expense in December then an adjusting entry
is necessary.
Dec 31 Utilities Expense 1,800.00
Utilities Payable 1,800.00
In the adjusting entry above, Utilities Expense is debited to recognize the expense and Utilities
Payable to record a liability since the amount is yet to be paid.
Here are some more examples.
More Examples: Adjusting Entries for Accrued Expense
Example 1: VIRON Company enters into a rental agreement to use the premises of DON's
building. The terms state that VIRON will pay monthly rentals of $1,500 at the end of every
month. The lease started on December 1, 2013. On December 31, the rent for the month has not
yet been paid and no record for rent expense was made.
In this case, VIRON Company already incurred (consumed/used) the expense. Even if it has not
yet been paid, it should be recorded as an expense. The necessary adjusting entry would be:
Dec 31 Rent Expense 2,000.00
Rent Payable 2,000.00
Example 2: VIRON Company borrowed $6,000 at 12% interest on August 1, 2013. The amount
will be paid after 1 year. At the end of December, the end of the accounting period, no entry was
entered in the journal to take up the interest.
Let's analyze the above transaction.
VIRON will be paying $6,000 principal plus $720 interest after a year. The $720 interest covers
1 year. At the end of December, a part of that is already incurred, i.e. $720 x 5/12 or $300. That
pertains to interest for 5 months, from August 1 to December 31. The adjusting entry would be:
Dec 31 Interest Expense 300.00
Interest Payable 300.00
An expense is recognized when it is incurred regardless of when it is paid. What you need to
remember here is this: when it has been consumed or used and no entry was made to record an
expense, then there is a need for an adjusting entry.









Reversing Entries
Reversing entries, or reversing journal entries, are journal entries made at the beginning of an
accounting period to reverse or cancel out adjusting journal entries made at the end of the
previous accounting period. This is the last step in the accounting cycle. Reversing entries are
made because previous year accruals and prepayments will be paid off or used during the new
year and no longer need to be recorded as liabilities and assets. These entries are optional
depending on whether or not there are adjusting journal entries that need to be reversed.
Reversing entries are usually made to simplify bookkeeping in the new year. For example, if an
accrued expense was recorded in the previous year, the bookkeeper or accountant can reverse
this entry and account for the expense in the new year when it is paid. The reversing entry erases
the prior year's accrual and the bookkeeper doesn't have to worry about it.
If the bookkeeper doesn't reverse this accrual enter, he must remember the amount of expense
that was previously recorded in the prior year's adjusting entry and only account for the new
portion of the expenses incurred. He can't record the entire expense when it is paid because some
of it was already recorded. He would be double counting the expense.
Example
It might be helpful to look at the accounting for both situations to see how difficult bookkeeping
can be without recording the reversing entries. Let's look at let's go back to your accounting
cycle example of Paul's Guitar Shop.
In December, Paul accrued $250 of wages payable for the half of his employee's pay period that
was in December but wasn't paid until January. This end of the year adjusting journal entry
looked like this:


Accounting with the reversing entry:
Paul can reverse this wages accrual entry by debiting the wages payable account and crediting
the wages expense account. This effectively cancels out the previous entry.


But wait, didn't we zero out the wages expense account in last year's closing entries? Yes, we
did. This reversing entry actually puts a negative balance in the expense. You'll see why in a
second.
On January 7th, Paul pays his employee $500 for the two week pay period. Paul can then record
the payment by debiting the wages expense account for $500 and crediting the cash account for
the same amount.
Since the expense account had a negative balance of $250 in it from our reversing entry, the
$500 payment entry will bring the balance up to positive $250-- in other words, the half of the
wages that were incurred in January.


See how easy that is? Once the reversing entry is made, you can simply record the payment entry
just like any other payment entry.
Accounting without the reversing entry:
If Paul does not reverse last year's accrual, he must keep track of the adjusting journal entry
when it comes time to make his payments. Since half of the wages were expensed in December,
Paul should only expense half of them in January.
On January 7th, Paul pays his employee $500 for the two week pay period. He would debit
wages expense for $250, debit wages payable for $250, and credit cash for $500.


The net effect of both journal entries have the same overall effect. Cash is decreased by $250.
Wages payable is zeroed out and wages expense is increased by $250. Making the reversing
entry at the beginning of the period just allows the accountant to forget about the adjusting
journal entries made in the prior year and go on accounting for the current year like normal.


As you can see from the T-Accounts above, both accounting method result in the same balances.
The left set of T-Accounts are the accounting entries made with the reversing entry and the right
T-Accounts are the entries made without the reversing entry.
Recording reversing entries is the final step in the accounting cycle. After these entries are made,
the accountant can start the cycle over again with recording journal entries. This cycle repeats in
the exact same format throughout the current year.



Income Summary Account
The income summary account is a temporary account used to store income statement account
balances, revenue and expense accounts, during the closing entry step of the accounting cycle. In
other words, the income summary account is simply a placeholder for account balances at the
end of the accounting period while closing entries are being made.
At the end of each accounting period, all of the temporary accounts are closed. You might have
heard people call this "closing the books." Temporary accounts like income and expenses
accounts keep track of transactions for a specific period and get closed or reset at the end of the
period. This way each accounting period starts with a zero balance in all the temporary accounts,
so revenues and expenses are only recorded for current years.v
There are two ways to close temporary accounts. You can either close these accounts directly to
the retained earnings account or close them to the income summary account.
Closing temporary accounts to the income summary account does take an extra step, but it also
provides and an audit trail showing the revenues, expenses, and net income for the year.
Once the temporary accounts are closed to the income summary account, the balances are held
there until final closing entries are made. This provides a useful check for errors. Once all the
temporary accounts are closed, the balance in the income summary account should be equal to
the net income of the company for the year.
Then the income summary account is zeroed out and transfers its balance to the retained earnings
(for corporations) or capital accounts (for partnerships). This transfers the income or loss from an
income statement account to a balance sheet account. This is the only time that the income
summary account is used. For the rest of the year, the income summary account maintains a zero
balance.
Example
After Paul's Guitar Shop prepares its closing entries, the income summary account has a balance
equal to its net income for the year. This balance is then transferred to the retained earnings
account in a journal entry like this.


After this entry is made, all temporary accounts, including the income summary account, should
have a zero balance.
Now that Paul's books are completely closed for the year, he can prepare the post closing trial
balance and reopen his books with reversing entries in the next steps of the accounting cycle.










Closing Entries
Closing entries, also called closing journal entries, are entries made at the end of an accounting
period to zero out all temporary accounts and transfer their balances to permanent accounts. In
other words, the temporary accounts are closed or reset at the end of the year. This is commonly
referred to as closing the books.
Temporary accounts are income statement accounts that are used to track accounting activity
during an accounting period. For example, the revenues account records the amount of revenues
earned during an accounting periodnot during the life of the company. We don't want the 2015
revenue account to show 2014 revenue numbers.
Permanent accounts are balance sheet accounts that track the activities that last longer than an
accounting period. For example, a vehicle account is a fixed asset account that is recorded on the
balance. The vehicle will provide benefits for the company in future years, so it is considered a
permanent account.
At the end of the year, all the temporary accounts must be closed or reset, so the beginning of the
following year will have a clean balance to start with. In other words, revenue, expense, and
withdrawal accounts always have a zero balance at the start of the year because they are always
closed at the end of the previous year. This concept is consistent with the matching principle.
Closing Entry Types
Temporary accounts can either be closed directly to the retained earnings account or to an
intermediate account called the income summary account. The income summary account is then
closed to the retained earnings account. Both ways have their advantages.
Closing all temporary accounts to the income summary account leaves an audit trail for
accountants to follow. The total of the income summary account after the all temporary accounts
have been close should be equal to the net income for the period.
Closing all temporary accounts to the retained earnings account is faster than using the income
summary account method because it saves a step. There is no need to close temporary accounts
to another temporary account (income summary account) in order to then close that again.
Both closing entries are acceptable and both result in the same outcome. All temporary accounts
eventually get closed to retained earnings and are presented on the balance sheet.
Example
In this example we will close Paul's Guitar Shop, Inc.'s temporary accounts using the income
summary account method from his financial statements in the previous example.
There are three general closing entries that must be made.
Close all revenue and gain accounts
All of Paul's revenue or income accounts are debited and credited to the income summary
account. This resets the income accounts to zero and prepares them for the next year.


Remember that all revenue, sales, income, and gain accounts are closed in this entry. Paul's
business or has a few accounts to close.
Close all expense and loss accounts
All expense accounts are then closed to the income summary account by crediting the expense
accounts and debiting income summary.


Close all dividend or withdrawal accounts


Since dividend and withdrawal accounts are not income statement accounts, they do not typically
use the income summary account. These accounts are closed directly to retained earnings by
recording a credit to the dividend account and a debit to retained earnings.
Now that all the temporary accounts are closed, the income summary account should have a
balance equal to the net income shown on Paul's income statement. Now Paul must close the
income summary account to retained earnings in the next step of the closing entries.














Accounting Worksheet
An accounting worksheet is a tool used to help bookkeepers and accountants complete the
accounting cycle and prepare year-end reports like unadjusted trial balances, adjusting journal
entries, adjusted trial balances, and financial statements.
Format
The accounting worksheet is essentially a spreadsheet that tracks each step of the accounting
cycle. The spreadsheet typically has five sets of columns that start with the unadjusted trial
balance accounts and end with the financial statements. In other words, an accounting worksheet
is basically a spreadsheet that shows all of the major steps in the accounting cycle side by side.
Each step lists its debits and credits with totals calculated at the bottom. Just like the trial
balances, the work sheet also has a heading that consists of the company name, title of the report,
and time period the report documents.
Example
Here is what Paul's Guitar Shop's year-end would look like in accounting worksheet format for
the accounting cycle examples in this section.

As you can see, the worksheet lists all the trial balances and adjustments side by side. During the
accounting cycle process, an accounting worksheet can be helpful to keep track of the different
steps and reduce errors.
It can also be used for a analytical and summary tool to show how accounts were originally
posted to the ledger and what adjustments were made before they were presented on the financial
statements.
I suggest using the accounting worksheet for all your year-end accounting problems. It saves
time and maintains accuracy in the process. Here is a downloadable excel version of this
accounting worksheet template, so you can use it with your accounting homework.



















Adjusted Trial Balance
An adjusted trial balance is a listing of all company accounts that will appear on the financial
statements after year-end adjusting journal entries have been made.
Preparing an adjusted trial balance is the fifth step in the accounting cycle and is the last step
before financial statements can be produced.
Format
An adjusted trial balance is formatted exactly like an unadjusted trial balance. Three columns are
used to display the account names, debits, and credits with the debit balances listed in the left
column and the credit balances are listed on the right.
Like the unadjusted trial balance, the adjusted trial balance accounts are usually listed in order of
their account number or in balance sheet order starting with the assets, liabilities, and equity
accounts and ending with income and expense accounts.
Both the debit and credit columns are calculated at the bottom of a trial balance. As with the
accounting equation, these debit and credit totals must always be equal. If they aren't equal, the
trial balance was prepared incorrectly or the journal entries weren't transferred to the ledger
accounts accurately.
As with all financial reports, trial balances are always prepared with a heading. Typically, the
heading consists of three lines containing the company name, name of the trial balance, and date
of the reporting period.


Preparation
There are two main ways to prepare an adjusted trial balance. Both ways are useful depending on
the site of the company and chart of accounts being used.
You could post accounts to the adjusted trial balance using the same method used in creating the
unadjusted trial balance. The account balances are taken from the T-accounts or ledger accounts
and listed on the trial balance. Essentially, you are just repeating this process again except now
the ledger accounts include the year-end adjusting entries.
You could also take the unadjusted trial balance and simply add the adjustments to the accounts
that have been changed. In many ways this is faster for smaller companies because very few
accounts will need to be altered.
Note that only active accounts that will appear on the financial statements must to be listed on
the trial balance. If an account has a zero balance, there is no need to list it on the trial balance.
Example
Using Paul's unadjusted trial balance and his adjusted journal entries, we can prepare the
adjusted trial balance.


Once all the accounts are posted, you have to check to see whether it is in balance. Remember
that all trial balances' debit and credits must equal.
Now that the trial balance is made, it can be posted to the accounting worksheet and the financial
statements can be prepared.
Adjusting Entries
Adjusting entries, also called adjusting journal entries, are journal entries made at the end of a
period to correct accounts before the financial statements are prepared. This is the fourth step in
the accounting cycle. Adjusting entries are most commonly used in accordance with the
matching principle to match revenue and expenses in the period in which they occur.
Adjusting Entry Types
There are three different types of adjusting journal entries. Each one adjusts income or expenses
to match the current period. This concept is based on the time period principle which states that
accounting records and activities can be divided into separate time periods. In other words, we
are dividing income and expenses into the amounts that were used in the current period and
deferring the amounts that are going to be used in future periods.
AJEs are used to record:
Prepaid expenses or unearned revenues Prepaid expenses are goods or services that have been
paid for by a company but have not been consumed yet. Insurance is a good example of a
prepaid expense. Insurance is usually prepaid at least six months. This means the company pays
for the insurance but doesn't actually get the full benefit of the insurance contract until the end of
the six-month period. This transaction is recorded as a prepayment until the expenses are
incurred. The same is true at the end of an accounting period. Only expenses that are incurred are
recorded, the rest are booked as prepaid expenses.
Unearned revenues are also recorded because these consist of income received from customers,
but no goods or services have been provided to them. In this sense, the company owes the
customers a good or service and must record the liability in the current period until the goods or
services are provided.
Accrued expenses and accrued revenues Many times companies will incur expenses but won't
have to pay for them until the next month. Utility bills are a good example. December's electric
bill is always due in January. Since the expense was incurred in December, it must be recorded
in December regardless of whether it was paid or not. In this sense, the expense is accrued or
shown as a liability in December until it is paid.
Non-cash expenses Adjusting journal entries are also used to record paper expenses like
depreciation, amortization, and depletion. These expenses are often recorded at the end of period
because they are usually calculated on a period basis. For example, depreciation is usually
calculated on an annual basis. Thus, it is recorded at the end of the year. This also relates to the
matching principle where the assets are used during the year and written off after they are used.
Recording AJEs
Recording adjusting journal entries is quite simple. The process includes three main steps:
-- Determine current account balance
-- Determine what current balance should be
-- Record adjusting entry

These adjustments are then made in journals and carried over to the account ledgers and
accounting worksheet in the next accounting cycle step.
Example
Following our year-end example of Paul's Guitar Shop, Inc., we can see that his unadjusted trial
balance needs to be adjusted for the following events.
-- Paul pays his $1,000 January rent in December.


-- Paul's December electric bill was $200 and is due January 15th.


-- Paul's leasehold improvement depreciation is $2,000 for the year.


-- On December 31, a customer prepays Paul for guitar lessons for the next 6 months.


-- Paul's employee works half a pay period, so Paul accrues $500 of wages.


Now that all of Paul's AJEs are made in his accounting system, he can record them on the
accounting worksheet and prepare an adjusted trial balance.



Unadjusted Trial Balance
An unadjusted trial balance is a listing of all the business accounts that are going to appear on the
financial statements before year-end adjusting journal entries are made. That is why this trial
balance is called unadjusted.
This is the third step in the accounting cycle. After the all the journal entries are posted to the
ledger accounts, the unadjusted trial balance can be prepared.
Format
An unadjusted trial balance is displayed in three columns: a column for account names, debits,
and credits. Accounts with debit balances are listed in the left column and accounts with credit
balances are listed on the right.
Accounts are usually listed in order of their account number. Most charts of accounts are
numbered in balance sheet order, so the unadjusted trial balance also displays the account
numbers in balance sheet order starting with the assets, liabilities, and equity accounts and
ending with income and expense accounts.
Both the debit and credit columns are calculated at the bottom of a trial balance. As with the
accounting equation, these debit and credit totals must always be equal. If they aren't equal, the
trial balance was prepared incorrectly or the journal entries weren't transferred to the ledger
accounts accurately.
As with all financial reports, trial balances are always prepared with a heading. Typically, the
heading consists of three lines containing the company name, name of the trial balance, and date
of the reporting period.


Preparation
Posting accounts to the unadjusted trial balance is quite simple. Basically, each one of the
account balances is transferred from the ledger accounts to the trial balance. All accounts with
debit balances are listed on the left column and all accounts with credit balances are listed on the
right column. That's all there is to it.
Example
After Paul's Guitar Shop, Inc. records its journal entries and posts them to ledger accounts, it
prepares this unadjusted trial balance.


As you can see, all the accounts are listed with their account numbers with corresponding
balances. In accordance with double entry accounting, both of the debit and credit columns are
equal to each other.
Managers and accountants can use this trial balance to easily assess accounts that must be
adjusted or changed before the financial statements are prepared.
After the accounts are analyzed, the trial balance can be posted to the accounting worksheet and
adjusting journal entries can be prepared.
























Post Journal Entries to T-Accounts or Ledger
Accounts
Once journal entries are made in the general journal or subsidiary journals, they must be posted
and transferred to the T-accounts or ledger accounts. This is the second step in the accounting
cycle.
The purpose of journalizing is to record the change in the accounting equation caused by a
business event. Ledger accounts categorize these changes or debits and credits into specific
accounts, so management can have useful information for budgeting and performance purposes.
Since management uses these ledger accounts, journal entries are posted to the ledger accounts
regularly. Most companies have computerized accounting systems that update ledger accounts as
soon as the journal entries are input into the accounting software. Manual accounting systems are
usually posted weekly or monthly. Just like journalizing, posting entries is done throughout each
accounting period.
T-Account
Ledger accounts use the T-account format to display the balances in each account. Each journal
entry is transferred from the general journal to the corresponding T-account. The debits are
always transferred to the left side and the credits are always transferred to the right side of T-
accounts.
Since most accounts will be affected by multiple transactions, there are usually several numbers
in both the debit and credit columns. Account balances are always calculated at the bottom of
each T-account. Notice that these are account balancesnot column balances. The total
difference between the debit and credit columns will be displayed on the bottom of the
corresponding side. In other words, an account with a credit balance will have a total on the
bottom of the right side of the account.
As a refresher of the accounting equation, all asset accounts have debit balances and liability and
equity accounts have credit balances. All contra accounts have opposite balances.
Since so many transactions are posted at once, it can be difficult post them all. In order to keep
track of transactions, I like to number each journal entry as its debit and credit is added to the T-
accounts. This way you can trace each balance back to the journal entry in the general journal if
you have any questions later in the accounting cycle.
Example
Let's post the journal entries that Paul's Guitar Shop, Inc. made during the first year in business
to the ledger accounts.
















As you can see, all of the journal entries are posted to their respective T-accounts and the
account balances are calculated on the bottom of each ledger account.
Now these ledgers can be used to create an unadjusted trial balance in the next step of the
accounting cycle.













Journal Entries
Journal entries are the first step in the accounting cycle and are used to record all business
transactions and events in the accounting system. As business events occur throughout the
accounting period, journal entries are recorded in the general journal to show how the event
changed in the accounting equation. For example, when the company spends cash to purchase a
new vehicle, the cash account is decreased or credited and the vehicle account is increased or
debited.
Identify Transactions
There are generally three steps to making a journal entry. First, the business transaction has to be
identified. Obviously, if you don't know a transaction occurred, you can't record one. Using our
vehicle example above, you must identify what transaction took place. In this case, the company
purchased a vehicle. This means a new asset must be added to the accounting equation.
Analyze Transactions
After an event is identified to have an economic impact on the accounting equation, the business
event must be analyzed to see how the transaction changed the accounting equation. When the
company purchased the vehicle, it spent cash and received a vehicle. Both of these accounts are
asset accounts, so the overall accounting equation didn't change. Total assets increased and
decreased by the same amount, but an economic transaction still took place because the cash was
essentially transferred into a vehicle.
Journalizing Transactions
After the business event is identified and analyzed, it can be recorded. Journal entries use debits
and credits to record the changes of the accounting equation in the general journal. Traditional
journal entry format dictates that debited accounts are listed before credited accounts. Each
journal entry is also accompanied by the transaction date, title, and description of the event. Here
is an example of how the vehicle purchase would be recorded.
Since there are so many different types of business transactions, accountants usually categorize
them and record them in separate journal to help keep track of business events. For instance, cash
was used to purchase this vehicle, so this transaction would most likely be recorded in the cash
disbursements journal. There are numerous other journals like the sales journal, purchases
journal, and accounts receivable journal.
Example
We are following Paul around for the first year as he starts his guitar store called Paul's Guitar
Shop, Inc. Here are the events that take place.
Journal Entry 1 -- Paul forms the corporation by purchasing 10,000 shares of $1 par stock.


Journal Entry 2 -- Paul finds a nice retail storefront in the local mall and signs a lease for $500 a
month.


Journal Entry 3 -- PGS takes out a bank loan to renovate the new store location for $100,000 and
agrees to pay $1,000 a month. He spends all of the money on improving and updating the store's
fixtures and looks.


Journal Entry 4 -- PGS purchases $50,000 worth of inventory to sell to customers on account
with its vendors. He agrees to pay $1,000 a month.


Journal Entry 5 -- PGS's first rent payment is due.


Journal Entry 6 -- PGS has a grand opening and makes it first sale. It sells a guitar for $500 that
cost $100.


Journal Entry 7 -- PGS sells another guitar to a customer on account for $300. The cost of this
guitar was $100.


Journal Entry 8 -- PGS pays electric bill for $200.


Journal Entry 9 -- PGS purchases supplies to use around the store.


Journal Entry 10 -- Paul is getting so busy that he decides to hire an employee for $500 a week.
Pay makes his first payroll payment.


Journal Entry 11 -- PGS's first vendor inventory payment is due of $1,000.


Journal Entry 12 -- Paul starts giving guitar lessons and receives $2,000 in lesson income.


Journal Entry 13 -- PGS's first bank loan payment is due.


Journal Entry 14 -- PGS has more cash sales of $25,000 with cost of goods of $10,000.


Journal Entry 15 -- In lieu of paying himself, Paul decides to declare a $1,000 dividend for the
year.


Now that these transactions are recorded in their journals, they must be posted to the T-accounts
or ledger accounts in the next step of the accounting cycle.
Here is an additional list of the most common business transactions and the journal entry
examples to go with them.
Sale Entry
Depreciation Expense Entry
Accumulated Depreciation Entry
Accrued Expense Entry



Sales Journal Entry
A sales journal entry is a journal entry in the sales journal to record a credit sale of inventory. All
of the cash sales of inventory are recorded in the cash receipts journal and all non-inventory sales
are recorded in the general journal.
Since a sales journal entry consists of selling inventory on credit, four main accounts are affected
by the business transaction: the accounts receivable and revenue accounts as well as the
inventory and cost of goods sold accounts.
When a piece of merchandise or inventory is sold on credit, two business transactions need to be
record. First, the accounts receivable account must increase by the amount of the sale and the
revenue account must increase by the same amount. This entry records the amount of money the
customer owes the company as well as the revenue from the sale.
Second, the inventory has to be removed from the inventory account and the cost of the
inventory needs to be recorded. So a typical sales journal entry debits the accounts receivable
account for the sale price and credits revenue account for the sales price. Cost of goods sold is
debited for the price the company paid for the inventory and the inventory account is credited for
the same price.

Sales Journal Entry Example
Little Electrodes, Inc. is a retailer that sells electronics and computer parts. On January 1, Little
Electrode, Inc. sells a computer monitor to a customer for $1,000. Little Electrode, Inc.
purchased this monitor from the manufacturer for $750 three months ago. Here's how Little
Electrode, Inc. would record this sales journal entry.




Depreciation Journal Entry
A depreciation journal entry is used at the end of each period to record the fixed asset or plant
asset depreciation in the accounting system.
Unlike journal entries for normal business transactions, the deprecation journal entry does not
actually record a business event. Instead, it records the passage of time and the use of an asset.
According to the matching principle, long-term assets or capital assets can't be expensed
immediately when they are purchased because their useful life is longer than one year. This
makes sense because the company will have a benefit from these assets in future years, so they
should also realize expenses in futures that match the benefits. That is why capital assets must be
capitalized and depreciated on a systematic and consistent basis.
It's a common misconception that depreciation is a form of expensing a capital asset over many
years. Depreciation is really the process of devaluing the capital asset over a period of time due
to age and use. Depreciation and accumulated depreciation shows the current value or book
value of the used asset.
The depreciation journal entry records depreciation expense as well as accumulated depreciation.
Depreciation expense is debited for the current depreciation amount and accumulated
depreciation is credited. The depreciation expense is then presented on the income statement as
an operating expense and the accumulated depreciation is presented on the balance sheet as a
contra capital asset account.
There are many different depreciation methods and rates, but we will use the straight-line
deprecation method for this example. The straight-line depreciation method computes
depreciation expense like this: depreciation expense = (asset purchase price salvage value) /
useful life.

Depreciation Journal Entry Example
Big John's Pizza, LLC bought a new pizza oven at the beginning of this year for $10,000. Big
John, the owner, estimates that this oven will last about 10 years and probably won't be worth
anything after 10 years. At the end of the year, Big John would record this depreciation journal
entry.


Depreciation for the year was calculated on the straight-line method. Since the oven had no
salvage value, the depreciation expense for the year is simply $10,000 divided by 10 years or
$1,000 per year.



Accumulated Depreciation Journal Entry
An accumulated depreciation journal entry is an end of the year journal entry used to add the
current year depreciation expense to the existing accumulated depreciation account.
The accumulated depreciation account represents the total amount of depreciation that the
company has expensed over time. Each year when the accumulated depreciation journal entry is
recorded, the accumulated depreciation account is increased.
Accumulated depreciation is a contra asset account (an asset account with a credit balance) that
adjusts the book value of the capital assets. So if a fixed asset that was purchased for $100,000
has $90,000 of accumulated depreciation, the book value of this asset would only be $10,000.
Each year as the accumulated depreciation increases, the book value of the fixed asset decreases
until the book value is zero. In other words, the accumulated deprecation account can never be
more than the asset account. In the example above, accumulated deprecation could never be
more than $100,000. When the accumulated depreciation equals the asset purchase price, the
book value is zero and the asset can no longer be depreciated.
The accumulated depreciation journal entry is recorded by debiting the depreciation expense
account and crediting the accumulated depreciation account.

Accumulated Depreciation Journal Entry Example
Construction Bob's, Inc. recently purchased a new car that cost $5,000 for making deliveries and
picking up new supplies. This car's useful life is 5 years and Bob expects the salvage value to be
zero. The car is depreciated at a rate of $1,000 a year. At the end of this year, Bob will record
this accumulated depreciation journal entry.




Accrued Expense Journal Entry
An accrued expense journal entry is a year-end adjustment to record expenses that were incurred
in the current year but weren't actually paid until the next year.
The matching principle dictates that all revenue and expenses need to be matched according to
the year they were earned and incurred. In other words, expenses usually benefit the business by
providing resources to produce revenue. If an expense was incurred during the year, it must be
matched to the revenue that was created from the expense during the year.
Even if the expense wasn't actually paid during the year, the expense should be recorded with an
accrued expense journal entry and matched with the corresponding income. Expenses that are
incurred but not paid are called accrued expenses. Some of the most commonly accrued expenses
are rent, utilities, and payroll.
Payroll is probably the most common accrued expense. Many times the end of the year falls in
between pay periods. For example a pay period might start on December 24th and end on
January 7th. So employees work one week in December, but they aren't paid until the following
year. The amount of payroll in December should be recorded in December with an accrued
expense journal entry and accounted for on that year's income statement.
The accrued expense journal entry debits the expense account that is being accrued and credits
the accrued liability account. A liability is recorded because the company still owes the expense.
It hasn't paid for it yet. The company only incurred the expense.

Accrued Expense Journal Entry Example
Jen's Fashion Boutique is a retailer with three employees. Jen's Fashion Boutique rents a small
storefront in the local mall for $1,000 a month and usually incurs $200 a month in utility
expenses. Jen's electric bill is due on the 15th of every month. At the end of December, Jen has
incurred 15 days worth of electrical expenses but won't actually pay them until January 15th.
These 15 days worth of utility expense must be accrued at the end of the year. Jen's Fashion
Boutique would accrue its utilities in this accrued expense journal entry.





















Financial Statements
Financial statements are reports prepared and issued by company management to give investors
and creditors additional information about a company's performance and financial standings.
This is the fundamental purpose of financial accounting to provide useful financial information
to users outside of the company.
A set of general-purpose financial statements is designed to report the earnings and profitability,
asset and debt levels, uses of cash, and total investments by company owners for a specific time
period following the periodicity assumption. All of this information is presented in four general
reports including:
Income Statement
Statement of Owner's Equity
Balance Sheet
Statement of Cash Flows
These reports are prepared in this order and are issued to the public as a set of statements. This
means they are not only published together, but they are also designed and intended to be read
and used together. Since each statement only gives information about specific aspects of a
company's financial position, it is important that these reports are used together.
For instance, the balance sheet shows the debt levels of the company, but it can't show what the
debt coverage costs. Both the balance sheet and the income statement are needed to calculate the
debt coverage ratio for investors and creditors to see a true picture of the debt burden of a
company.
Companies issue financial statements for a variety of reasons at a variety of times during the
year. Public companies are required to issue audited financial statements to the public at least
every quarter. These regulated financial statements must meet SEC and PCAOB guidelines.
Non-public or private companies generally issue financial statements to banks and other creditors
for financing purposes. Many creditors will not agree to loan funds unless a company can prove
that it is financially sound enough to make its future debt payments.
Both public and private companies issue financial statements to attract new investors and raise
funding for expansions.
Interim Financial Statements
Financial statements that are issued for time periods smaller than one year are called interim
statements because they are used as temporary statements to judge a company's financial position
until the full annual statements are issued.
Interim statements are most commonly issued quarterly or semi-annually, but it is not uncommon
for companies to issue monthly reports to creditors as part of their loan covenants. Quarterly
statements, as the name implies, are issued every quarter and only include financial data from
that three-month span of time. Likewise, semi-annual statements include data from a six-month
span of time.
Since these interim statements cover a smaller time period, they also track less financial history.
This is why annual financial statements are generally more reliable and better represent a
company's true financial position.
Annual Financial Statements
Annual financial statements are prepared once a year and cover a 12-month period of financial
performance. Generally, these statements are issued at the end of a company's fiscal year instead
of a calendar year. A company with a June year-end would issue annual statements in July or
August; where as, a company with a December year-end would issue statements in January or
February.
Public companies are required by the SEC and the PCAOB to issue both interim and annual
statements. A CPA firm must always audit annual statements, but some interim statements can
simply be reviewed by a qualified firm.
Financial Statement Analysis
Investors and creditors analyze this set of statements to base their financial decisions on. They
also look at extra financial reports like financial statement notes and the management discussion.
The income statement and balance sheet accounts are compared with each other to see how
efficiently a company is using its assets to generate profits. Company debt and equity levels can
also be examined to determine whether companies are properly funding operations and
expansions.
Most investors and creditors use financial ratios to analyze these comparisons. There is almost
no limit to the amount of ratios that can be combined for analysis purposes.
These ratios by themselves rarely give outside users and decision makers enough information to
judge whether or not a company is fiscally sound, however. Investors and creditors generally
compare different companies' ratios to develop an industry standard or benchmark to judge
company performance.
Here are the main financial statements that are prepared by most companies that we will go over
in this section. We'll also talk about some extra styles of statements and other reports that are
commonly issued.


Income Statement
Statement of Stockholders Equity
Balance Sheet
Cash Flow Statement
Statement of Retained Earnings
Income Statement
The income statement, also called the profit and loss statement, is a report that shows the
income, expenses, and resulting profits or losses of a company during a specific time period. The
income statement is the first financial statement typically prepared during the accounting cycle
because the net income or loss must be calculated and carried over to the statement of owner's
equity before other financial statements can be prepared.
The income statement calculates the net income of a company by subtracting total expenses from
total income. This calculation shows investors and creditors the overall profitability of the
company as well as how efficiently the company is at generating profits from total revenues.
The income and expense accounts can also be subdivided to calculate gross profit and the
income or loss from operations. These two calculations are best shown on a multi-step income
statement. Gross profit is calculated by subtracting cost of goods sold from net sales. Operating
income is calculated by subtracting operating expenses from the gross profit.
Unlike the balance sheet, the income statement calculates net income or loss over a range of
time. For example annual statements use revenues and expenses over a 12-month period, while
quarterly statements focus on revenues and expenses incurred during a 3-month period.
Format
There are two income statement formats that are generally prepared.
Single-step income statement the single step statement only shows one category of income and
one category of expenses. This format is less useful of external users because they can't calculate
many efficiency and profitability ratios with this limited data.
Multi-step income statement - the multi-step statement separates expense accounts into more
relevant and usable accounts based on their function. Cost of goods sold, operating and non-
operating expenses are separated out and used to calculate gross profit, operating income, and net
income.
In both income statement formats, revenues are always presented before expenses. Expenses can
be listed alphabetically or by total dollar amount. Either presentation is acceptable.
Income statement expenses can also be formatted by the nature and the function of the expense.
All income statements have a heading that display's the company name, title of the statement and
the time period of the report. For example, an annual income statement issued by Paul's Guitar
Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc.
Income Statement
For the Year Ended December 31, 2015
Example
Here is an example of how to prepare an income statement from Paul's adjusted trial balance in
our earlier accounting cycle examples.
Single Step Income Statement


As you can see, this example income statement is a single-step statement because it only lists
expenses in one main category. Although this statement might not be extremely useful for
investors looking for detailed information, it does accurately calculate the net income for the
year.
This net income calculation can be transferred to Paul's statement of owner's equity for
preparation.



Statement of Stockholders Equity
The statement of stockholder's equity, often called the statement of changes in equity, is one of
four general purpose financial statements and is the second financial statement prepared in the
accounting cycle. This statement displays how equity changes from the beginning of an
accounting period to the end.
The statement of stockholder's equity displays all equity accounts that affect the ending equity
balance including common stock, net income, paid in capital, and dividends. This in depth view
of equity is best demonstrated in the expanded accounting equation.
In other words, the statement of stockholder's equity is a basic reconciliation of how the ending
equity is calculated. How did the equity balance on January 1 turn into the equity balance on
December 31?
First, the beginning equity is reported followed by any new investments from shareholders along
with net income for the year. Second all dividends and net losses are subtracted from the equity
balance giving you the ending equity balance for the accounting period.
As you can see, net income is needed to calculate the ending equity balance for the year. This is
why the statement of changes in equity must be prepared after the income statement.
Format
This statement has four sections:
-- Beginning balance
-- Additions
-- Subtractions
-- Ending Balance
The beginning equity balance is always listed on its own line followed by two indented sections:
additions and subtractions. Additions include new investments and net income if the company is
profitable. If the company is not profitable, net loss for the year is included in the subtractions
along with any dividends to the owners. The last line on this statement always lists the ending
equity balance.
Like all financial statements, the statement of stockholder's equity has a heading that display's
the company name, title of the statement and the time period of the report. For example, an
annual income statement issued by Paul's Guitar Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc.
Statement of Stockholder's Equity
For the Year Ended December 31, 2015
Example
Here is an example of how to prepare a statement of stockholder's equity from our unadjusted
trial balance and financial statements used in the accounting cycle examples for Paul's Guitar
Shop.
As you can see, the beginning equity is zero because Paul just started the company this year.
Paul's initial investment in the company, issuance of common stock, and net income at the end of
the year increases his equity in the company. Conversely, his dividends decrease the overall
equity.
This ending equity balance can then be cross-referenced with the ending equity on the balance
sheet to make sure it is accurate.

Balance Sheet
The balance sheet, also called the statement of financial position, is the third general purpose
financial statement prepared during the accounting cycle. The balance sheet report a company's
financial position based on its assets, liabilities, and equity at a single moment in time.
Unlike the income statement, the balance sheet does not report activities over a vast time frame.
The balance sheet is essentially a picture a company's recourses, debts, and ownership on a given
day. This is why the balance sheet is sometimes considered less reliable or less telling of a
company's current financial performance. Annual income statements look at performance over
the course of 12 months, where as, the balance sheet only focuses on the financial position of one
day.
The balance sheet is basically a report version of the accounting equation also called the balance
sheet equation where assets always equation liabilities plus shareholder's equity.
In this way, the balance sheet show how the resources controlled by the business (assets) are
financed by debt (liabilities) or shareholder investments (equity). Investors and creditors
generally look at the balance sheet for insight as to how efficiently a company can use its
resources and how effectively it can finance them.
Format
The balance sheet can be reported in two different formats: account form and report form. The
account form consists of two columns displaying assets on the left column of the report and
liabilities and equity on the right column. You can think of this like debits and credits. The debit
accounts are displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more of a traditional
report that is issued by companies. Assets are always present first followed by liabilities and
equity.
In both formats, assets are categorized into current and long-term assets. Current assets consist of
resources that will be used in the current year, while long-term assets are resources lasting longer
than one year.
Liabilities are also separated into current and long-term categories.
Like all financial statements, the balance sheet has a heading that display's the company name,
title of the statement and the time period of the report. For example, an annual income statement
issued by Paul's Guitar Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc.
Balance Sheet
December 31, 2015
Example
Here is an example of how to prepare the balance sheet from our unadjusted trial balance and
financial statements used in the accounting cycle examples for Paul's Guitar Shop.
Account Format Balance Sheet



Report Format Balance Sheet


As you can see, the report format is a little bit easier to read and understand. That is why most
issued reports are presented in report form. Plus the report form fits better on a standard sized
piece of paper.
One thing to note is that just like in the accounting equation, total assets equals total liabilities
and equity. This is always the case. If you are preparing a balance sheet for one of your
accounting homework problems and it doesn't balances, something was input incorrectly. You'll
have to go back through the trial balance and T-accounts to find the error.
Now that the balance sheet is prepared and the beginning and ending cash balances are
calculated, the statement of cash flows can be prepared.

Cash Flow Statement
The cash flow statement, also called the statement of cash flows, is the fourth general-purpose
financial statement and summarizes how changes in balance sheet accounts affect the cash
account during the accounting period. It also reconciles beginning and ending cash and cash
equivalents account balances.
The cash flow statement shows investors and creditors what transactions affected the cash
accounts and how effectively and efficiently a company can use its cash to finance its operations
and expansions. This is particularly important because investors want to know the company is
financially sound while creditors want to know the company is liquid enough to pay its bills as
they come due. In other words, does the company have good cash flow?
The term cash flow generally refers to a company's ability to collect and maintain adequate
amounts of cash to pay its upcoming bills. In other words, a company with good cash flow can
collect enough cash to pay for its operations and fund its debt service without making late
payments.
Format
The cash flow statement is divided into three main sections: cash flows from operating activities,
investing activities, and financing activities.
Cash Flows From Operating Activities
Cash flows from operating activities include transactions from the operations of the business. In
other words, the operating section represent the cash collected from the primary revenue
generating activities of the business like sales and service income. Operating activities are short-
term and only affect the current period. For example, payment of supplies is an operating activity
because it relates to the company operations and is expected to be used in the current period.
Operating cash flows are calculated by adjusting net income by the changes in current asset and
liability accounts.
Cash Flows From Investing Activities
Cash flows from investing activities consist of cash inflows and outflows from sales and
purchases of long-term assets. In other words, the investing section represents the cash that the
company either collected from the sale of a long-term asset or the amount of money spent on
purchasing a new long-term asset. You can think of this section as the company investing in
itself. The investments are long-term in nature and expected to last more than one accounting
period.
Investing cash flows are calculated by adding up the changes in long-term asset accounts.
Cash Flows From Financing Activities
Cash flows from financing consists of cash transactions that affect the long-term liabilities and
equity accounts. In other words, the financing section represents the amount of cash collected
from issuing stock or taking out loans and the amount of cash disbursed to pay dividends and
long-term debt. You can think of financing activities as the ways a company finances its
operations either through long-term debt or equity financing.
Financing cash flows are calculated by adding up the changes in all the long-term liability and
equity accounts.
Here's a tip!
Here is a tip on how I keep track of what transactions go in which section.
Operating Activities: includes all activities that are reported on the income statement under
operating income or expenses.
Investing Activities: includes all cash transactions used to buy or sell long-term assets. Think of
these as the company investing in itself.
Financing Activities: includes all cash transactions that affect long-term liabilities and equity.
Whenever long-term debt or equity is involved, it is considered a financing activity.
Like all financial statements, the statement of cash flows has a heading that display's the
company name, title of the statement and the time period of the report. For example, an annual
income statement issued by Paul's Guitar Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc.
Cash Flow Statement
December 31, 2015
Example
Here is an example of the statement of cash flows from our unadjusted trial balance and financial
statements used in the accounting cycle examples for Paul's Guitar Shop.
Preparation
The cash flow statement is generally prepared using two different methods: the direct method
and the indirect method. Both result in the same financial statement, but each method is used for
different sized companies.

Statement of Retained Earnings
The statement of retained earnings is a financial statement that is prepared to reconcile the
beginning and ending retained earnings balances. Retained earnings are the profits or net income
that a company chooses to keep rather than distribute it to the shareholders.
In other words, assume a company makes money (has net income) for the year and only
distributes half of the profits to its shareholders as a distribution. The other half of the profits are
considered retained earnings because this is the amount of earnings the company kept or
retained.
The retained earnings calculation or formula is quite simple. Beginning retained earnings
corrected for adjustments, plus net income, minus dividends, equals ending retained earnings.
Just like the statement of shareholder's equity, the statement of retained is a basic reconciliation.
It reconciles how the beginning and ending RE balances. In other words, how did the RE balance
on January 1 turn into the RE balance on December 31?
Although this statement is not included in the four main general-purpose financial statements, it
is considered important to outside users for evaluating changes in the RE account. This statement
is often used to prepare before the statement of stockholder's equity because retained earnings is
needed for the overall ending equity calculation.
Format
This statement has five main sections:
-- Beginning RE
-- Prior Period Adjustments
-- Additions
-- Subtractions
-- Ending Balance
The beginning equity balance is always listed on its own line followed by any adjustments that
are made to retained earnings for prior period errors. These adjustments could be caused by
improper accounting methods used, poor estimates, or even fraud. The sum or difference is
usually subtotaled at this point.
Next, additions and subtractions are listed. Additions include net income if the company is
profitable. If the company is not profitable, net loss for the year is included in the subtractions
along with any dividends to the owners. Dividends are always subtracted from RE because once
dividends are declared, the company owes its shareholders the funds and must take these funds
out of its retained earnings even if they are simply declared and not paid.
The last line on the statement sums the total of these adjustments and lists the ending retained
earnings balance.
Like all financial statements, the statement of retained earnings has a heading that display's the
company name, title of the statement and the time period of the report. For example, an annual
income statement issued by Paul's Guitar Shop, Inc. would have the following heading:
Paul's Guitar Shop, Inc.
Statement of Retained Earnings
For the Year Ended December 31, 2015
Example
Here is an example of how to prepare a statement of retained earnings from our unadjusted trial
balance and financial statements used in the accounting cycle examples for Paul's Guitar Shop.
As you can see, the beginning retained earnings account is zero because Paul just started the
company this year. There were no retained earnings in prior years. Likewise, there were no prior
period adjustments since the company is brand new.
Paul's net income at the end of the year increases the RE account while his dividends decrease
the overall the earnings that are kept in the business.
This ending retained earnings balance can then be used for preparing the statement of
shareholder's equity and the balance sheet.





The Adjustment Process Illustrated
Accountants prepare a trial balance both before and after making adjusting entries. Reexamine
the Greener Landscape Group's unadjusted trial balance for April 30, 20X2.


Account Debit Credit
100 Cash $ 6,355
110 Accounts Receivable 150
140 Supplies 50
145 Prepaid Insurance 1,200
150 Equipment 3,000
155 Vehicles 15,000
200 Accounts Payable $ 50
250 Unearned Revenue 270
280 Notes Payable 10,000
300 J. Green, Capital 15,000
350 J. Green, Drawing 50
400 Lawn Cutting Revenue 750
500 Wages Expense 200
510 Gas Expense 30
520 Advertising Expense 35
$26,070 $26,070
Consider eight adjusting entries recorded in Mr. Green's general journal and posted to his general
ledger accounts. Then, see the adjusted trial balance, which shows the balance of all accounts
after the adjusting entries are journalized and posted to the general ledger accounts.
Adjustment A: During the afternoon of April 30, Mr. Green cuts one lawn, and he agrees to
mail the customer a bill for $50, which he does on May 2. In accordance with the revenue
recognition principle, Mr. Green makes an adjusting entry in April to increase (debit) accounts
receivable for $50 and to increase (credit) lawn cutting revenue for $50.



Adjustment B: Mr. Green's $10,000 note payable, which he signed on April 2, carries a 10.2%
interest rate. Interest calculations usually exclude the day that loans occur and include the day
that loans are paid off. Therefore, Mr. Green uses the formula below to calculate how much
interest expense accrued during the final twentyeight days of April.



Since the matching principle requires that expenses be reported in the accounting period to which
they apply, Mr. Green makes an adjusting entry to increase (debit) interest expense for $79 and
to increase (credit) interest payable for $79.



Adjustment C: Mr. Green's parttime employee earns $80 during the last four days of April but
will not be paid until May 10. This requires an adjusting entry that increases (debits) wages
expense for $80 and that increases (credits) wages payable for $80.



Adjustment D: On April 20 Mr. Green received a $270 prepayment for six future visits.
Assuming Mr. Green completed one of these visits in April, he must make a $45 adjusting entry
to decrease (debit) unearned revenue and to increase (credit) lawn cutting revenue.



Adjustment E: Mr. Green discovers that he used $25 worth of office supplies during April. He
therefore makes a $25 adjusting entry to increase (debit) supplies expense and to decrease
(credit) supplies.



Adjustment F: Mr. Green must record the expiration of one twelfth of his company's insurance
policy. Since the annual premium is $1,200, he makes a $100 adjusting entry to increase (debit)
insurance expense and to decrease (credit) prepaid insurance.



Adjustment G: If depreciation expense on Mr. Green's $15,000 truck is $200 each month, he
makes a $200 adjusting entry to increase (debit) an expense account (depreciation expense
vehicles) and to increase (credit) a contraasset account (accumulated depreciationvehicles).



The truck's net book value is now $14,800, which is calculated by subtracting the $200 credit
balance in the accumulated depreciationvehicles account from the $15,000 debit balance in the
vehicles account. Many accountants calculate the depreciation of longlived assets to the nearest
month. Had Mr. Green purchased the truck on April 16 or later, he might not make this adjusting
entry until the end of May.
Adjustment H: If depreciation expense on Mr. Green's equipment is $35 each month, he makes
a $35 adjusting entry to increase (debit) depreciation expenseequipment and to increase (credit)
accumulated depreciationequipment.



After journalizing and posting all of the adjusting entries, Mr. Green prepares an adjusted trial
balance. The Greener Landscape Group's adjusted trial balance for April 30,20X2 appears below.
The Greener Landscape Group Adjusted Trial Balance April 30,20X2
Account Debit Credit
100 Cash $ 6,355
110 Accounts Receivable 200
140 Supplies 25
145 Prepaid Insurance 1,100
150 Equipment 3,000
151 Accumulated DepreciationEquipment $ 35
155 Vehicles 15,000
156 Accumulated DepreciationVehicles 200
Account Debit Credit
200 Accounts Payable 50
210 Wages Payable 80
220 Interest Payable 79
250 Unearned Revenue 225
280 Notes Payable 10,000
300 J. Green, Capital 15,000
350 J. Green, Drawing 50
400 Lawn Cutting Revenue 845
500 Wages Expense 280
510 Gas Expense 30
520 Advertising Expense 35
530 Interest Expense 79
540 Supplies Expense 25
545 Insurance Expense 100
551 Depreciation ExpenseEquipment 35
556 Depreciation ExpenseVehicles 200
$26,514 $26,514
Cliff's Notes