CHAPTER NO 4

ADJUSTING ENTRIES

Many transactions affects the revenues or expenses

of two or more accounting periods. e.g depreciable
assets, supplies, insurance policy, prepaid expenses,
Unearned Revenue etc
Therefore Adjusting Entries are needed at the end of
each Accounting period.
The purpose of these entries is to assign to each
accounting period the appropriate amount of
revenue and expenses.
These entries “adjust” the balances of various ledger
accounts, therefore it is known as a Adjusting
Entries.
 Year end at Overnight Auto Service

To discuss various types of adjusting entries we will

again use our examples involving “Overnight Auto
Service”.
We will skip ahead to December 31,2007 the end of
the company’s first complete year of operation. This
will enable us to prepare annual financial
statements, rather than statements that cover only a
single month.
In chapter no 3 we assume that Overnight adjusted
and closed its accounts at the end of each month.
But most companies adjust their accounts every
month but make closing entries only at year end. We
will assume that Overnight has been following this
approach through out 2007.
The business unadjusted Trial Balance as of
December 31, 2007 is shown below.
 OVERNIGHT AUTO SERVICE
Trial Balance
December 31, 2007

Description Debit Balance Credit Balance

$ $
Cash 29,550
Account Receivable 6,500
Shop Supplies 1,800
Unexpired insurance 3,000
Land 52,000
Building 36,000
Accumulated Depreciation; Building 1,800
Tools and Equipment 15,000
Accumulated Depreciation; Tools & Equipment 2,950
Notes Payable 40,000
Account Payable 2,690
Unearned Rent Revenue 6,000
Asad Capital 82,600
Asad Drawing 44,800
Repair Service Revenue 161,460
Advertising Expense 3,900
Wages Expense 56,800
Supplies Expense 6,900
Depreciation Expense; Building 1,650
Depreciation Expense ;tools & equipment 2, 200
Utilities Expense 19,400
Insurance Expense 15,000
Interest Expense 3,000
Because Overnight now closes its accounts only at
year end, the balances in the revenue, expenses, and
owner’s drawing accounts represents the activities of
the entire year rather than those of a single month.
But Overnight last adjusted its accounts on
November 30, 2007; therefore it is still necessary to
make adjusting entries for the month of December,
2007.
 Types of Adjusting Entries

The exact number of Adjustments needed at the end

of each accounting period depends on the nature of
the company’s business activities. However most
adjusting entries fall into one of the four general
categories.
1. Entries to apportion recorded cost
2. Entries to apportion unearned revenue
3. Entries to record unrecorded expense
4. Entries to record unrecorded revenue
 1. Entries to apportion recorded cost

A cash expenditures that will benefit more than one

accounting period usually is recorded by debiting an
asset account (for example supplies, unexpired
insurance and depreciable assets etc) and by
crediting cash.
At the end of each accounting period when the
business take benefits from this expenditure, an
adjusting entry is made to transfer an appropriate
portion of the cost from the asset account to an
expense account.
This adjusting entry shows that part of the asset has
been used up or becomes expense during the current
accounting period.
An adjusting entry to apportion a previously
recorded cash expenditures (or cost) consist of
a Debit to an “Expense account” and Credit to
an “Asset account (or contra asset account)”.
Examples of these adjustments include the entries to
record Depreciation expense and to apportion the
costs of prepaid expense.
 PREPAID EXPENSES

 Payments in advance are often made for such items as

insurance, rent and supplies.
 If the advance payments (or prepayments) will benefit
more than just current accounting period the cost
represents an asset rather than an expense.
 The cost of this asset will be allocated to expense in the
accounting periods in which the services or supplies are
used.
 In summary Prepaid Expenses are assets; they becomes
expenses only as the goods or services are used up.
 SHOP SUPPLIES

Prior to adjusting entries at December 31, 2007 the

balance of shop supplies account in the trial balance
is $1,800.
Assume that at December 31 the owner Asad find out
that the remaining shop supplies on hand is of
$1,200, this shows that shop supplies of amount
$600 is used during the month of December 2007.
The following is the adjusting entry for shop supplies
at December 31, 2007
 Adjusting Entry for shop supplies at
December 31, 2007

GENERAL JOURNAL
Date Account Titles and Debit Credit
Explanation $ $
2007 Supplies expense 600
Dec 31 Shop supplies 600
To recognize as
expense the cost of
shop supplies used
in December
The above adjusting entry serve two purposes
1. it charges to expense the cost of supplies used in
December and
2. It reduces the balance of shop supplies account to
$1,200.
 This $1,200 is the amount of the supplies estimated
to be on hand at December 31, 2007.
 INSURANCE POLICIES

Insurance policies also are a prepaid expense. These

policies provide a service, insurance protection, over
a specified period of time.
As the time passes, the insurance policy expires that
is, it is “used up” in business operations.
On February 1, Overnight purchased for $18,000 a
one year insurance policy and pay cash.
The following is the entry to record this transaction.
 Entry to record prepaid insurance
GENERAL JOURNAL
Date Account Titles and Debit Credit
Explanation $ $
2007 Unexpired insurance 18,000
Feb1 Cash 18,000
Purchased an
insurance policy
providing coverage
for the next 12
months
This $18,000 expenditure provide insurance
coverage for a period of one year.
So (18,000/12)= $1,500 is recognized as insurance
expense every month.
The insurance expense for the month of December,
2007 is recorded by the following adjusting entry.
 Adjusting Entry for Insurance expense at
December 31, 2007
GENERAL JOURNAL
Date Account Titles and Debit Credit
Explanation $ $
2007 Insurance expense 1,500
Dec 31 Unexpired insurance 1,500
To recognize as expense
the cost of Unexpired
insurance used in December
Notice the similarities between the effect of this
adjusting entry and the one that we previously made
for shop supplies.
In both cases, the entries transfer to expense that
portion of an asset that was “used up” during the
period
 Depreciation of Building

The recording of depreciation expense at the end of

an accounting period provides another example of an
adjusting entry that apportions a recorded cost.
The adjusting entry to record depreciation on
Overnight’s building is the same every month
throughout the building’s estimated useful life (20
years). This entry is same as we have made for
building in chapter no 3.
The monthly depreciation expense of building is
based on the following facts;
Overnight purchased its building for $36000.And
Asad owner estimate that its useful life is 20 years.
Annual depreciation expense of the building is equal
to (36000/20)=$1800 and per month depreciation
expense is equal to (1800/12)=$150.
The adjusting entry to record depreciation on this
building for the month of December, 2007 appears
below
 Adjusting Entry for Depreciation expense
at December 31, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $
2007 Depreciation Expense; Building 150
Dec 31 Accumulated Depreciation; Building 150
To record one month’s depreciation on
building
 Depreciation on the Tools and Equipment

Overnight also must record depreciation on its tools

and equipment. These assets cost $15,000, in
December 31, 2007 trial balance and management
estimates that they will remain in service for about 5
years.
Thus per year depreciation expense is equal to
(15000/5)=$3000 and monthly depreciation
expense is equal to (3000/12)=$250.
The adjusting entry to recognize this monthly
expense is;
 Adjusting Entry for Depreciation expense
at December 31
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Depreciation Expense; Tools & Equip 250

Dec 31 Accumulated Depreciation; Tools & Equip 250
To record one month’s depreciation on tools and
equipment
 APPORTIONING UNEARNED REVENUE

In some instances, customer may pay in advance for

services to be rendered in later accounting periods.
For examples collecting of fee in advance for 6
months by Kardan Institute from a student, selling of
Airline tickets in advance of a scheduled flight.
For accounting purposes, amounts collected in
advance do not represent revenue, because these
amount has not yet been earned.
Amounts collected from customers in advance are
recorded by Debiting the “cash account” and
crediting an “unearned revenue account”.
Unearned revenue also may be called “deferred
revenue”.
When a company collects money in advance from its
customers, it has an obligation to render services in
the future.
Therefore, the balance of an unearned revenue
account is considered to be a liability; it appears in
the liability section of the balance sheet, not in the
income statement.
Unearned revenue differs from other liabilities
because it usually will be settled by rendering
services, rather than by making payment in cash.
In short unearned revenue will be worked off rather
than paid off.
Of course if the business is unable to render the
service, it must discharge this liability by refunding
money to its customers.
When the company rendered the services for which
customers have paid in advance, it is working off its
liability to these customers and is earning the
revenue.
At the end of the accounting period, an adjusting entry
is made to transfer an appropriate amount from the
unearned revenue account to revenue account.
This adjusting entry consist of Debit to liability
account (Unearned revenue) and Credit to a revenue
account.
To discuss these concepts, assume that on December
1, 2007, Harbor cab company agreed to rent space in
Overnight auto service building and paid $6000 cash
in advance for three months.
The journal entry to record this transaction on
December 1 was:
 Entry to record unearned revenue at
December 1
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Cash 6000

Dec 1 Unearned Rent Revenue 6000
Collected in advance from Harbor cab for rental of
storage space for three months
Overnight will earn rent revenue when the Harbor
cab co will use the building for three months
gradually.
At the end of each of these three months, Overnight
will make an adjusting entry, transferring
$2000=(6000/3) from the Unearned Rent Revenue
account to an earned revenue account, Rent Revenue
Earned, which will appear in Overnight’s income
statement.
In short in the adjusting entry of unearned rent
revenue we Debit “Unearned Rent Revenue” and
Credit “Rent Revenue Earned”.
The following is the adjusting entry at December 31,
2007
 Adjusting Entry for Unearned Rent
Revenue at December 31, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Unearned Rent Revenue 2000

Dec 31 Rent Revenue earned 2000
To record one month’s rent revenue earned
during December, 2007
After this adjusting entry has been posted, the
unearned revenue account will have a $4000 credit
balance (it will decrease by an amount of $2000).
This $4000 balance represents Overnight’s
obligation to $4000 value of services over the next 2
months and will appear in the liability section of the
company balance sheet.
And the rent revenue earned account will appear in
Overnight’s income statement.
 Entries to record unrecorded expense

These type of adjusting entries recognizes expenses

that will be paid in future transaction; therefore, no
cost has yet been recorded in the accounting records.
Salaries of employees and interest on borrowed
money are common examples of expenses that
accumulate from day to day but that are not usually
recorded until they are paid.
These expenses are said to accrue over time, that is,
to grow or to accumulate.
At the end of the accounting period, an adjusting
entry should be made to record any expense that
have accrued but that have not yet been recorded.
Since these expenses will be paid at a future date, the
adjusting entry consist of a Debit to an EXPENSE
ACCOUNT and Credit to a LIABILITY ACCOUNT.
We shall now use the example of Overnight Auto
Service to explain these type of adjusting entries.
 Accrual of Wages (or salaries) Expense

Overnight like many businesses, pays its employees

every other Friday. This month, however ends on a
Wednesday two days before the next scheduled
payday.
Thus Overnight’s employees have worked for more
than a week in December for which they have not yet
been paid.
Time card indicate that since the last payroll date,
Overnight’s employees have worked a total of 130
hours.
Overnight’s wages expense averages about $15 per
hour.
Therefore at December 31 the amount payable to
employees is (130*15)=$1950 for worked performed
in December.
The following adjusting entry should be made to
record this amount both as wages expense of the
current period and as a liability:
 Adjusting Entry for Unrecorded expense at
December 31, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Wages Expense 1,950

Dec 31 Wages payable 1,950
To record unrecorded wages as of month end
The adjusting increases Overnight’s “wages
expenses” for 2007 and also creates a liability “wages
payable” this liability will appear in December 31
Balance sheet.
On Friday January 2 when Overnight will pay the
salaries. let us assume that the total amount payable
in the form of wages is equal to $2,397.
Out of 2,397 already we have recorded wages
expenses of $1,950 for December.
Wages for January is equal to ($2,397-
$1,950)=$ 447
The following is the entry at January 2 when
Overnight will pay the wages.
 Entry for the payment of wages at January
2, 2008
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2008 Wages Expense (for January) 447

Jan 2 Wages payable (accrued in December) 1,950
2,397
Cash
Two week wages of which $1,950 had been
accrued at December 31
 Accrual of Interest Expense

On November 30, 2007 Overnight borrowed

$40,000 from American National Bank.
The following entry will be made to record Borrowed
money on November 30, 2007.
 Entry to record borrowed money from
bank, on November 30, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Cash 40,000

Nov 30 Notes Payable 40,000
Borrowed $40,000 cash from American
National Bank, by issuing 3 months
Notes Payable
This loan is repayable after 3 months on February
28,2008 along with interest of $900 means the total
amount to be paid will be $40,900.
Out of $40,900, $40,000 will be the principal
amount (the amount which business has borrowed
actually) and $900 will be the interest for 3 months,
$300 for every month.
The $900 interest charge covers a period of 3
months. Although no payment will be made until
February 28, 2008, interest expense is incurred at
the rate of $300 per month.
The following adjusting entry is made at December
31, 2007 to record interest expense for the month of
December.
 Adjusting Entry for Unrecorded expense at
December 31, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Interest Expense 300

Dec 31 Interest payable 300
To record unrecorded interest as of month end
This entry increases the amount of interest expense
recognized during the year from $3,000 (the amount
written in unadjusted trial balance) to $3,300.
This $3,300 interest expense will appear in
Overnight’s 2007 Income statement and $300
interest payable and $40,000 note payable to
American National Bank both will appear as
liabilities in December 31, 2007 Balance sheet.
Overnight will make a second adjusting entry
recognizing another $300 an interest expense on
January 31, 2008.
The entry at February 28, 2008 to record repayment
of this loan, including $900 interest charges, will be
as follows;
 Entry to record the payment of loan to
bank, on February 28, 2008
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2008 Notes Payable 40,000

Feb 28 Interest Payable (from December and January) 600
Interest Expense (February only) 300

Cash 40,900
Repaid $40,000 note payable to American
National Bank, Including $900 in interest
charges
Notice that only $300 of the total interest charge is
recognized as expense in February. Through the
process of adjusting entries, we have spread the total
$900 interest charge over the 3 months during
which this expense was incurred.
 Recording Unrecorded Revenue

A business may earn revenue during the current

accounting period but not billed the customer until a
future accounting period, in this case the bill might
not be prepared until all services are completed.
Any revenue that has been earned but not recorded
during the current accounting period should be
recorded at the end of the period by means of an
adjusting entry.
This adjusting entry consist of Debit to an “A/R” and
Credit to the appropriate “REVENUE ACCOUNT”.
The term “Accrued Revenue” often is used to
describe revenue that has been earned during the
period but that has not been recorded prior to the
closing entry.
To discuss this type of adjusting entry assume that in
December, Overnight enter into an agreement to
perform routine maintenance on several vans owned
by Airport Shuttle Service.
Overnight agreed to maintain these vans for a fee of
$1,500 per month, payable on the 15th of each month.
No entry was made to record the signing of this
agreement, because no services had yet been
rendered.
Overnight began rendering services on December 15,
but the 1st monthly payment will not be received until
January 15.
Therefore, Overnight should make the following
adjusting entry at December 31 to record revenue
earned from Airport Shuttle during December 2007;
 Adjusting Entry for Unrecorded Revenue at
December 31, 2007
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2007 Account Receivable 750

Dec 31 Repair Service Revenue 750
To record unrecorded revenue at the end of the
month
The collection of the 1st monthly fee from Airport
Shuttle will occur in the next accounting period
(January 15).
Of this $1,500 cash receipt, half represents collection
of the receivable recorded on December 31; the other
half represents revenue earned in January.
Thus the entry to record the receipt of $1,500 from
Airport Shuttle On January 15, 2008 will be;
 Entry to record the Collection of Cash, on
January 15, 2008
GENERAL JOURNAL
Date Account Titles and Explanation Dr Cr
$ $

2008 Cash 1,500

Jan 15 A/R 750
Repair Service Revenue 750

Collected cash from Airport Shuttle for van

maintenance, Dec 15 through Jan 15
The net result of December 31 adjusting entry has
been to divide the revenue from maintenance of
Airport Shuttle’s vans between December and
January in proportion to the services rendered
during each month.
WORK
SHEET
 The work sheet is a useful
device for understanding the
flow of accounting data from
the unadjusted trial balance to
the financial statements.
 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Prepared from the general ledger.

Accounts are listed in the following
order: assets, liabilities,
stockholders’ equity, revenues, and
expenses.
 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments are entered here.

 The Work Sheet

Trial Balance Adjustments Adjusted TB

Accounts Dr Cr Dr Cr Dr Cr

Adjustments are combined with

the trial balance. Account
balances are now adjusted.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 The Unadjusted
9 Asad Capital 25,000
10 Asad Drawing 4,000 Trial Balance
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800
16 Miscellaneous Expense 455
17 42,600 42,600
18
19
20
21
22
(a) The Supplies account has a debit of
$2,000. A count of supplies at the end of
the period reveals that $760 is on hand.
Therefore, $1,240 in supplies was used
during the two-month period.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360
9 Asad Capital 25,000
10 Asad Drawings 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18
19
20
21
22
(b) The Prepaid Insurance account has a
debit balance of $2,400, which
represents prepayment of insurance for
24 months beginning December 1.
Thus, the insurance expense for this
month is $100 ($2,400 ÷ 24).
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360
9 Asad Capital 25,000
10 Asad Drawings 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19
20
21
22
Accounts are added as needed.
(c) The Unearned Rent account has a credit
balance of $360, which represents the
receipt of three-months’ rent beginning
with December 1. Thus, the rent revenue
for December is $120.

FOR
RENT
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20
21
22
(d) Wages accrued but not paid at
the end of December total $250.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21
22
(e) Fees accrued at the end of
December, but not recorded,
total $500.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21
22
(f) Depreciation of the office
equipment is $50 for December.
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
 NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
To make
Trial Balance
more
Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 space, let’s remove
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 the heading. (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
Depreciation Expense (f) 50
21
22 Accum. Depreciation
Summed (f) 50
23 and 2,260 2,260
24
25
ruled
Next, the unadjusted Trial
Balance columns and the
Adjustments columns are
combined to determine the
amounts displayed in the
Adjusted Trial Balance.
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,220 (e) 500
3 Supplies 2,000 (a) 1,240
4 Prepaid Insurance 2,400 (b) 100
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 360 (c) 120
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,340 (e) 500
12 Wages Expense 4,275 (d) 250
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 800 (a) 1,240
16 Miscellaneous Expense 455
17 42,600 42,600
18 Insurance Expense (b) 100
19 Rent Revenue (c) 120
20 Wages Payable (d) 250
21 Depreciation Expense (f) 50
22 Accum. Depreciation (f) 50
23 2,260 2,260
24
25
 Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,220 (e) 500 2,720
3 Supplies 2,000 (a) 1,240 760
4 Prepaid Insurance 2,400 (b) 100 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 360 (c) 120 240
9 Asad Capital 25,000 25,000
10 Asad Drawing 4,000 4,000
11 Fees Earned 16,340 (e) 500 16,840
12 Wages Expense 4,275 (d) 250 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 800 (a) 1,240 2,040
16 Miscellaneous Expense 455 455
17 42,600 42,600
18 Insurance Expense (b) 100 100
19 Rent Revenue (c) 120 120
20 Wages Payable (d) 250 250
21 Depreciation Expense (f) 50 50
22 Accum. Depreciation (f) 50 50
23 2,260 2,260 43,400 43,400
24
25
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

Revenue and expense balances in

the Adjusted Trial Balance column
are extended to the Income
Statement column.
 The Work Sheet

Adjusted TB Income State. Balance Sheet

Accounts Dr Cr Dr Cr Dr Cr

Asset, liability, and stockholders’

equity balances in the Adjusted
Trial Balance column are extended
to the Balance Sheet column.
To make room on the slides for
the Income statement and
Balance Sheet columns, the
Trial Balance and Adjustments
columns have been removed.
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065
2 Accounts Receivable 2,720
3 Supplies 760
4 Prepaid Insurance 2,300
5 Land 20,000
6 Office Equipment 1,800
7 Accounts Payable 900
8 Unearned Rent 240
9 Asad Capital 25,000
10 Asad Drawing 4,000
11 Fees Earned 16,840
12 Wages Expense 4,525
13 Rent Expense 1,600
14 Utilities Expense 985
15 Supplies Expense 2,040
16 Miscellaneous Expense 455
17
18 Insurance Expense 100
19 Rent Revenue 120
20 Wages Payable 250
21 Depreciation Expense 50
22 Accum. Depreciation 50
23 43,400 43,400
24
25
Now, let’s extend the balances
from the Adjusted Trial
Balance column.
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Asad Capital 25,000 25,000
10 Asad Drawing 4,000 4,000
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 2,040 2,040
16 Miscellaneous Expense 455 455
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400
24
25
 These four
columns are
summed.
 Adjusted
Trial Balance Income Statement Balance Sheet
Account Title Debit Credit Debit Credit Debit Credit
1 Cash 2,065 2,065
2 Accounts Receivable 2,720 2,720
3 Supplies 760 760
4 Prepaid Insurance 2,300 2,300
5 Land 20,000 20,000
6 Office Equipment 1,800 1,800
7 Accounts Payable 900 900
8 Unearned Rent 240 240
9 Asad Capital 25,000 25,000
10 Asad Drawing 4,000 4,000
11 Fees Earned 16,840 16,840
12 Wages Expense 4,525 4,525
13 Rent Expense 1,600 1,600
14 Utilities Expense 985 985
15 Supplies Expense 2,040 2,040
16 Miscellaneous Expense 455 455
17
18 Insurance Expense 100 100
19 Rent Revenue 120 120
20 Wages Payable 250 250
21 Depreciation Expense 50 50
22 Accum. Depreciation 50 50
23 43,400 43,400 9,755 16,960 33,645 26,440
24
25
 The difference between the
Income Statement column
totals is the net income (or net
loss) for the period.
The difference between the
Balance Sheet column totals
is also the income (or net
loss) for the period.
 Income Statement Balance Sheet

9,755 16,960 33,645 26,440

7,205 7,205
16,960 16,960 33,645 33,645

Net Income Net Income

 NetSolutions
Income Statement
For Two Months Ended December 31, 2005

Fees earned $16,840

Rent revenue 120
Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205

Every amount on this income statement was taken from the

Income Statement column of the work sheet.
 NetSolutions
Owner’s Equity Statement
For the Two Months Ended December 31, 2005

Asad Capital as per Adjusted Trial Balance $25000

Net income for November and December 7,205
Sub Total 32,205
Less: Asad Drawing (4000)
Asad Capital, December 31, 2005 $28,205
Either from the
Fromincome
the Balance
statement
Sheet or the
debit column
of work sheet.
the work sheet.
 NetSolutions
Balance Sheet
December 31, 2005
Assets Liabilities
Current assets: Current liabilities:
Cash $ 2,065 Accounts payableFrom$900the
Accounts receivable 2,720 Wages payable 250
Supplies 760 Unearned rent Owner’s 240
Prepaid insurance 2,300 Total liabilities Equity
$ 1,390
Total current assets $ 7,845
Statement
Property, plant, and
equipment:
Land $20,000
Office equip. $1,800 Owners’ Equity
Less accum.
depreciation 50 1,750 Asad Capital $28,205
Total property, plant
and equipment 21,750 Total liabilities and

Total assets $29,595 Owner’s equity

Adjusting and Closing Entries

Adjusting entries are

recorded in the journal at the
end of the accounting
period.
Adjusting and Closing Entries
If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
 The Closing Process

Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3 Net Income or Net Loss is

transferred to Owner’s Capital

DRAWING

4
Drawing are transferred to
Owner’s Capital
 The Closing Process
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3 Net Income
The Income or Net Loss is
Summary
transferred to Owner’s Capital
account does not appear on
the financial statements.
DRAWING
DRAWING

4
Drawings are transferred to
Owner’s capital
 The Closing Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary Bal. 16,840

Rent Expense Rent Revenue

Bal. 1,600 Bal. 120
Depreciation Expense
Bal. 50 Note: The
Utilities Expense balances shown
Asad Capital
Bal. 985 are adjusted
Bal. 25,000
Supplies Expense balances before
Bal. 2,040 closing. The
Insurance Expense following
Bal. 100
Asad Drawing sequence
Miscellaneous Expense
Bal. 4,000 demonstrates the
Bal. 455
closing process.
 The Closing Process
Wages Expense Fees Earned

Bal. 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 16,960 Rent Revenue
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985 Asad Capital Debit each revenue
Supplies Expense
Bal. 25,000
account for the
Bal. 2,040
amount of its
Insurance Expense
Bal. 100
balance, and credit
Miscellaneous Expense
Asad Drawing Income Summary
Bal. 4,000
Bal. 455 for the total
revenue.
 The Closing Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
Bal. 1,600 1,600
120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Asad Capital Debit Income
Supplies Expense
Bal. 25,000 Summary for the
Bal. 2,040 2,040 total expenses and
Insurance Expense credit each expense
Bal. 100 100
Asad Drawing account for its
Miscellaneous Expense
Bal. 4,000 balance.
Bal. 455 455
 The Closing Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
1,600 7,205
Bal. 1,600 120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Asad Capital Debit Income
Supplies Expense
Bal. 25000
Summary for the
7,205
Bal. 2,040 2,040 amount of its
Insurance Expense
balance (in this
Bal. 100 100
Miscellaneous Expense
Asad drawing case, the net
Bal. 455 455
Bal. 4,000
income) and credit
Asad Capital.
 The Closing Process
Wages Expense Fees Earned

Bal. 4,525 4,525 Income Summary 16,840 Bal. 16,840

Rent Expense 9,775 16,960 Rent Revenue
Bal. 1,600 1,600 7,205
120 Bal. 120
Depreciation Expense
Bal. 50 50
Utilities Expense
Bal. 985 985 Asad Capital Debit Asad Capital
Bal. 25000
Supplies Expense
4,000
for the balance of
7,205
Bal. 2,040 2,040
Asad Drawing and
Insurance Expense
Bal. 100 100
credit Asad
Miscellaneous Expense
Asad Drawing Drawing for the
Bal. 4,000 4,000
Bal. 455 455 same amount.
 Review of the Closing Process
Wages Expense Fees Earned

Bal. 4,525 4,525

4,525 Income Summary 16,480 Bal. 16,840
16,840
Rent Expense 9,775 16,960
16,960 Rent Revenue
Bal. 1,600 1,600
1,600 7,205
120 Bal.
120 120
Depreciation Expense
Bal. 50 50
50
Utilities Expense
Close Revenues
Bal. 985 985
985 Asad Capital
4,000
4,000 7,205
Bal. 25000 Close Expenses
Supplies Expense
7,205
Bal. 2,040 2,040
2,040 Close Income Summary
Insurance Expense
Bal. 100 100
100 Close Drawing
Asad Drawing
Miscellaneous Expense
Bal. 4,000 4,000
Bal. 455 455
445
 After the closing entries
are posted, all of the
temporary accounts have
zero balances.
 Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 720 00
Supplies 760 00
Prepaid Insurance 2 300 00
Land 20 000 00
Office Equipment 1 800 00
Accumulated Depreciation 50 00
Accounts Payable 900 00
Wages Payable 250 00
Unearned Rent 240 00
Asad Capital 28 205

29 645 00 29 645 00
The End