INTERNATIONAL SCHOOL OF BUSINESS

Revision on Principle of
Accounting
BY ISB ACADEMIC TEAM

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Chap 1 1

CHAPTER 1 : ACCOUNTING IN ACTION

LO1: Identify the activities and users associated with accounting.

- Accounting consists of 3 basic activities in the economic event of the organization to interested
users – it:

 Identifies the economic events relevant to its business.

 Records systematic and chronological diary events.
 Communicates the collected information by financial reports.
An accounting process includes bookkeeping function.

- Two groups of users of financial information: internal and external users.

 Internal users: people inside the company who need detailed information on a timely
basis. Normally, Managerial Accounting provides reports that contain the information.
 External users: people outside the company who commonly are investors and creditors.
Financial Accounting provides the information that external users need.
LO2: Explain the building blocks of accounting: ethics, principles, and assumptions.

- Ethnics in financial reporting

- Generally Accepted Accounting Principles (GAAP) – Standards that are generally accepted and
universally practiced. These standards indicate how to report economic events.

- Standard-setting bodies:

 Financial Accounting Standards Board (FASB)

 Securities and Exchange Commission (SEC)
Chap 1 2

 International Accounting Standards Board (IASB)

- Measurement principles:

 HISTORICAL COST PRINCIPLE (or cost principle) dictates that companies record
assets at their cost.
 FAIR VALUE PRINCIPLE states that assets and liabilities should be reported at fair
value (the price received to sell an asset or settle a liability).
Selection of which principle to follow generally relates to trade-offs between relevance and
faithful representation.

- Assumptions provide a foundation for accounting process. Two main assumptions:

 MONETARY UNIT ASSUMPTION requires that companies include in the accounting

records only transaction data that can be expressed in terms of money.
 ECONOMIC ENTITY ASSUMPTION requires that activities of the entity be kept
separate and distinct from the activities of its owner and all other economic entities.
► Proprietorship
► Partnership
► Corporation
- Forms of business ownership:

 Proprietorship:
► Owned by one person.
► Owner is often manager/operator.
► Owner receives any profits, suffers any losses, and is personally liable for all debts.
 Partnership:
► Owned by two or more persons
► Often retail and service-type businesses.
► Generally unlimited personal liability.
► Partnership agreement.
 Corporation:
► Ownership divided into shares of stock.
► Separate legal entity organized under state corporation law.
► Limited liability.
LO3: State the accounting equation, and define its components.

- Assets:

 Resources a business owns.

 Provide future services or benefits.
 Cash, Supplies, Equipment, etc.
 Chap 1 3

- Liabilities:

 Claims against assets (debts and obligations).

 Creditors (party to whom money is owed).
 Accounts Payable, Notes Payable, Salaries and Wages Payable, etc.
- Owner’s Equity:

 Ownership claim on total assets.

 Referred to as residual equity.
 Investment by owners and revenues (+)
 Drawings and expenses (-).
LO3:State the accounting equation, and define its components.

Assets Liabilities Owner’s Equity

+ + + + + = + + + - + -
Cash Account Supplies Equipment Prepaid Account Notes Capital Drawing Revenu Expense
Receivable Expense Payable Payabl e
e

LO4:Analyze the effects of business transactions on the accounting equation.

1/Investment by + = +
owner
2/Buy equip. - + =
for cash
3/Buy Supplies + = +
on credit
4/Services + = +
perform for
cash
5/Buy = + -
advertisements
on credit
6/Services + + = +
perform for
cash and credit
7/Pay expenses - = -
8/ Pay Account - = -
Payable
9/ Receive cash + - =
on account
10/ Withdraw - = -
cash by owner
11/ Borrow + = +
cash from bank
on Notes
Payable
Chap 1 4

Notes:
 Account Receivable: They (outside) pay later >< Account Payable: I (the company) pay
later
 Liabilities also includes Taxes Payable, Salary and Wages Payable, Unearned Service
Revenue,…

- Transactions are a business’s economic events recorded by accountants.

 May be external or internal.

 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting equation.
LO5: Four financial statements

- Income Statement: (NI=R-Ex) presents revenue and expenses -> net income or net loss
- Owner’s Equity Statement: (OES= C - D + R - Ex = C - D + NI) summarize changes in
owner’s equity (Capital, Drawing, Revenue, Expense)
- Balance Sheet: (A= L + E) reports Asset, Liabilities and Owner’s Equity at a specific
date
- Statement of Cash Flow: chap 17
Chap 1 5

RECOMMENDED PROBLEMS:
Chap 1 6

ANSWER:

2. Decrease in owner’s equity and Decrease in Asset

3. Increase in Assets and Increase in Liabilities

4. Increase in Assets and Increase in Owner’s Equity

5. Decrease in owner’s equity and Decrease in Asset

6. Increase in Assets and Increase in Owner’s Equity

7. Increase in Liabilities and Decrease in Owner’s Equity

8. Decrease in Cash and Increase in Equipment => A balance in Asset

9. Increase in Assets and Increase in Owner’s Equity

ANSWER:

1–c

2–d

3–b

4–b
 Chap 1 7

5–d

6–b

7–e

8–f

ANSWER:

Date Assets = Liabilities Owner’s Equity

+ + + + = + + +
- + -
Cash Account Supplies Equipment Account (Notes Owner’s
Drawing Revenue Expense
Receivable Payable Payable) Capital
5/1 + +7,000
7,000
5/2 -900 -900
5/3 +600 +600
5/5 -125 -125
5/9 +4,000 +4,000
5/12 - -1,000
1,000
5/15 +5,400 +5,400
5/17 -2,500 -2,500
5/20 -600 -600
 Chap 1 8

5/23 +4,000 -4,000

5/26 +5,000 +5,000
5/29 +4,200 +4,200
5/30 -275 -275

b/ MATRIX CONSULTING

Income Statement
For the month of May

Revenue

Service revenue $9,400

Expense

Rent expense $900

Advertising Expense $125
Salaries Expense $2,500
Utilities Expense $275
Total Expense $3,800

Net income $5,600

c/ MATRIX CONSULTING
Balance Sheet
For the month of May
Assets
Cash $14,600
Account Receivable $1,400
Supplies $600
Equipment $4,200
Total Assets $20,800
Liabilities and Owner's Equity
Liabilities
Note Payable $5,000
Account Payable $4,200
Total Liabilities $9,200
Owner's Equity
Owner's Capital $7,000
Net income $5,600
Less: Drawing ($1,000)
Chap 1 9

Total Owner's Equity $11,600

Total Liabilities and Owner's Equity $20,800
Chap 2 10

Chapter 2: The Recording Process

LO1: Account definition and its purposes:
 An Account: an individual accounting record of increases and decreases in a specific
asset, liability, or owner’s equity item.
Ex: There are accounts for Cash, Accounts Receivable, Account Payable, Revenue, etc.
 T account: an account’s simplest form, consists of three parts: (1) a title, (2) a left side
(Debit side) and (3) a right side (Credit side).

LO2: Define Debits and Credits and their purposes:

 Debit (Dr.): the left side of an account.
→ Debiting the account: the act of entering an amount on the left side of an account
 Credit (Cr.): the right side of an account.
→ Crediting the account: the act of entering an amount on the right side of an account
*Note: The terms Debit and Credit do not mean increase and decrease. They just refer to the
place where entries are made in accounts.
 When comparing the totals of the two sides, an account show:
 Debit balance: if the totals of the debis > the credit.
 Credit balance: if the totals of the credit > the debit.
Ex: Cash account show a debit balance.

 Debit and Credit Procedure:

Keeping in mind that both sides of the basic equation (Assets = Liabilities + Owner’s Equity)
must be equal. → When transactions are made, they affect two or more accounts to keep the
equation in balance. In other words, debits must equal credits → Double-entry system.
Chap 2 11

*Note: The (+) side is the normal balance of an account.

LO3: Basic steps in recording process.

1. Analyze each transaction
2. Enter transaction in a journal (*)
3. Transfer journal information to ledger (**) account

LO4: Definition of a journal and its purposes.

(*) The Journal: the book of original entry. For each transaction the journal shows the debit and
credit effects on specific accounts. → General journal: the most basic form of journal.
⇒ Journalizing: entering transaction data in the journal.
 Advantages of the journal:
1. Disclose the complete effects of a transaction.
2. Provide a chronological record (time order).
3. Help to prevent and locate errors.
 Example of a journal and its components:

1. The date of the transaction.

2. The debit account title is entered in the extreme left margin, and the debit amount in the
Debit column
3. The credit account title is entered one letter from the extreme left margin, and the credit
amount in the Credit column.
4. A brief explanation of the transaction.
5. Ref column used to enter the account number.
 A Simple Entry: an entry involves only two accounts, one credit and one debit.
 A Compound Entry: an entry that requires three or more accounts.
Chap 2 12

* Example of a compound entry:

LO5: Definition of a ledger and its purposes.

(**) The ledger: the entire group of accounts maintained by a company. → General ledger:
contain all the assets, liabilities, and owner’s equity accounts.
⇒ Posting: transferring journal entries to the ledger accounts. Below is a posting process:
Chap 2 13

LO6: Preparing a trial balance and its purposes:

 A Trial Balance: is a list of accounts and their balances at a given time.
→ The trial balance (1) proves the mathematical equality of debits and credit after posting, may
also (2) uncover errors in journalizing and posting, (3) is useful in the preparation of financial
statements.

 Step for preparing a trial balance:

1. List the account titles and their balances in the appropriate debit or credit column.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

*Note: the order of presentation in the trial balance is:

Assets
Liabilities
Owner’s equity
Revenues
Expenses
*Example of a trial balance:

 Limitation of a Trial Balance:

Mistakes may NOT be identified with Trial Balance if...
1. A transaction is not journalized.
2. A correct journal entry is not posted.
3. A journal entry is posted twice.
4. Incorrect accounts are used in journalizing or posting.
5. Offsetting errors are made in recording the amount of a transaction.
Chap 2 14

EXERCISE
P2-1A:

GENERAL JOURNAL
Date Account Titles and Explanations Debit Credit

Mar 1 Cash 20,000

Owner’s Capital 20,000
3 Land 12,000
Buildings 2,000
Equipment 1,000
Cash 15,000
5 Advertising Expense 900
Cash 900
6 Prepaid Insurance 600
Cash 600
10 Equipment 1,050
Account Payable 1,050
18 Cash 1,100
ServiceService Revenue 1,100
Chap 2 15

19 Cash 1,500
Unearned Service Revenue 1,500
25 Owner’s Drawing 800
Cash 800
30 Salaries and Wages Expenses 250
Cash 250
Account Payable 1,050
Cash 1,050
31 Cash 2,700
Service Revenue 2,700

P2-2A:

a. GENERAL JOURNAL
Date Account Titles and Explanations Ref Debit Credit

Apr 1 Cash 101 20,000

Owner’s Capital 301 20,000

2 Rent Expenses 729 1,100

Cash 101 1,100

3 Supplies 126 4,000

4,000
Chap 2 16

Account Payable 201

10
Account Receivable 112 5,100 5,100
Service Revenue 400
11
Cash 101 1,000 1,000
Unearned Service Revenue 209
20
Cash 101 2,100 2,100
Service Revenue 400
30
2,800 2,800
Salaries and Wages Expense 726
Cash 101
2,400 2,400
Account Payable 201
Cash 101

(b)
GENERAL LEDGER

Cash No.101
Date Debit Credit Balance

Apr 1 20,000 20,000

2 1,100 18,900
11 1,000 19,900
20 2,100 22,000
30 2,800 19,200
2,400 16,800

Account Receivable No.112

Date Debit Credit Balance

Apr 10 5,100 5,100

Supply No.126
Date Debit Credit Balance

Apr 3 4,000 4,000

Chap 2 17

Account Payable No.201

Date Debit Credit Balance

Apr 3 4,000 4,000

30 2,400 1,600

Unearned Service Revenue No.209

Date Debit Credit Balance

Apr 11 1,000 1,000

Owner’s Capital No.301

Date Debit Credit Balance

Apr 1 20,000 20,000

Service Revenue No.400

Date Debit Credit Balance

Apr 10 5,100 5,100

20 2,100 7,200

Salaries and Wages Expenses No.726

Date Debit Credit Balance

Apr 30 2,800 2,800

Rent Expenses No.729

Date Debit Credit Balance

Apr 2 1,100 1,100

Chap 2 18

(c)

EMILY VALLEY
Trial Balance
Apr 30, 2017

Debit Credit

Cash $ 16,800
Account Receivable 5,100
Supply 4,000
Account Payable $ 1,600
Unearned Service Revenue 1,000
Owner’s Capital 20,000
Service Revenue 7,200
Salaries and Wages Expenses 2,800
Rent Expenses 1,100

$ 29,800 $ 29,800
Chap 3 19

Chapter 3: ADJUSTING THE ACCOUNTS

LO1: The accrual basis of accounting and the reasons for adjusting entries
 Time Period Assumption = Periodicity Assumption: artificial time periods of a
business economic life. Generally a month, a quarter, or a year.
 Fiscal and Calendar Years:
 Fiscal: accounting time period that is one year in length. Ex: maybe from 4 Dec,
th

2017 to 4 Dec, 2018

th

 Calendar: 1 Jan, 2020 �31 Dec, 2020

st th

 Accrual vs Cash – Basis Accounting

 Cash – basis:
 Record revenue when they receive cash.
 Record expenses when they pay out cash.
 Not in accordance with GAAP.
 Accrual – basis:
 Recognize revenue when they perform service.
 Recognize expenses when incurred (rather than when paid).
 In accordance with GAAP.
 GAAP relationships in revenue and expense recognition

 Types of Adjusting Entries:

Chap 3 20

Deferrals Accruals

1. Prepaid Expenses 1. Accrued Revenues

Expenses paid in cash before they Revenues for services performed but not yet
are used or consumed. received in cash or recorded.
2. Unearned Revenues 2. Accrued Expenses
Cash received before services are Expenses incurred but not yet paid in cash
performed. or recorded.
→ Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed and complete the data of a trial balance (which may not
contain up-to-date data).

LO2: Adjusting entries for deferrals

Deferrals: Expenses or revenues that are recognized at a date later than the point when cash was
originally exchanged. Example: Cash is received today, Revenue & Expense are recognized
tomorrow.

1. Prepaid Expense: is recorded as an asset.

 Prepaid expenses recorded in asset accounts have been used → need for
adjustment.
 Entries: Dr. Assets (insurance, supplies, depreciation...) / Cr. Cash
 Adjusting entries: Dr. Expenses / Cr. Assets or Contra Assets

 Supplies:
Ex: Pioneer Advertising purchase supplies costing $2,500 on Oct 5. Pioneer recorded the
payment by debiting Supplies (and crediting Cash). This account shows a balance of $2,500 in
the Oct 31 trial balance. An inventory count at the close of business on Oct 31 reveals that
$1,000 of supplies are still on hand. Prepare adjusting entries.
Oct 31 Supplies Expense (Equity) $1,500
Supplies (Asset) $1,500

 Insurance:
Ex: On Oct 4, Pioneer Advertising paid $600 for a one-year fire insurance policy.
Coverage began on Oct 1. Pioneer recorded the payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of $600 in the Oct 31 trial balance. Insurance of $50
($600 ÷ 12) expires each month. Prepare adjusting entries on Oct 31.
Oct 31 Insurance Expense (E) $50
Prepaid Insurance (A) $50

 Depreciation:
*Depreciation: the process of allocating the cost of an asset to expense over its useful life.
Ex: For Pioneer Advertising, assume that depreciation on the equipment is $480 a year,
or $40 per month.
Oct 31 Depreciation Expense (E) $40
Accumulated Depreciation (Equipment) (A) $40
 Chap 3 21

*Accumulated Depreciation is a contra asset account.

*Book value = cost of asset - its accumulated depreciation.

2. Unearned Revenue: is recorded as a liability because the service has not

been performed.
 Entries: Dr. Cash / Cr. Unearned Revenue
 Adjusting entries: Dr. Unearned Revenue / Cr. Revenue
Ex: Pioneer Advertising received $1,200 on Oct 2 from R. Knox for advertising services
expected to be completed by Dec 31. Unearned Service Revenue shows a balance of $1,200 in
the October 31 trial balance. Analysis reveals that the company performed $400 of services in
October.
Oct 31 Unearned Service Revenues (Liability account) $400
Service Revenue (Equity account) $400

LO3: Adjusting entries for accruals

Accruals: Record Revenues for services performed but not yet recorded (accrued revenues); and
Expenses incurred but not yet paid or recorded (accrued expenses)
For example :Cash is received tomorrow, Revenue & Expense are recognized today.

1. Accrued Revenues:
 Adjusting entries: Dr. Assets / Cr. Revenues
Ex: In October Pioneer Advertising performed services worth $200 that were not billed
to clients on or before Oct 31.
Oct 31 Accounts Receivable (Asset) $200
Service Revenue (Equity) $200

2. Accrued Expenses:
 Adjusting entries: Dr. Expenses / Cr. Liability
 Accrued Interest
Ex: Pioneer Advertising signed a three-month note payable in the amount of $5,000 on
Oct 1. The note requires Pioneer to pay interest at an annual rate of 12%.
* Interest = Face Value of Note * Annual Interest Rate * Time in Terms of One Year
= $5,000 * 12% * 1/12
= $50
Oct 31 Interest Expense (E) $50
Interest Payable (L) $50
 Accrued wages and salaries:
Salaries and Wages Expense (E)
Salaries and Wages Payable (L)
 Chap 3 22

Summary of Basic Relationships:

LO4: Adjusted Trial Balance

 The same as Trial Balance, but is prepared after all adjusting entries are journalized.
 Is the primary basis for the preparation of financial statements.
Notes:
+ Pay attention to the time period (usually a month).
+ Use the fair value only (not the original value).

EXERCISES
E3-3: Carillo Industries collected $108,000 from customers in 2017. Of the amount
collected $25,000 was for services performed in 2016. In addition, Carillo performed services
worth $36,000 in 2017, which will not be collected until 2018.
Carillo Industries also paid $72,000 for expenses in 2017. Of the amount paid, $30,000 was for
expenses incurred on account in 2016. In addition, Carillo incurred $42,000 if expenses in 2017,
which will not be paid until 2018.
a. Compute 2017 cash-basis net income.
b. Compute 2017 accrual-basis net income.
a) 2017 cash-basis net income
Revenues = $108,000
Expenses = $72,000
Net income = $108,000 - $72,000 = $36,000
b) 2017 accrual-basis net income
Revenues = $108,000 - $25,000 + $36,000 = $119,000
Expenses = $72,000 - $30,000 + $42,000 = $84,000
Net income = $119,000 - $84,000 = $35,000
Chap 3 23

E3-7: The ledger of Passehl Rental Agency on March 31 of the current year includes the selected
accounts, shown below, before adjusting entries have been prepared.
Debit Credit
Prepaid Insurance $ 3,600
Supplies 2,800
Accumulated
Depreciation - Equipment 8,400
Notes Payable 20,000
Unearned Rent Revenue 10,200
Rent Revenue 60,000
Interest Expense -
Salaries and Wages Expense 14,000
An analysis of the accounts shows the following.
1. The equipment depreciates $400 per month.
2. One-third of the unearned rent revenue was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $750.
5. Insurance expires at the rate of $300 per month.
Prepare the adjusting entries on March 31, assuming that adjusting entries are made quarterly.
Additional accounts are Depreciation Expense, Insurance Expense, Interest Payable, and
Supplies Expense.

No. Date Account Titles and Explanation Debit Credit

Mar. Depreciation Expense $1,200

1. 31 Accumulated Depreciation - Equipment $1,200
($400 x 3 = $1,200)
*Because adjusting entries are made quarterly, the depreciation
amount needed to record is the total depreciation expense of each
of the 3 months during the quarter, which is $400 x 3.
2. Mar. Unearned Rent Revenue $3,400
31 Rent Revenue $3,400
($10,200 / 3 = $3,400)
3. Mar. Interest Expense $500
31 Interest Payable $500
4. Mar. Supplies Expense $2,050
31 Supplies $2,050
($2,800 - $750 = $2,050)
Chap 3 24

5. Mar. Insurance Expense $900

31 Prepaid Insurance $900
($300 x 3 = $900)
*Because adjusting entries are made quarterly, the insurance
amount needed to record is the total insurance expense of each of
the 3 months during the quarter, which is $300 x 3.

E3-10: The income statement of Montee Co. for the month of July shows net income of $1,400
based on Service Revenue $5,500, Salaries and Wages Expense $2,300, Supplies Expense
$1,200 and Utilities Expense $600. In reviewing the statement, you discover the following.
1. Insurance expired during July of $400 was omitted.
2. Supplies expense includes $250 of supplies that are still on hand at July 31.
3. Depreciation on equipment of $150 was omitted
4. Accrued but unpaid salaries and wages at July 31 of $300 were not included.
5. Services performed but unrecorded totaled $650.
Prepare a correct income statement for July 2017.

MONTEE CO.
(Adjusted) Income Statement
For the Year Ended December 31, 2017

Revenues
Service revenue ($5,500 + $650) $6,150
Expenses
Salaries & wages expense ($2,300 + $300) $2,600
Insurance expense 400
Supplies expense ($1,200 - $250) 950
Utilities expense 600
Depreciation expense 150
Total expenses (4,700)
Net income $1,450
Chap 4 25

Chap 4 : COMPLETING THE ACCOUNTING CYCLE

LO2: PREPARE CLOSING ENTRIES AND A POST-CLOSING TRIAL BALANCE

a) Closing entries
Temporary -> R.E.D -> R (Revenue). E (Expense). D (Drawing) -> closed
4 steps:
1/ Debit Revenue, Credit Income Summary
2/ Debit Income Summary, Credit Expenses
3/ Debit Income Summary, Credit Capital
4/ Debit Capital, Credit Drawing

b) Post-closing Trial Balance:

- Report Owner’s Capital only (at the end of Trial Balance), instead of Revenue, Expenses,
Drawing

LO3: EXPLAIN THE STEPS IN THE ACCOUNTING CYCLE AND HOW TO

PREPARE CORRECTING ENTRIES
Chap 4 26

LO4: IDENTIFY THE SECTIONS OF A CLASSIFIED BALANCE SHEET

Current Assets
- Cash
- Investments (short-term)
- Receivables (Notes Receivables, Accounts Receivables, Interest Receivables)
- Inventories
- Prepaid Expense (Supplies, Insurance)

Long-term Investments
- Investments for stocks and bonds of other companies
- Long-term assets (land or building that the company don’t currently use)
- Long-term Note Receivable
Property, Plant and Equipment
- Land
- Building
- Machines
- Equipment
- Furniture
- Accumulated Depreciation

Intangible Assets
- Goodwill
- Patents
- Copyrights
- Trade mark (Trade names)

Current Liabilities
- Account Payable
- Salary and Wages Payable
- Notes Payable
- Interest Payable
- Income taxes Payable
- Current maturities of long-term obligations

Long-term Liabilities
- Bonds Payable
- Mortgages Payable
- Long-term Notes Payable
- Lease Liabilities
- Pension Liabilities
Chap 4 27

Owner’s Equity
- Stockholders’ equity
----------

EXERCISES

E 4-1

The trial balance columns of the worksheet for Dixon Company on June 30,
2017, are as follows.

Other data:

1. A physical count reveals $500 of supplies on hand.

2. $100 of the unearned revenue is still unearned at month-end.

3. Accrued salaries are $210.

Instructions

Enter the trial balance on a worksheet and complete the worksheet.

Chap 4 28

DIXON COMPANY

Worksheet

For the Month Ended June 30, 2017

Adj. Trial Income

Account Titles Trial Balance Adjustments Balance Statement Balance Sheet

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 2,320 2,320 2,320

Accounts
Receivable 2,440 2,440 2,440

(a)
Supplies 1,880 1,380 500 500

Accounts
Payable 1,120 1,120 1,120

Unearned
Service
Revenue 240 (b) 140 100 100

Owner’s
Capital 3,600 3,600 3,600

Service
Revenue 2,400 (b) 140 2,540 2,540

Salaries and
Wages
Expense 560 (c) 210 770 770

Miscellaneous
Expense 160 160 160

Totals 7,360 7,360

Supplies (a)
Expense 1,380 1,380 1,380
 Chap 4 29

Salaries and (c)

Wages Payable 210 210 210

Totals 1,730 1,730 7,570 7,570 2,310 2,540 5,260 5,030

Net Income 230 230

Totals 2,540 2,540 5,260 5,260

E 4-2
The adjusted trial balance columns of the worksheet for Savaglia Company
are as follows.

Instructions
Complete the worksheet.
Chap 4 30

SAVAGLIA COMPANY
(Partial) Worksheet
For the Month Ended April 30, 2017

Adjusted Trial Income

Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 10,000 10,000

Accounts Receivable 7,840 7,840

Prepaid Rent 2,280 2,280
Equipment 23,050 23,050

Accum. Depreciation—
Equipment 4,900 4,900
Notes Payable 5,700 5,700
Accounts Payable 4,920 4,920
Owner’s Capital 27,960 27,960
Owner’s Drawings 3,650 3,650
Service Revenue 15,590 15,590
Salaries and Wages Expense
10,840 10,840

Rent Expense 760 760

Depreciation Expense 650 650
Interest Expense 57 57
Interest Payable 57 57
Totals 59,127 59,127 12,307 15,590 46,820 43,537
Net Income 3,283 3,283
Totals 15,590 15,590 46,820 46,820

P 4-1A

The trial balance columns of the worksheet for Warren Roofing at March 31,
2017, are as follows.
Chap 4 31

Other data:

1. A physical count reveals only $480 of roofing supplies on hand.

2. Depreciation for March is $250.

3. Unearned revenue amounted to $260 on March 31.

4. Accrued salaries are $700.

Instructions

(a) Enter the trial balance on a worksheet and complete the worksheet.

(b) Prepare an income statement and owner’s equity statement for the month
of March and a classified balance sheet on March 31. T. Warren made an
additional investment in the business of $10,000 in March.

(c) Journalize the adjusting entries from the adjustments columns of the
worksheet.

(d) Journalize the closing entries from the financial statement columns of the
worksheet.
 Chap 4 32

(a)

WARREN ROOFING

Worksheet

For the Month Ended March 31, 2017

Adjusted Income

Account Titles Trial Balance Adjustments Trial Balance Statement Balance Sheet

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

Cash 4,500 4,500 4,500

Accounts Receivable 3,200 3,200 3,200

Supplies 2,000 (a) 1,520 480 480

Equipment 11,000 11,000 11,000

Accumulated Depreciation
—Equipment
1,250 (b) 250 1,500 1,500
Accounts Payable
2,500 2,500 2,500
Unearned Service Revenue
550 (c) 290 260 260
Owner’s Capital
12,900 12,900 12,900
Owner’s Drawings
1,100 1,100 1,100
Service Revenue
6,300 (c) 290 6,590 6,590
Salaries and Wages

Expense
1,300 (d) 700 2,000 2,000
Miscellaneous Expense
400 400 400
Totals
23,500 23,500
Supplies Expense
(a) 1,520 1,520 1,520
Depreciation Expense
(b) 250 250 250
Salaries and Wages

Payable
(d) 700 700 700
Totals
Chap 4 33

Net Income 2,760 2,760 24,450 24,450 4,170 6,590 20,280 17,860

Totals 2,420 2,420

6,590 6,590 20,280 20,280

Key: (a) Supplies Used; (b) Depreciation Expensed; (c) Service Revenue Recognized; (d)
Salaries Accrued.

(b) WARREN ROOFING

Income Statement
For the Month Ended March 31, 2017

Revenues
Service revenue $6,590
Expenses
Salaries and wages expense $2,000
Supplies expense 1,520
Miscellaneous expense 400
Depreciation expense 250
Total expenses 4,170
Net income $2,420

WARREN ROOFING
Owner’s Equity Statement
For the Month Ended March 31, 2017

Owner’s Capital, March 1 $ 2,900

Investments 10,000
Add: Net income 2,420
12,420
15,320
Less: Drawings 1,100
Owner’s Capital, March 31 $14,220
Chap 4 34

WARREN ROOFING
Balance Sheet
March 31, 2017

Assets
Current assets
Cash $4,500
Accounts receivable 3,200
Supplies 480
Total current assets $ 8,180
Property, plant, and equipment
Equipment 11,000
Less: Accum. depreciation—equipment 1,500 9,500
Total assets $17,680

WARREN ROOFING
Balance Sheet (Continued)
March 31, 2017

Liabilities and Owner’s Equity

Current liabilities
Accounts payable $2,500
Salaries and wages payable 700
Unearned service revenue 260
Total current liabilities $ 3,460
Owner’s equity
Owner’s capital 14,220
Total liabilities and owner’s equity $17,680

(c) Mar. 31Supplies Expense 1,520

Chap 4 35

Supplies 1,520

31 Depreciation Expense 250

Accumulated Depreciation—
Equipment 250

31 Unearned Service Revenue 290

Service Revenue 290

31 Salaries and Wages Expense 700

Salaries and Wages Payable 700

(d) Mar. 31Service Revenue 6,590

Income Summary 6,590

31 Income Summary 4,170

Salaries and Wages Expense 2,000
Supplies Expense 1,520
Depreciation Expense 250
Miscellaneous Expense 400

31 Income Summary 2,420

Owner’s Capital 2,420

31 Owner’s Capital 1,100

Owner’s Drawing 1,100
 Reference

Kieso, D. E. , Kim, P. D. , Weygandt, J. J. , (2015). Principle of Accounting (12th)

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