Appendixaccounting cycle notes W14 1intermediate accounting fifth edtion.docx

Appendixaccounting cycle notes W14 1intermediate accounting fifth edtion.docx

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AppendixaccountingcyclenotesW141intermediateaccountingfifthedtion

ReviewoftheAccountingCycle-Supplementarynotes

Thebestwaytolearnthestepsintheaccountingcycleistoworkthroughanexampleusingacase.BelowyouwillfindtheLarryOwensRealEstateLimitedcase.AssumethatLarryOwenshasstartedanewcompanyintherealestateindustry;heplanstosellrealestateandalsotomanagepropertiesonbehalfofclients.HestartsthebusinessonJuly1,2011.

Onthefollowingpages,youwillbegivenaseriesoftransactionforLarryOwensRealEstateLimitedandwillrecordthetransactionsandpreparethefinancialstatementsforthebusiness’firstmonthofoperation.

Case:

LarryOwensRealEstate

ConsiderthefollowingtransactionswhichoccurinthemonthofJuly,2011:

（1）LarryOwensinvests$50,000ofhisownmoneyinOwensRealEstateLimited（OREL）bypurchasingsharecapital.

（2）ORELpurchaseda$30,000businessautomobileoncredit（a36monthcarloan）.

（3）ORELpaidthreemonthsofficerentinadvance,$3,000.

（4）Purchasedofficeequipmentforcash,$10,000

（5）PurchasedoncreditfromStandardSupplyCompanyofficesupplies,$600,

andfromOfficeDepotofficeequipment,$3,500.

（6）SoldunneededofficeequipmenttoDaleHall,$1,000cashand$500tobepaid

atalaterdate.

（7）Collected$500fromDaleHall.

（8）PaidOfficeDepot$1,750oftheamountowedforequipment.

（9）Soldahouseandcollectedan$8,500commission.

（10）Paidthesecretary'ssalaryforthefirsttwoweeksofthemonth,$1,000.

（11）Signedacontracttomanageanapartmentbuildingfor$500permonth.CollectedthemanagementfeeforthelasthalfofJulyandthemonthofAugust,amonthandahalf,$750

（12）Paidthesecretary'ssalaryforthesecondtwoweeksofJuly,$1,000.

（13）Paida$200dividendtohimselfasthesoleshareholder.

（14）Paidthemonthlytelephonebill,$200.

（15）Paidforgasandoilusedintheagencycar,$250.

（16）Paidfornewspaperadvertisingthathadappeared,$600.

Notethatthenumbershownwitheachaccountentrycorrespondstothetransactionnumber.Eachaccounthasbothalefthand（debit）sideandrighthand（credit）side.Adebitrepresentsanincreaseinassetsoradecreaseinliabilitiesorowners'equity.Acreditrepresentsanincreaseinliabilitiesorowners'equityandadecreaseinassets.Thetermsdebitandcreditthereforetakeonoppositesignsaswechangesidesintheaccountingequation.

Wefirstrecordtransactionsinjournalentries.Thejournalentriesarethenenteredin（postedto）theaccounts.Journalentriesfortheabove16transactionsareshownbelow.Thedebitsideoftheentryisshownfirst,andthecreditsideonthelinebelow,slightlyindented.

（1）Cash50,000

CommonStock50,000

（2）Automobile30,000

CarLoan30,000

（3）PrepaidRent3,000

Cash3,000

（4）OfficeEquipment10,000

Cash10,000

（5）OfficeSupplies600

OfficeEquipment3,500

AccountsPayable4,100

（6）Cash1,000

AccountsReceivable500

OfficeEquipment1,500

（7）Cash500

AccountsReceivable500

（8）AccountsPayable1,750

Cash1,750

（9）Cash8,500

CommissionsEarned8,500

（10）OfficeSalariesExpense1,000

Cash1,000

（11）Cash750

UnearnedManagementFees750

（12）OfficeSalariesExpense1,000

Cash1,000

（13）Dividends200

Cash200

（14）TelephoneExpense200

Cash200

（15）Gas,Oil,andRepairs250

Cash250

（16）AdvertisingExpense600

Cash600

SeeTaccountsonnextpage.

Assets=Liabilities+Owner’sEquity

（1）50,000

（3）3,000

（6）1,000（4）10,000

（7）500（8）1,750

（9）8,500（10）1,000

（11）750（12）1,000

（13）200

（14）200

（15）250

（16）600

42,750

（8）1,750（5）4,100

2,350

（1）50,000

50,000

CashAccountsPayableCommonStock

UnearnedManagementFees

Dividends

（11）750

750

（13）200

200

Carloan

AccountsReceivable

CommissionsEarned

（9）8,500

8,500

（2）30,000

30,000

（6）500（7）500

0

PrepaidRent

OfficeSalariesExpense

（3）3,000

3,000

（10）1,000

（12）1,000

2,000

OfficeSupplies

TelephoneExpense

（5）600

600

（14）200

200

Gas,Oil,andRepairs

Automobile

（15）250

250

（2）30,000

30,000

OfficeEquipment

AdvertisingExpense

（4）10,000（6）1,500

（5）3,500

1,2000

（16）600

600

SubLedgers

Beforemovingon,considerthe$2,350balanceinAccountsPayable.

Itisimportanttoknownotjustthetotalinthisaccount,butalsothebalancesduetoindividualsupplierssothatchequescanbewrittentopaythecorrectsupplierandtoensurethatallsuppliersarepaidappropriately.

Formally,acompanykeepstrackofamountsduetoindividualsuppliersthroughthemaintenanceofanAccountsPayablesubledger.

EachtimeajournalentryismadetoAccountsPayable,anentryisalsomadetotheindividualsupplieraccountinthesubledger.Journalentries（5）and（8）involveAccountsPayable.TheywouldbereflectedintheAccountsPayablesubledgerasfollows:

StandardSupplyCompany

OfficeDepot

（8）1750（5）3500

1750

（5）600

600

ATrialbalanceoftheAccountsPayablesubledgerfollows:

StandardSupplyCompany$600

OfficeDepot1,750

$2,350

NotethatthisequalsthebalanceintheAccountsPayableaccount.Thisisasweexpect,sincetheAccountsPayablesubledgerisnothingmorethanabreakdownofthataccountbyindividualsupplier.

WhenOwensRealEstateLimiteddevelopsaclientbase,itwillalsoneedtosetupanAccountsReceivablesubledgerinordertomaintainabreakdownofamountsowingfromindividualclients.

Let’scontinuewiththenextstepsintheaccountingcycle.Ifweaddupthebalancesinthegeneralledgeraccounts,wecanentertheminatrialbalanceandcheckthatthesumofthedebitsequalsthesumofthecredits,asfollows:

OwensRealEstateLimited

TrialBalance

July31,2011

DebitCredit

Cash$42,750

PrepaidRent3,000

OfficeSupplies600

Automobile30,000

OfficeEquipment12,000

AccountsPayable$2,350

UnearnedManagementFees750

CarLoan30,000

CommonStock50,000

Dividends200

CommissionsEarned8,500

OfficeSalariesExpense2,000

TelephoneExpense200

Gas,Oil,andRepairs250

AdvertisingExpense600

Totals$91,600$91,600

NowassumethatLarrywouldliketopreparefinancialstatementsattheendofJuly.Wewillprepareanincomestatementtoshowrevenuesearnedduringtheperiod,andtheexpensesincurredinordertoearntheserevenues.Wewillalsoprepareastatementoffinancialpositioninordertoshowtheamountsofthevariousassetsandliabilitiesandtheclosingowner'sequityfortheperiod.

Thetrialbalanceasitnowstandsdoesnotshowproperaccountbalances.Thatisbecausethenatureofsomeoftheitemshaschangedwiththepassageoftimefromwhentheywereoriginallyrecorded.Considertransaction

（2）,thepaymentofthreemonthsrentinadvance.AssumethispaymentwasmadeonJuly1.Werecordedthistransactionasadebittoprepaidrent.However,nowitistheendofJuly.Onemonthhaspassed.Therefore,one-thirdofthe$3,000originallypaidisnolongerprepaid.Assetsusedupinthecourseofdoingbusinessbecomeexpenses.Werecordthisinthefollowingadjustingentry（journalentriesarenumberedbeginningfromwheretheprevioussequenceofjournalentriesleftoff）:

（17）RentExpense1,000

PrepaidRent1,000

Similarly,physicalassets（theautomobileandtheofficeequipment）willwearout.Wecallthewearandtearonsuchassetsdepreciation.Assumetheautomobilehasdepreciatedby1/10ofitsoriginalcost.Assumethedepreciationontheofficeequipmentis$1200.Werecordthisdepreciationasfollows:

（18）DepreciationExpense4,200

AccumulatedDepreciationAutomobile3,000*

AccumulatedDepreciationOfficeEquipment1,200

*1/10X$30,000=$3,000

TheAccumulatedDepreciationaccountsarecalledcontraassetaccounts.Inordertopreservetheoriginalcostofthefixedassetsintact,wedonotcredittheAutomobileandOfficeEquipmentaccountsdirectly.Instead,wecreditthecontraaccountswhosecreditbalancesaredeductedfromthedebitbalancesintheassetaccountsthemselveswhenfinancialstatementsareprepared.

Larrycollected$750inJuly,representingmanagementfeesforhalfofJulyandallofAugust（transaction#11）.ItisnowJuly31,sohehasnotearnedthe$500portionofthefeethatpertainstoAugust.Hehas,however,earnedthe$250portionofthefeepertainingtoJuly.Wethereforeneedtoremovethis$250fromtheliabilityaccount,UnearnedManagementFees,andassignittoarevenueaccount:

（19）UnearnedManagementFees250

ManagementFeesEarned250

Inordertopreparefinancialstatements,theadjustingjournalentries（17）through（19）arepostedtothetrialbalanceandthebalancesextendedouttotheincomestatementandstatementoffinancialpositioncolumns.Thisdocumentisreferredtoasaworksheet.Thefinancialstatementscanthenbeprepareddirectlyfromthisworksheet.

Notethatweneedtoentera$500debittothebottomoftheincomestatementtobalancethedebitandcreditcolumns.Thisisbecauserevenues（whicharecredits）exceededexpenses（whicharedebits）by$500resultingina$500netincomefortheperiod.Wealsoneedtoaddthe$500netincomefiguretothestatementoffinancialpositioncre