Steps in accounting cycle:

A typical accounting cycle is a 9-step procedure:

1. Analyzing:

The first step of the accounting cycle is to analyze the accounting transaction and determine the
nature of the accounts involved so that proper recording can be done.

2. Journalize:

After determining the accounts involved, the next step is to journalize the transaction in a Journal
Book, which is also called the Book of Original Entry because this is the first record where
transactions are entered. Transactions in a Journal are entered as and when they occur in a
chronological order. A Journal is prepared on the concept of Double Entry, where every transaction
affects at least two accounts, i.e. debit to one account and credit to another. read more about journal
entries.

3. Posting:

After Journalizing, the accounting transactions are posted to Ledger accounts in order to classify
and group transactions relating to a single account at one place. Read more about posting from
journal to ledger accounts.
4. Summarizing:

The accounting cycle requires summarizing of the entries pertaining to a particular period in a
Trial Balance. A trial balance is essentially a list of all accounts (debit as well as credit) and
provides an overview of the various types of financial transactions entered into by any organization
during a period.

5. Adjusting:

After preparation of Trial Balance, the next step is to pass Journal entries pertaining to certain
adjustments, like, recording of closing stock, adjusting prepaid/outstanding expenses, recording
advance/accrued income, etc.

6. Correcting:

After the adjusting entries are passed and posted to respective ledgers, the Trial Balance has to be
corrected and adjusted to show the impact of the adjusting entries and an Amended Trial Balance
is prepared.

7. Organizing:

The next step in the accounting cycle is to organize the various accounts by preparing the financial
statements, namely, income statement and balance sheet. The income statement shows all the
expenses incurred and incomes earned by the organization during a financial period. The balance
sheet is a depiction of the financial position of the business and displays the various assets owned
and liabilities owed (to owners and outsiders) by and organization.

8. Closing:

After preparation of the profit and loss account/income statement and balance sheet, the accounts
have to be closed to prepare for the next accounting period. The temporary accounts, i.e. nominal
accounts (income and expenses accounts) are closed by transferring their balances to the Profit &
Loss A/c by means of a single consolidated journal entry and then the Profit & Loss A/c is closed
by transferring the profit or loss to the Capital account.

9. Finalizing:

The last step is to prepare the final trial balance showing the effect of all the transactions of the
year and having closing balances of the accounts for the year. This closing trial balance serves as
the base/opening trial balance for the next year’s accounting cycle.
General journal

A Journal entry is the first step of the accounting or book-keeping process. In this step, all the
accounting transactions are recorded in general journal in a chronological order. The general
journal is maintained essentially on the concept of double entry system of accounting, where each
transaction affects at least two accounts.

Other names used for general journal are “journal book” and “book of original entry”

The process of making a journal entry

The first step in the process of preparing a journal entry is to analyze the accounts involved in
a business transaction and then apply the rules of debit and credit based on the type of each
account. After identifying the accounts involved in the transaction and deciding upon the
applicable rules, the journal entry is recorded in the general journal in a specified format which
includes the following details:

1. Date of transaction
2. Ledger accounts involved
3. Amount of transaction
4. A brief narration to describe the transaction

Format of general journal

Let’s understand the format of general journal and the process of making a journal entry through
an illustration.

Transaction:

January 05: Purchase of machinery by making cash payment of $15,000.

Analysis of transaction:

Recording journal entry:

According to rules of debit and credit, when an asset increases, its account is debited and when an
asset decreases, its account is credited. In this transaction, machinery (an asset) is increasing, and
cash (an asset) is decreasing. So the journal entry would be made as follows:
All business transactions are recorded in the general journal in a manner illustrated above. After
making journal entries in the journal, they are periodically posted to the ledger accounts.

Example:

The Moon Service Inc. engaged in the following transactions during the month of November 2015:

 Nov. 01: Issued 20,000 shares of common stock at $20 per share
 Nov. 03: Paid office rent for the moth of November $500.
 Nov. 06: Purchased office supplies $250.
 Nov. 12: Purchased office equipment on account $4,500
 Nov. 16: Purchased business car for $25,000. Paid $10,000 cash and issued a note for the
balance.
 Nov. 21: Billed clients $24,000 on account.
 Nov. 25: Declared dividends $3,000. The amount of dividends will be distributed in
December.
 Nov. 28: Paid utility bills for the month of November $180.
 Nov. 29: Received $20,000 cash from clients billed on November 21.
 Nov. 30: Paid salary for the month of November $7,500

Required: Record the above transactions in a general journal.

Solution:
The format of ledger account and posting process

The process of posting journal entries to ledger accounts is very simple. No new information is
needed to prepare ledger accounts. The information that has already been recorded in the journal
is just transferred to the relevant ledger accounts.

For the purpose of posting, we can divide a journal entry into two parts – a debit part and a credit
part. Both the parts essentially contain one or more accounts. The amount of the account (or
accounts) in the debit part of the entry is written on the debit side of the respective account and the
amount of the account (or accounts) in the credit part of the entry is written on the credit side of
the respective account in the ledger.

To have a better understanding of the posting process and to illustrate the format of ledger
accounts, we need to take a transaction, prepare a journal entry and then transfer it to the relevant
ledger accounts.

Transaction: On January 1, 2015, US company sold goods to customers for cash $25,000.

The journal entry of the above transaction and its posting to ledger accounts is illustrated below:

The debit part of the above journal entry is “cash account” and the credit part is “sales account”.
So the amount of the journal entry ($25,000) is written on the debit side of the cash account and
credit side of the sales account. All journal entries are similarly posted to accounts in general
ledger.

Example:

We can prepare ledger accounts using journal entries of Moon Service Inc. prepared on the journal
entriespage.
Format of unadjusted trial balance

The unadjusted trial balance consists of three columns. All account names are written in the first
column, the debit balances are written in the second column and the credit balances are written in
the third column. The accounts are listed in the order in which they appear in the general ledger.
A simple format of unadjusted trial balance is given below:

The total of the debit column of the unadjusted trial balance must be equal to the total of the credit
column. If they aren’t in agreement, it means that the trial balance has been prepared incorrectly
or the journal entries have not been transferred to the ledger accounts accurately.

Example

We can prepare unadjusted trial balance from the ledger accounts of the Moon Service
Inc. prepared on the general ledger page.
The purpose of unadjusted trial balance:

The main purposes of preparing an unadjusted trial balance is to check the mathematical equality
of debits and credits.

If all the transactions have been correctly recorded in the general journal according to double
entry principle of bookkeeping and have been correctly transferred to the ledger accounts, the total
of the debit balances should be equal to the total of the credit balances of ledger accounts. An
unbalanced trial balance, on the other hand, indicates one or more of the following typical errors:

1. A debit amount has been incorrectly posted as credit or a credit amount has been incorrectly
posted as debit.
2. The balances of the ledger accounts have been incorrectly determined.
3. The balances of ledger accounts have been incorrectly copied to the trial balance.
4. A debit balance has been incorrectly listed in the credit column or a credit balance has been
incorrectly listed in the debit column of the trial balance.
5. The debit or credit columns of the trial balance has been incorrectly totaled.

The above errors are typical errors that an unbalanced trial balance indicates. One should keep in
mind that the errors may still exist even if the totals of debit and credit columns of the trial balance
are equal. A few examples of such errors are given below:
Examples of errors that will not be detected by trial balance:

1. The transaction is not correctly analyzed and recorded. For example, the receipt of cash is
erroneously debited to another account instead of cash.
2. A transaction is completely omitted from the journal or ledger.
3. The debit and credit amounts of a journal entry are equally overstated.
4. The debit and credit amounts of a journal entry are equally understated.

We may conclude that if the trial balance is balanced, the errors may or may not exist; and if the
trial balance is not balanced, the errors certainly exist.

Adjusting entries

Definition and explanation:

Adjusting entries (also known as end of period adjustments) are journal entries that are made at
the end of an accounting period to adjust the accounts to accurately reflect the revenue and
expenses of the current period. The preparation of adjusting entries is the fourth step of accounting
cycle and comes after the preparation of unadjusted trial balance. Companies that prepare their
financial statements in accordance with US GAAP and IFRS usually prepare some adjusting
entries at the end of each accounting period. In this article, first we shall discuss the purpose of
adjusting entries and then explain the method of their preparation with the help of some examples.

Types of adjusting entries:

Adjusting entries can be divided into the following four types.

(1). Adjusting entries that convert assets to expenses:

Some cash expenditures are made to obtain benefits for more than one accounting period.
Examples of such expenditures include advance payment of rent or insurance, purchase of office
supplies, purchase of an office equipment or any other fixed asset. These are recorded by debiting
an appropriate asset (such as prepaid rent, prepaid insurance, office supplies, office equipment
etc.) and crediting cash account. This procedure is known as postponement or deferral of
expenses. An adjusting entry is made at the end of accounting period for converting an appropriate
portion of the asset into expense.

Example: On January 01, 2015, the Moon company paid $12,000 as advance rent of the head
office building to Mr. X for the first quarter of the of year. If the company makes adjusting entries
on monthly basis, the relevant journal entries are given below:

Entry on January 01 when the advance payment of rent is made:

Adjusting entry on January 31 to convert a portion of prepaid rent (an asset) to rent expense:

*12,000/4

As the advance rent is for a quarter (three months), the adjusting entry made on January 31 will
also be made at the end of the next two months.

(2). Adjusting entries that convert liabilities to revenue:

Sometime companies collect cash for which the goods or services are to be provided in some future
period. Such receipt of cash is recorded by debiting cash and crediting a liability account known
as unearned revenue. This procedure is known as postponement or deferral of revenue. At the end
of accounting period the unearned revenue is converted into earned revenue by making an
adjusting entry for the value of goods or services provided during the period.

Example: The Moon company receives $180,000 cash from Mr. Y (a client of the company) on
January 01, 2015. At the end of January, the total value of the services provided to Mr. Y
is $15,000. If accounts are adjusted at the end of each month, the relevant journal entries are given
below:

Entry on January 01 when advance payment is received:

Adjusting entry on January 31 to convert a portion of unearned revenue (a liability) to

earned revenue:
(3). Adjusting entries for accruing unpaid expenses:

Unpaid expenses are expenses which are incurred but no cash payment is made during the period.
Such expenses are recorded by making an adjusting entry at the end of accounting period. It is
known as accruing the unpaid expenses.

Example: The Moon company pays salary to its employees on fifth day of every month. The total
salary payable for the month of January is $8,500. If Moon company makes adjusting entries at
the end of each month, it will record the following adjusting entry on January 31:

Adjusting entry on January 31:

(4). Adjusting entries for accruing uncollected revenue:

Uncollected revenue is the revenue that is earned but not collected during the period. Such revenue
is recorded by making an adjusting entry at the end of accounting period. It is known as accruing
the uncollected revenue.

Example: The Moon company provides services valuing $34,000 to Mr. Z during the month of
December. Mr. Z will be billed next year. The company will record this accrued revenue by
making the following adjusting entry:

Adjusting entry on January 31:

After preparing all necessary adjusting entries, they are either posted to the ledger accounts or
directly added to the unadjusted trial balance for the purpose of preparing adjusted trial balance of
the company. Click on the next link below to understand how an adjusted trial balance is prepared.

EXERCISES

Exercise 1-1 (10 minutes)

a. Corporation e. Sole proprietorship

b. Sole proprietorship f. Sole proprietorship
c. Corporation g. Corporation
d. Partnership

Exercise 1-2 (10 minutes)

Code Description Principle

E 1. Usually created by a pronouncement from an Specific accounting
authoritative body. principle
G 2. Requires financial statements reflect the assump-tion Going-concern
that the business continues operating. principle
A 3. Derived from long-used and generally accepted General accounting
accounting practices. principle
F 4. Requires financial statement information to be Objectivity principle
supported by evidence other than someone’s opinion or
belief.
C 5. Requires every business to be accounted for separately Business entity
from its owner or owners. principle
D 6. Requires revenue to be recorded only when the earnings Revenue recognition
process is complete. principle
B 7. Requires information to be based on actual costs Cost principle
incurred in transactions.
Exercise 1-3 (10 minutes)

1. A
2. B
3. B
4. B
5. C
6. A
7. A
8. C

11
Exercise 1-4 (20 minutes)

External users and some questions they seek to answer with accounting information include:

1. Shareholders (investors), who seek answers to questions such as:

a. Are resources owned by a business adequate to carry out plans?
b. Are the debts owed excessive in amount?
c. What is the current level of income (and its components)?
2. Creditors, who seek answers for questions such as:
a. Does the business have the ability to repay its debts?
b. Can the business take on additional debt?
c. Are resources sufficient to cover current amounts owed?
3. Employees, who seek answers to questions such as:
a. Is the business financially stable?
b. Can the business afford to pay higher salaries?
c. What are growth prospects for the organization?

Exercise 1-5 (20 minutes)

a. Situations involving ethical decision making in coursework include performing

independent work on examinations and individually completing assignments/projects.
It can also extend to promptly returning reference materials so others can enjoy them,
and to properly preparing for class to efficiently use the time and question period to
not detract from others’ instructional benefits.

b. Managers face several situations demanding ethical decision making in their dealings
with employees. Examples include fairness in performance evaluations, salary
adjustments, and promotion recommendations. They can also include avoiding any
perceived or real harassment of employees by the manager or any other employees. It
can also include issues of confidentiality regarding personal information known to
managers.

c. Accounting professionals who prepare tax returns can face situations where clients
wish to claim deductions they cannot substantiate. Also, clients sometimes exert
pressure to use methods not allowed or questionable under the law. Issues of
confidentiality also arise when these professionals have access to clients’ personal
records.

12
d. Auditing professionals with competing audit clients are likely to learn valuable
information about each client that the other clients would benefit from knowing. In this
situation the auditor must take care to maintain the confidential nature of information
about each client.

13
Exercise 1-6 (10 minutes)

1. G
2. A
3. C
4. F
5. D

Exercise 1-7 (20 minutes)

a. Using the accounting equation:

Assets($123,000) = Liabilities($53,000) + Equity(?)
Thus: $70,000 = Equity

a. Using the accounting equation at the beginning of the year:

Assets($200,000) = Liabilities(?) + Equity($150,000)
Thus: Beginning Liabilities = $50,000
Using the accounting equation at the end of the year:
Assets($200,000 + $70,000) = Liabilities($50,000 + $30,000) + Equity(?)
Thus: Ending Equity = $190,000

Alternative approach to solving part (b):

Assets($70,000) = Liabilities($30,000) + Equity(?)
where “” refers to “change in.”
Thus: Ending Equity = $150,000 + $40,000 = $190,000

c. Using the accounting equation at the end of the year:

Assets($180,000) = Liabilities($60,000 - $10,000) + Equity(?)
Thus: Ending Equity = $130,000
Using the accounting equation at the beginning of the year:

14
Assets($180,000 - $80,000) = Liabilities($60,000) + Equity(?)
Thus: Beginning Equity = $40,000

15
Exercise 1- 8 (10 minutes)

a. $95,000
b. $67,000
c. $112,000

Exercise 1-9 (15 minutes)

Examples of transactions that fit each case include:

a. Cash withdrawal (or some other asset) by the owner from the business; OR, the business
incurs an expense paid in cash.
b. Business purchases equipment (or some other asset) on credit.
c. Business replaces one form of liability with another (for example, it can sign a note
payable to extend the due date on an account payable)
d. Business pays an account payable (or some other liability) with cash (or some other
asset).
e. Business purchases office supplies (or some other asset) for cash (or some other asset).
f. Business incurs an expense that is not yet paid (for example, when employees earn wages
that are not yet paid).
g. Owner invests cash (or some other asset) in the business; OR, the business earns revenue
and accepts cash (or another asset).

Exercise 1-10 (20 minutes)

a. Started the business with the owner investing $20,000 cash.

b. Purchased office supplies for $1,500 by paying $1,000 cash and putting the remaining
$500 balance on credit.
c. Purchased office furniture by paying $8,000 cash.
d. Billed a customer $3,000 for services earned.
e. Provided services for $500 cash.

16
 Exercise 1-11 (15 minutes)

a. Purchased land for $2,000 cash.

b. Purchased $500 of office supplies on credit.
c. Billed a client $950 for services provided.
d. Paid the $500 account payable created by the credit purchase of office supplies in
transaction b.
e. Collected $950 cash for the billing in transaction c.

Exercise 1-12 (30 minutes)

Maben
, With-
Accounts Equip- Accounts Maben, - -
Receivable Payable drawal
Cash + + ment = + Capital + Revenu Expense
s
e s

a. +$50,000 + $10,000 = + $60,000

b. – 1,600 ______ ______ – $1,600

Ba 48,400 + + 10,000 = + 60,000 – 1,600

l.

c. _______ + 12,000 +$12,000 ______ _____

Ba 48,400 + + 22,000 = 12,000 + 60,000 – 1,600

l.

d. + 2,000 ______ _______ ______ + $2,000 _____

Ba 50,400 + + 22,000 = 12,000 + 60,000 + 2,000 – 1,600

l.

e. _______ + $7,000 ______ _______ ______ + 7,000 _____

Ba 50,400 + 7,000 + 22,000 = 12,000 + 60,000 + 9,000 – 1,600

l.

f. – 8,000 ______ + 8,000 _______ ______ _____ _____

17
Ba 42,400 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 1,600
l.

g. – 2,400 ______ ______ _______ ______ _____ – 2,400

Ba 40,000 + 7,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000

l.

h. + 5,000 - 5,000 ______ _______ ______ _____ _____

Ba 45,000 + 2,000 + 30,000 = 12,000 + 60,000 + 9,000 – 4,000

l.

i. – 12,000 ______ ______ – 12,000 ______ _____ _____

Ba 33,000 + 2,000 + 30,000 =0 + 60,000 + 9,000 – 4,000

l.

j. – 500 ______ ______ _______ ______ – $500 _____ _____

Ba $32,500 + $2,000 + $30,000 = $ 0 + $60,000 – $500 + $9,000 – $4,000

l.

18
Exercise 1-13 (15 minutes)

BEST ANSWERS
Income Statement
For Month Ended October 31

Revenues
Consulting fees earned ................................. $15,000
Expenses
Salaries expense ............................................ $6,000
Rent expense ................................................. 2,550
Telephone expense ....................................... 660
Miscellaneous expenses ................................ 680
Total expenses............................................... 9,890
Net income ................................................................ $ 5,110

Exercise 1-14 (15 minutes)

BEST ANSWERS
Statement of Owner’s Equity
For Month Ended October 31

S. Shandi, Capital, Oct. 1 ............................................... $ 0

Add: Investments by owner……………… ................. 74,000
Net income (from Exercise 1-13) ....................... 5,110
79,110
Less: Withdrawals by owner ......................................... 3,360
S. Shandi, Capital, Oct. 31 ............................................. $75,750

19
Exercise 1-15 (15 minutes)

BEST ANSWERS
Balance Sheet
October 31

Assets Liabilities
Cash ....................................... $ 2,000 Accounts payable ........................... $ 7,500
Accounts receivable ............. 13,000
Office supplies ...................... 4,250 Equity
Office equipment .................. 28,000 S. Shandi, Capital*......................... 75,750
Land ...................................... 36,000
Total assets............................ $83,250 Total liabilities and equity ............. $83,250

* Computation of amount from Exercise 1-14.

Exercise 1-16 (15 minutes)

BEST ANSWERS
Statement of Cash Flows
For Month Ended October 31

Cash flows from operating activities

Cash received from customers $ 2,000
Cash paid to employees ............................................................................ (2,750)
Cash paid for rent ..................................................................................... (2,550)
Cash paid for telephone expenses ............................................................ (660)
Cash paid for miscellaneous expenses ..................................................... (680)
Net cash used by operating activities ...................................................... ( 4,640)

Cash flows from investing activities

Purchase of office equipment ................................................................... (28,000)
Net cash used by investing activities........................................................ (28,000)

20
Cash flows from financing activities
Owner’s cash investments ........................................................................ 38,000
Owner’s cash withdrawals ....................................................................... (3,360)
Net cash provided by financing activities ............................................... 34,640

Net increase in cash ................................................................................... $ 2,000

Cash balance, October 1 ........................................................................... 0
Cash balance, October 31 ......................................................................... $ 2,000

21
Exercise 1-17 (10 minutes)

A 1. Cash paid for wages A 5. Cash paid on an account payable

C 2. Cash withdrawal by owner C 6. Cash investment by owner
B 3. Cash purchase of equipment A 7. Cash received from clients
A 4. Cash paid for advertising A 8. Cash paid for rent

Exercise 1-18 (10 minutes)

Return on assets = Net income / Average total assets

= $20,000 / [($100,000 + $150,000)/2]

= 16%

Interpretation: Its return on assets of 16% is markedly above the 10% return of its
competitors. Accordingly, its performance is assessed as superior to its competitors.

Exercise 1-19B (10 minutes)

a. Financing
b. Investing
c. Operating
d. Financing
e. Investing

22
 MODULE 4

ADJUSTING AND CLOSING ENTRIES - ACCRUALS

Demonstration Problem 1

Anderson Architects

The transactions for the year 2000 for Anderson Architects have already been recorded. This problem
shows how to prepare adjusting entries for December 2000.

Dec. 31 A note payable of $6,000 has been outstanding since September 1, 2000. Under the
terms of the note, the note plus interest (12%) is to be paid on March 1, 2001. No
interest has been recorded on the note.

Dec. 31 Wages of $650 for December will be paid in January.

Dec. 31 Services were performed for a client for $800. The client has not been billed yet.

Dec. 31 Advertising costs of $105 for December will be paid in January.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Interest Expense 240

Interest Payable 240

Dec. 31 Wages Expense 650

Wages Payable 650

Dec. 31 Accounts Receivable 800

Service Revenue 800

Dec. 31 Advertising Expense 105

Accounts Payable 105

23
24
 Practice Problem 1

Comfort Furniture Company

The transactions for the year 2000 for Comfort Furniture Co. have been recorded in the accounting
system. This assignment requires you to prepare adjusting entries for Comfort Furniture Co. for
December 2000.

Dec. 31 Wages owed but unpaid at the end of December were $5,000.

Dec. 31 The company signed a 12%, six-month note for $6,000 on November 1, 2000.
No interest has been recorded for November and December.

Dec. 31 Service provided to a customer for $350 has not been recorded.

Dec. 31 Advertising cost of $90 for December has not been recorded.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Wages Expense 5,000

Wages Payable 5,000

Dec. 31 Interest Expense 120

Interest Payable 120

Dec. 31 Accounts Receivable 350

Service Revenue 350

Dec. 31 Advertising Expense 90

Accounts Payable 90

25
 Practice Assignment 2

Conway Floor Covering Incorporated

The transactions for Conway Floor Covering Inc. for the year 2000 have been recorded in the accounting
system. This assignment requires you to record the adjusting entries for December 2000.

Dec. 31 Performed services for a client for $850. The customer will be billed in January.

Dec. 31 $15,000 was borrowed by signing a 10%, 2 year note on September 1, 2000.
Record the interest on the note.

Dec. 31 Employee wages of $950 for December will be paid in January.

Dec. 31 Advertising costs of $95 for December will be paid in January.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Accounts Receivable 850

Service Revenue 850

Dec. 31 Interest Expense 500

Interest Payable 500

Dec. 31 Wages Expense 950

Wages Payable 950

Dec. 31 Advertising Expense 95

Accounts Payable 95

26
 Homework Problem 1

Gym on Wheels

Gym on Wheels provides gymnastics lessons at various daycare centers. The transactions for the year
2000 have been recorded in the accounting system. This assignment requires you to prepare adjusting
entries for December 2000.

Dec. 31 The note payable of $8,000 has been outstanding since July 1, 2000. Under the terms of
the note, the note plus interest (12%) is to be paid on July 1, 2001. No interest has been
recorded on the note.

Dec. 31 Instructors’ salaries of $2,000 for December will be paid in January.

Dec. 31 December fees of $160 will be collected in January.

Dec. 31 $85 will be paid in January for advertising in December.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Interest Expense 480

Interest Payable 480

Dec. 31 Salaries Expense 2,000

Salaries Payable 2,000

Dec. 31 Accounts Receivable 160

Service Revenue 160

Dec. 31 Advertising Expense 85

Accounts Payable 85

27
 Homework Problem 2

Borden Realty

The transactions for Borden Realty for the year 2000 have been recorded in the accounting system. This
assignment requires you to prepare adjusting entries for December 2000.

Dec. 31 Services provided to customers for $2,600 were unrecorded at the end of December.

Dec. 31 $115 will be paid in January for advertising in December.

Dec. 31 $1,080 of salaries earned by employees during December will be paid in January.

Dec. 31 The note payable of $12,000 has been outstanding since September 1, 2000. Under the
terms of the note, the note plus interest (10%) is to be paid on September 1, 2001. No
interest has been recorded on the note.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Accounts Receivable 2,600

Service Revenue 2,600

Dec. 31 Advertising Expense 115

Accounts Payable 115

Dec. 31 Salaries Expense 1,080

Salaries Payable 1,080

Dec. 31 Interest Expense 400

Interest Payable 400

28
 Homework Problem 3

Party Town Incorporated

The transactions for Party Town Inc. for the year 2000 have been recorded in the accounting system.
This assignment requires you to prepare adjusting entries for December 2000.

Dec. 31 A birthday party was arranged in December. The customer will pay $200 in January.

Dec. 31 Party Town Inc. borrowed $20,000 by signing a 12%, 2 year note on July 1, 2000.
Record the interest on the note.

Dec. 31 Employee wages of $750 for December will be paid in January.

Dec. 31 Advertising costs of $135 for December will be paid in January.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Accounts Receivable 200

Service Revenue 200

Dec. 31 Interest Expense 1,200

Interest Payable 1,200

Dec. 31 Salaries Expense 750

Salaries Payable 750

Dec. 31 Advertising Expense 135

Accounts Payable 135

29
 Homework Problem 4

Star Interior Designs

The transactions for Star Interior Designs for the year 2000 have been recorded in the accounting
system. This assignment requires you to prepare adjusting entries for December 2000.

Dec. 31 Performed services for a client for $1,250. The customer will be billed in January.

Dec. 31 $10,000 was borrowed by signing a 12%, two year note on October 1, 2000.
Record the interest on the note.

Dec. 31 Employee wages of $1,150 for December will be paid in January.

Dec. 31 Advertising costs of $115 for December will be paid in January.

DATE ACCOUNT DEBIT CREDIT

2000

Dec. 31 Accounts Receivable 1,250

Service Revenue 1,250

Dec. 31 Interest Expense 300

Interest Payable 300

Dec. 31 Salaries Expense 1,150

Salaries Payable 1,150

Dec. 31 Advertising Expense 115

Accounts Payable 115

30