Chapter 2

Accounting cycle for service-giving business

Accounting cycle is the sequence of accounting procedure during a particular period or fiscal
year. It is a chronological order used to record, classify, summarize and report accounting
information. The cycle begins with analyzing and recording of business transactions or
journalizing and ends with preparation of post closing trial balance.

1, Analyzing and recording transaction in a journal (journalizing)

2, Posting- transactions are transferred from journal to the ledger

3, preparing trial balance- to show Dr and Cr equal

4, preparing work sheet-summarize adjusting entries and account balances for financial statement

5, preparing financial statements

6, journalizing and posting the adjusting entries

7, journalizing and posting closing entries

8, preparing post closing trial balance

In chapter 1, we recorded transactions related with sole proprietorship using accounting equation
format. However, this format is not efficient or practical for companies that have to record
thousands or millions of transactions daily. As a result, accounting systems are designed to show
the increases and decreases in each accounting equation element as a separate record. This record
is called an account.

2.1 Characteristics of an account

Account –a form of record that shows increases and decreases in each element of accounting
equation as separate record or a separate record designed to show the increases and decreases in
asset, liability and owners equity. The simplest form of an account is “T” account and it has 3-
parts.
1. A title, which is the name of the item recorded in the account.

2. A space for recording increases in the amount of an item in terms of money.

3. A space for recording decreases in the amount of the element.

Title
Example, asset liability + Capital A = L + C
Left side Right side Left side = right side

Debit side = Credit side

Many times when accountants analyze complex transactions, they use T accounts to simplify
the thought process. Recording transactions in accounts must follow certain rules. For
example, increases in assets are recorded on the debit (left side) of an account. Likewise,
decreases in assets are recorded on the credit (right side) of an account. The excess of the
debits of an asset account over its credits is the balance of the account
2.2 Classification of accounts
There are two major groups of an account

A, Balance sheet account

B, Income statement account

Balance sheet accounts- consists assets, liabilities and owner’s equity.

Assets; resource owned by the business enterprise or any tangible or physical thing or right
(intangible) that has monetary value. Examples of intangible assets include patent rights,
copyrights, and trademarks. Examples of other assets include accounts receivable, prepaid
expenses (such as insurance), Buildings, Equipment, and land. Assets can be classified as

 Current assets – Cash and other assets that are expected to be converted to cash or sold or
used up usually within one year or less, through the normal operations of the business,
are called current assets or assets that may reasonably expected to be realized in cash or
sold or used up usually within one year or less through the normal operation of the
business. Example account receivable, note receivable, supplies, prepaid insurance…
 e.t.c. Notes receivable are amounts that customers owe. They are written promises to pay
the amount of the note and interest. Accounts receivable are also amounts customers owe,
but they are less formal than notes. Accounts receivable normally result from providing
services or selling merchandise on account. Notes receivable and accounts receivable are
current assets because they are usually converted to cash within one year or less.
 Fixed assets or plant assets- are physical resources that are owned and used by a business
and are permanent or have a long life. Examples of fixed assets include land, buildings,
and equipment. In a sense, fixed assets are a type of long-term prepaid expense. Because
of their unique nature and long life, they are discussed separately from other prepaid
expenses, such as supplies and prepaid insurance.

Note: all plant assets with exception of land gradually wear out or otherwise lose their
usefulness with the passage of time. They are subject to depreciate to provide useful service. As
a fixed asset depreciates while being used to generate revenue, a portion of its cost should be
recorded as an expense. This periodic expense is called depreciation expense. The adjusting
entry to record depreciation expense is similar to the adjusting entry for supplies used. The
depreciation expense account is increased (debited) for the amount of depreciation. However, the
fixed asset account is not decreased (credited). Instead, an account entitled Accumulated
Depreciation i.e contra-account of fixed asset is increased (credited). The normal balance of a
fixed asset account is a debit; the normal balance of an accumulated depreciation account is a
credit. Example contra asset- account for building is Accumulated depreciation of Building.

Liabilities are debts of a business owed to outsiders or creditors. Liabilities are often identified
on the balance sheet by titles that include the word payable. Cash received before services are
delivered creates a liability to perform the services. The two most common classes of liabilities
are

 Current liabilities –the liabilities that will be due within a short time usually within one
year or less. Ex Account payable, Note payable, Tax payable, interest payable…
 Long term liabilities-liabilities that will not be due for a long time usually more than one
year. Ex bond payable, mortgage payable,-pledged as a guarantee.

Owner’s equity- the residual claim of the owner against the assets of the business.
  Capital – accumulated investment by the owner
 Drawing –amount of cash with dawn by the owner
 Income summary -used to summarize the effects of revenue and expense on capital
income statement accounts-includes revenue and related expenses

Revenues are increases in owner’s equity as a result of selling services or products to

customers. Examples of revenues include fees earned, fares earned, commissions revenue,
and rent revenue.

Expenses result from using up assets or consuming services in the process of generating
revenues. Examples of expenses include wages expense, rent expense, utilities expense,
supplies expense, and miscellaneous expense. Income statement accounts are temporary
accounts or nominal accounts since they are closed to a summary accounts i.e income
summary at the end of accounting period.

2.3 Chart of accounts

A group of account for a business entity is called ledger. A list of accounts in the ledger is called
chart of accounts. It is listing of the account and account number being used by a given business.
Accounts are usually arranged in the ledger in the financial statements order. First balance sheet
accounts are listed in the order of assets, liabilities and owner’s equity. Next income statement
accounts are listed in the order of revenue and expense. Example, chart of account for Mesfin
Garage is given below

Balance Sheet Accounts Income Statement Accounts

1. Assets 4. Revenue

11 Cash 41 Fees Earned

12 Accounts Receivable 5. Expenses

14 Supplies 51 Wages Expense

15 Prepaid Insurance 52 Rent Expense

17 Land 54 Utilities Expense

 18 Office Equipment 55 Supplies Expense

2. Liabilities 59 Miscellaneous Expense

21 Accounts Payable

23 Unearned Rent

3. Owner’s Equity

31, Mesfin Garage, Capital

32, Mesfin Garage, Drawing

A chart of accounts should meet the needs of a company’s managers and other users of its
financial statements. The accounts within the chart of accounts are numbered for use as
references. A flexible numbering system is normally used, so that new accounts can be added
without affecting other account numbers.

Note: Designing of chart of account for one company may differ from that of other company. It
depends on the type of the business, size or on the nature of operation. In the chart of account for
mesfin garage each account number has two digits.

First digit indicates the major classification of the ledger in which the asset account is located.
Ex the account number one indicates assets i.e the major division. Second digit indicates the
location the account within its class (within major division).

Note: numbering of the accounts in the ledger is used to facilitate record keeping process, to
meet information needs of management and users of financial statements, to identify the
accounts in the business document. The new account can be inserted whenever necessary without
affecting the other account number.

2.4 Rules of debit (Dr) and credit (Cr)

Debit is the left side of an account while Credit is the right side of an account. The amounts
entered on the left side of an account are called debits and the account is said to be debited or
charged. The amounts entered on the right side are credits and the account is said to be credited.

2.5 Normal balance of accounts

The sum of the increases in an account is usually equal to or greater than the sum of the
decreases in the account. Thus, the normal balance of an account is either a debit or credit
depending on whether increases in the account are recorded as debits or credits. The normal
balance for an account is always the same as the increase side of an account. Example, for assets
increase side is left or Dr, for liabilities and owner’s equity the increase side is right or Cr.
The assignment of normal balance for asset, liability and owner’s
equity is based on the position of an account on the basic equation. The normal balance for
revenue, expense and withdrawal is assigned based on the effect on the owner’s equity.

Note: the normal balance for all assets is debit because found in the left side. While the normal
balance for liabilities and owner’s equity is credit since they found on the right side of basic
accounting equation. Revenue increases owner’s equity so increase in OE is recorded in the
credit side so that the normal balance for revenue is credit side. Expense and withdrawal
decreases owner’s equity so decrease in OE is recorded in the debit side so that the normal
balance for expense and withdrawal is debit side.

Account type Increase Decrease Normal balance

Asset debit credit debit

Liability credit debit credit

Capital credit debit credit

Revenue credit debit credit

Expense debit credit debit

Withdrawal debit credit debit

 2.6 Analyzing and recording transactions in journal
Transactions that initially recorded in accounting record called journal. Journal is also known as
the book of original entry since the journal is the accounting record in which transactions first
recorded. It is chronological order that shows the effect of each transaction in a specific account.
The process of recording the transaction in journal is called journalizing. Two types of journals

Special journal- used to record specific types of transaction such as sales journal, cash journal

General journal- - used to record all types of transaction. Steps for journalizing

A, write the year, month and date

B, write the title of the account to be debited and the amount i.e entered

C, write the title of the account to be credited and the amount i.e entered

D, write the explanation about the transaction (effect)

Regardless of the account numbers that are affected, the sum of Dr and Cr is always the same in
a journal entry. Example, in this section we use mesfin Garage transaction. During June, mesfin
Garage completed the following transactions.

On June-5 mesfin deposits $25,000 in bank account in the name of mesfin Garage.

On June-5 mesfin garage paid office rent for June, $1,700.

On June- 7 purchased office equipment on account from ABC Company, $10,500

On June- 8 purchased Tuck $18,000 paying in cash $10,000 and the remaining on Note payable.

On June -10 purchased supplies $1,315 for cash.

On June -12 received fees of $3,300from customers for services.

On June -20 paid a premium of $800 for a comprehensive insurance policy covering liability,
theft and fire. The policy covers the two years period.

On June -22 fees earned on account totaled, $1,950 for June.

On June -24 received an invoice for truck expenses, to be paid in June, $290.

On June -29 paid $490 telephone bill for the month.

On June - paid $195 for news paper and advertisement

On June -30 received $1,200 from customers in payment of their accounts.

On June - 30 paid for its employees $1,900 for two weeks wage.

On June -30 paid $ 3000 for its supplies purchased on account.

On June - 30 withdrew $2,500 for personal use.

Journalize each transaction in to two column- step 2

General journal page -1

Date Description Post Debit Credit

reference

June 5 Cash 11 25000

1999
Mesfin garage capital 31 25000

Invested cash in mesfin garage

5 Rent expense 52 1700

Cash 11 1700

Paid rent for June

7 Office Equipment 18 10500

Account payable 21 10500

Purchased office Equipment

8 Truck 17 18000

Cash 11 10000

N/p 22 8000

10 Supplies 14 1315
 cash 11 1315

12 Cash 11 3300

Fees earned 41 3300

20 Prepaid insurance 15 800

cash 11 800

22 Account receivable 12 1950

Fees earned 41 1950

24 Truck expense 55 290

Account payable 21 290

Page -2

29 Utility expense 54 490

cash 11 490

29 Miscellaneous expense 19 195

cash 11 195

30 Cash 11 1200

Account receivable 12 1200

30 Wage expense 51 1900

cash 11 1900

30 Account payable 21 3000

cash 11 3000

30 Mesfin Garage withdrawal 32 2500

Cash 11 2500
Posting the accounts to the ledger (4-column account)

The process of transferring journal entries to the proper ledger account is called posting

Account cash Account number 11 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 1 1 25000 25000

999

5 1 1700 23300

8 1 10000 13300

10 1 1315 11985

12 1 3300 15285

20 1 800 14485

29 2 490 13995

29 2 195 13800

30 2 1200 15000

30 2 1900 13100

30 2 3000 10100

30 2 2500 7600
Account –account receivable Account number 12 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 22 1 1950 1950

999

30 2 1200 750

Account –supplies Account number 14 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 10 1 1315 1315

999

Account –prepaid insurance Account number 15 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 20 1 800 800

999

Account –office equipment Account number 18 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 7 1 10500 10500

999
Account –truck Account number 17 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 8 1 18000 18000

999

Account –account payable Account number 21 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 7 1 10500 10500

999

24 2 290 10790

30 2 3000 7790

Account –note payable Account number 14 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 8 1 8000 8000

999

Account –mesfin capital Account number 31 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 1 1 25000 25000

999
Account –mesfin drawing Account number 32 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 30 2 2500 2500

999

Account –fees earned Account number 41 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 7 1 3300 3300

999

22 1 1950 5250

Account –wage expense Account number 51 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 30 2 1900 1900

999

Account –rent expense Account number 52 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 5 1 1700 1700

999
Account –utility expense Account number 54 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 29 2 490 490

999

Account –truck expense Account number 55 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 24 2 290 290

999

Account –miscellaneous expense Account number 55 Balance

Date Item Post Debit Credit Debit Credit

reference

June1 29 2 195 195

999

2.5 Preparing trial balance

Errors may occur in posting debits and credits from the journal to the ledger. One way to detect
such errors is by preparing a trial balance. Double-entry accounting requires that debits must
always equal credits. The trial balance verifies this equality. The steps in preparing a trial
balance are as follows:

Step 1: List the name of the company, the title of the trial balance, and the date the trial balance
is prepared.

Step 2: List the accounts from the ledger and enter their debit or credit balance in the Debit or
Credit column of the trial balance.

Step 3: Total the Debit and Credit columns of the trial balance.
Step 4: Verify that the total of the Debit column equals the total of the Credit column

Mesfin Garage

Trial balance

For the June, 2000

Cash…………………………………………………………………………………$7600

Account receivable………………………………………………………………750

Supplies……………………………………………………………………………..1315

Prepaid insurance…………………………………………………………………800

Equipment………………………………………………………………………….10500

Truck………………………………………………………………………………….18000

Account payable……………………………………………………………………………………………………..$7790

Note payable……………………………………………………………………………………………………………8000

Mesfin Garage capital……………………………………………………………………………………………..25000

Mesfin Garage drawing……………………………………………………………2500

Fees earned………………………………………………………………………………………………………………5250

Wage expense………………………………………………………………………….1900

Rent expense……………………………………………………………………………1700

Utility expense…………………………………………………………………………4090

Truck expense………………………………………………………………………….…290

Miscellaneous expense……………………………………………………………….195

$46040 $46040
Note: the sum total of Dr and Cr should be equal unless we have error. The trial balance does
not provide complete proof of the accuracy of the ledger. It indicates only that the debits and the
credits are equal. This proof is of value, however, because errors often affect the equality of
debits and credits.
2.18 The Usefulness and limitation of trial balance

Even though the trial balance helps to check the equality between Dr and Cr sides it has the
following limitations.

1, failure to record or to post the transaction

2, recording the same wrong amount for both Dr and Cr parts of transaction

3, recording the same transaction more than ones

4, posting a part of transaction as a debit and credit but to the wrong amount

Trial balance errors there are three types of errors that cause a trial balance unequal

A, Trial balance preparation errors –errors will occur in journalizing and posting transactions.

 One of the columns of trial balance was in correctly added or computed

 The amount of an account balance was incorrectly recorded on TB- when we post the
end balance of an account from ledger to TB we may record incorrectly.
 A debit balance was recorded on the trial balance as credits or vice versa or balance was
omitted

B, Errors determining the account balances or account balance errors

A balance was incorrectly computed- when we compute the end balance of each account
we may add or subtract incorrectly.
A balance was posted in the wrong balance column

C, Errors in recording transaction in the ledger or posting errors

 Wrong amount posted to an account

 Debit posted as credits or vice versa
 Debit or credit posting omitted

Errors can be detected

 By audit procedures (reviewing source document, posting journal)

 By chance
 By looking trial balance- observing the sum total of Dr and Cr
The two most common types of errors

Transposition errors-reversing the digits in a number or incorrect rearrangement of digits or

when the order of the digit is changed.

Example, correct wrong

$690 $960

$26 $62

$452 $425

Slide error- incorrect placement of decimal point or the number is moved one space or more to
the right or left or moving the entire number either to the right or left.

Example, correct wrong

$845.00 $84.5 or 8.45

$525.00 $52.50

$442.00 $4420.00

2.9 The adjusting process accrual versus cash basis of accounting

Basis of accounting (revenue and expenses can be reported in the I/S either by

Cash basis- reports revenue and expenses in the income statement in the period in which cash is
received or paid. Example fees are recorded (reported) in the period when cash is received from
clients. Wages are recorded in the period when cash is paid to employees.

Accrual basis of accounting- reports revenue and expenses in the income statement in the period
in which they are earned (incurred) or revenue is recognized even though cash is not paid or
received during the period. Example revenue is reported when service is provided to customers.
Employee’s wages are reported as expenses in the period in which the employees provided
services to customers and are not necessarily when the wages are paid.
The adjusting process

Analyzing and updating of some accounts when financial statements are prepared. Adjusting
entries are required at the end of accounting period to bring the accounts up to date to assure the
matching of the revenue and expense. All adjustments are internal transactions (they are not
transactions with outsiders). All adjustments do not affect cash. All adjusting entries affect at
least one income statement account and one balance sheet account.

4- Items that require adjustment

1, deferred expenses are adjustments for goods or services collected or paid for in advance of
benefits given or received. They are also items that have been initially recorded as assets but are
expected to become expenses over time or through the normal operation of the business.
Example supplies and prepaid insurance

2, deferred revenue or unearned revenue- are items that have been initially recorded as an assets
but are expected to become expenses over time or through the normal operation of the business.
Example unearned rent, fees received from students by college or cash collected from customers
in advance before providing services.

3, accrued expenses or accrued liabilities- are expenses that have been incurred but not recorded
or paid in the accounts. Example accrued wage expenses that have been incurred but not
recorded or paid. Accrued interest on note payable

4, accrued revenue or accrued assets – revenues that have been earned but not recorded or
collected in the accounts. Example fees for services rendered to customers.

Fixed assets- physical resource owned and used by a business and are permanent or have long
life. They are a type of long term deferred expenses. However, because of their nature and long
life they are presented separately from other deferred expenses such as supplies and prepaid
insurance. As time passes fixed assets lose their ability to provide useful service. This decrease
in usefulness is depreciation. All fixed assets except land lose their usefulness. The process of
allocating the cost of fixed assets to expense over their estimated life is depreciation expense.
The contra- account for fixed asset is Accumulated depreciation. Example contra account for
Equipment- accumulated depreciation of Equipment, contra account for Building- accumulated
depreciation of Building

Summary of basic adjustment and the effect of omitting adjustment on the financial
statements.

Type of adjustment adjusting entry effect of omitting adjusting entry on B/S and I/S

1, Deferred expense Dr Asset expenses under stated & NI over stated

Cr asset assets overstated & owner’s equity over stated

2, deferred revenue Dr Asset liability understated & owner’s equity under stated

Cr liabilities NI understated &revenue under stated

3, Accrued expenses Dr expense expense under stated and NI over stated

Cr liability liability under stated and OE overstated

4, Accrued revenue Dr asset asset understated & OE understated

Cr revenue revenue &net income understated

5, fixed assets Dr expense under stated &NI over stated

Cr contra- account asset & OE over stated

2.10 preparing a work sheet

The work sheet is the working paper that accountants use to summarize adjusting entries and the
balances for preparation of financial statements. Enable accountants for collecting and
summarizing data that they need for preparing various analysis and reports. It doesn’t consider as
part of the formal accounting records. Useful device for understanding the flow of the accounting
data from unadjusted trial balance to the financial statements.
Adjustments in preparation of final accounts and preparation of the work sheet for
financial statements

Mesfin garage prepared the following trial balance at may31, 2000 and the end of fiscal year or
accounting year.

Mesfin garage

Unadjusted trial balance

May 31, 2000

Cash…………………………………………$7500
Account receivable…………………………..16500
Prepaid insurance……………………………..2600
Supplies……………………………………….1950
Land……………………………………………60000
Building………………………………………..100500
Equipment………………………………………72400
Accumulated depreciation of Equipment…………………………………………. $81700
Accumulated depreciation of Building………………………………………………63800
Account payable………………………………………………………………………6100
Unearned rent………………………………………………..………………………..1500
Mesfin G. Capital…………………………………………………………………….60700
Mesfin G. Drawing………………………………...4000
Fees revenue………………………………………………………………………….161200
Salaries and wage expense………………………..60200
Advertising expense………………………………..19000
Utility expense………………………………………18200
Repair expense……………………………………….8100
Miscellaneous expense……………………………….4050
375000 375000
The data needed to determine yearend adjustments are as follows

a, fees revenue occurred at May 31 is $3500

b, Insurance expired during the year is $1000

c, supplies on hand at may 31 are $450

d, depreciation of Building for the year is $1620

e, depreciation of Equipment for the year is $ 3160

f , accrued salaries and wages at may 31 are $1700

g, unearned rent at may 31 is $1000

Instruction

1, enter the trial balance at a 10 column work sheet and complete the work sheet

2, prepare the income statement for the year ended may 31

3, prepare a statement of owner’s equity for the year ended may 31. No additional investment
was made during the year.

4, prepare a balance sheet as of may 31

 Journalize adjusting entries

Account receivable……….3500

Fees revenue…………………………3500

Insurance expense………… 1000

Prepaid insurance……………………….1000

Supplies expense………….1500

Supplies…………………………………….1500

Depreciation expense………..1620

Accumulated depreciation of Building…….,. 1620

Depreciation expense………..3160

Accumulated depreciation of Equipment……., 3160

Salaries and wage expense…….1700

Salaries and wage payable…………………….1700

Unearned rent …………………..500

Rent revenue……………………………………500

Un adjusted trial balance Adjustments Adjusted final Income statement Balance sheet
 balance

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

cash 7500 7500 7500

Account receivable 16500 a,+3500 20000 20000

Prepaid insurance 2600 b-1000 1600 1600

supplies 1950 c-1500 450 450

Land 60000 60000 60000

Building 100500 100500 100500

Accumulated dep B. 81700 d+1620 83320 83320

Equipment 72400 72400 72400

Accumulated dep E. 63800 e+3160 66960 66960

Account payable 6100 6100 6100

Unearned rent 1500 g-500 1000 1000

Mesfin G, capital 60700 60700 60700

Mesfin G, drawing 4000 4000 4000

Fees revenue 161200 a+3500 165200 165200

g+500

Salaries &wage expense 60200 f+1700 61900 61900

Advertising expense 19000 19000 19000

utility expense 18200 18200 18200

Miscellaneous expense 4050 4050 4050

Insurance expense b+1000 1000 1000

supplies expense c+1500 1500 1500

Depreciation ex.B. d+1620 1620 1620

Depreciation ex.E. e+3160 3160 3160

Salaries &wage payable f+1700 1700 1700

$12980 $12980 385220 385220 118530 165200 266450 219780

NI4667
0 NI46670

2.11 preparations of financial statements from work sheet

 Mesfin Garage
Income statement
For the year ended may 31, 2000
Fees revenue…………………………………………………………………...…$165200
Salaries and wage expense……………………………………..61900
Utility expense………………………………………………….18200
Advertising expense……………………………………………..19000
Prepaid expense…………………………………………………..8100
Insurance expense…………………………………………….…..1000
Supplies expense…………………………………………………..1500
Depreciation expense of building…………………………………..1620
Depreciation expense of equipment…….……………………….…3160
Miscellaneous expense………………………………………………4050
Total expense……………………………………………………………………………..118530
Net income…………………………………………………………………………………46670
Mesfin Garage
Statement of owner’s equity
For the year ended may 31, 2000
Beginning capital…………………………………………………………$60700
Net income…………………………………………………………………46670
Less withdrawal……………………………………………………………..4000
Ending capital of mesfin G…………………………………………………..103370

Mesfin Garage
 Balance sheet
May 31, 2000
Current assets
Cash …………………………………………………. ...$7500
Account receivable………………………………………20000
Prepaid insurance………………………………………...1600
Supplies…………………………………………………...450
Total current assets………………………………………29550
Plant assets
Land ………………………………………………………60000
Building……………………………100500
Less accumulated dep .B……………83320…………..…..17180
Equipment …………………………72400
Less accumulated dep .E…………….66960………………..5440
Total plant assets…………………………………………….82620
Total asset……………………………………………….….112170
Liability
Account payable………………………………………………..6100
Unearned rent…………………………………………………..1000
Salaries and wage payable………………………………………1700
Total liability…………………………………………………….8800
Mesfin Garage capital………………………………………….103370
Total liabilities and capital……………………………………..112170

2.12 Journalizing and posting adjusting and closing entries

Journalizing adjusting entries
a Account receivable……….3500
Fees revenue…………………………3500
b Insurance expense………… 1000
Prepaid insurance……………………….1000
c Supplies expense………….1500
Supplies…………………………………….1500
d Depreciation expense………..1620
Accumulated depreciation of Building…….,. 1620
e Depreciation expense………..3160
Accumulated depreciation of Equipment……., 3160
f Salaries and wage expense…….1700
Salaries and wage payable…………………….1700
g Unearned rent …………………..500
Rent revenue……………………………………500

Posting of adjusting entries

Account –account receivable Account number 12 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 1 16500
2000
3500 20000

Account –supplies Account number 14 Balance

 Date Item Post Debit Credit Debit Credit

reference
May 31 1 1950
2000
1500 450

Account –prepaid insurance Account number 15 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 1 2600
2000
1000 1600

Account –accumulated depreciation of building Account number Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 1 81700
2000
1620 83320

 Revenue, expense and drawing are temporary accounts. While all assets,
liabilities and capitals are permanent accounts. Closing has four parts i.e
revenue, expense, drawing and income summary.
 To close all revenues
May 31 fees revenue………………165200
Income summary………………..165200

 To close expenses
 May 31 income summary 118530
Salaries and wage expense……………………….61900
Utility expense…………………………………….18200
Advertising expense………………………………..19000
Prepaid expense………………………………….8100
Insurance expense………….…………………... 1000
Supplies expense…………………………………..1500
Depreciation expense of building………………. .1620
Depreciation expense of equipment…….…….…..3160
Miscellaneous expense…………………………… 4050
 To close income summary or NI the account is credited for the amount
of net income income summary…………………46670

M.G capital…………………………….46670
 Drawing is credited for the amount of its balance; the capital account is
debited for the same amount. To close drawing
M.G capital……………………..4000
M.G drawing………………………..…..4000
Note: income summary is used only at the end of the period because it has the effect of clearing
the expense and revenue accounts of their balance.

Posting closing entries

Account –M.G capital Account number 31 Balance

Date Item Post Debit Credit Debit Credit

reference
May 60700 60700
2000
31 closing 46670 107370

closing 4000 103370

Account –M G. drawing Account number 32 Balance

Date Item Post Debit Credit Debit Credit

reference
May 4000 4000
2000
31 closing 4000 =

Account –income summary Account number 323 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 closing 165200 165200
2000
31 closing 118530 46670

31 closing 46670 =

Account –fees revenue Account number 41 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 161200 161200
2000
31 adjustment 3500 164700

31 adjustment 500 165200

31 closing 165200 =

Account –salaries and wage expense Account number 51 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 60200 60200
2000
31 adjustment 1700 61900

31 closing 61900 =
Account –advertising expense Account number 53 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 19000 19000
2000
31 closing 19000 =

Account –utility expense Account number 5 Balance

Date Item Post Debit Credit Debit Credit

reference
May 31 18200 18200
2000
31 closing 18200 =

After closing entries have been journalized and posted to the ledger they will have zero balances.
2.13 post closing trial balance

Is the last accounting procedure in the accounting cycle. A post-closing trial balance is prepared
after the closing entries have been posted. The purpose of the post-closing (after closing) trial
balance is to verify that the ledger is in balance at the beginning of the next period. The accounts
and amounts should agree exactly with the accounts and amounts listed on the balance sheet at
the end of the period.

Mesfin Garage
Post closing trial balance
May 31, 2000
Cash …………………………………………………. ...$7500
Account receivable………………………………………20000
Prepaid insurance………………………………………...1600
Supplies…………………………………………………...450
Land ………………………………………………… …60000
Building………………………………………………….100500
Accumulated depreciation of Building…………………………………………$83320
Equipment ………………………………………………..72400
Accumulated depreciation of Equipment……………………………………..….66960
Account payable…………………………………………………………………..6100
Unearned rent………………………………………………………………………1000
Salaries and wage payable…………………………………………………………1700
Mesfin Garage capital…………………………………………………………….103370
262,450 262,450