Chapter 4, Problem 4.5AP

(a)

To determine

Journalizing: Journal is the book of original entry whereby all the financial transactions are recorded in chronological order. Under this method each transaction has two sides, debit side and credit side. Total amount of debit side must be equal to the total amount of credit side. In addition, it is the primary books of accounts for any entity to record the daily transactions and processed further till the presentation of the financial statements

Accounting rules for journal entries:

• To Increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To Decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Worksheet: A worksheet is a tool that is used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger. Usually organizations use Microsoft Excel in order to use a worksheet electronically.

Trial Balance: It is prepared at the end of an accounting period listing all the ledgers and their balances. The total of the debit balances in the trial balance shall be equal to the total of the credit balances. It is prepared to check whether there is any mathematical error in the accounts.

Adjusted Trial Balance: Once the adjusting entries are made and posted to the ledger accounts, an adjusted trial balance is prepared. The main purpose of preparing an adjusted trial balance (second trial balance in an accounting cycle) is to check whether the debit and credit balance of the statements after passing the adjustment entries are equal.

Financial Statements: Financial statements are the financial reports that a company prepares in order to disseminate the information about its financial position and performance for a particular period of time. It is the major source of information for the stakeholders of the company from where they can collect real-time information about the performance and financial position of the company and proceed with the informed decision making. The three financial statements of a company include the balance sheet, income statement and the cash flow statement.

Income Statements: Income statement is also known as the profit and loss statement or revenue statement or also referred to as the operating statement. It is one of the financial statements of the company and represents the financial performance of the company for a particular time period. An income statement assists the accountants in calculating the net profit or net loss of the company.

Retained Earnings Statement: Retained earnings are the profits of the company that are not distributed among the shareholders of the company. These retained earnings are included in the retained earnings statement which are used for the development of the business in the future whenever required.

Classified Balance Sheet: In order to improve the ease of understanding, a classified balance sheet is used. In a classified balance sheet, various standard classifications and sections are used to classify all the similar assets and similar liabilities together. The items having similar economic characteristics are put in the same group so that the users of the statement can easily understand the items.

Closing entries: Closing entries are those journal entries which are passed to transfer the balances of temporary accounts to the permanent accounts. These are passed at the end of the accounting period, to transfer the final balance.

Rules for closing entries:

• Debit the account: All temporary accounts with credit balances.
• Credit the account: All temporary accounts with debit balances

Ledger Account: A ledger account helps to prepare the financial statements. The accounts of all the items are prepared separately such as assets, liabilities, revenues, expenses, owner’s equity and so on. The ledger accounts along with their balances are further posted to the trial balance.

The general ledger accounts are represented graphically through the T Accounts.

Post-Closing Trial Balance: It is the statement of trial balance, which is prepared after journalizing the closing entries and posting them to the respective ledgers.

To Prepare: Journal entries.

(b)

To determine

To Prepare: the trial balance on worksheet

(c)

To determine

To Adjust: the following entries on the worksheet and complete the worksheet.

(d)

To determine

To Prepare: the income statement.

(e)

To Record: the adjustment entries:

Explanation:

1)

Record the adjustment entry for service revenue.

J2
Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
31 Dec.	Accounts Receivable	112	2,700
	Service Revenue	400		2,700
	(To record the service revenue)

• Accounts Receivable is an asset account and debit in nature. Since the services have performed but has not billed, accrued revenue has recognized, which increased the value of asset. So, debit the Accounts Receivable account.
• Service Revenue is a revenue account and credit in nature. Since the revenue has earned, the value of revenue has increased. So, credit the Service Revenue account.

2)

Record the adjustment entry for depreciation expense.

J2
Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
31 Dec.	Depreciation Expense	711	2,700
	Accumulated Depreciation-Equipment	158		2,700
	(To record the depreciation expense)

• Depreciation Expense is an expense account. Since expenses reduce equity, Depreciation Expense account is debited with .
• Accumulated Depreciation is a contra asset account. Contra-asset accounts have a normal credit balance. Hence, credit Accumulated Depreciation-Equipment.

3)

Record the adjustment entry for insurance expense.

J2
Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
31July	Insurance Expense	722	150
	Prepaid Insurance	130		150
	(To adjust the insurance expense)

• Insurance Expense account is an expense account and expenses are debit in nature. Insurance expense has incurred for $150, expense need to be recorded. So, debit the Insurance Expense account.
• Prepaid Insurance account is an asset account. Since, the insurance expired for $150, the value of assets decreased. So, credit the Prepaid Insurance account

4)

Record the adjustment entry for supplies expense.

J2
Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
31July	Supplies Expenses	631	1,500
	Supplies	126		1,500
	(To adjust the supply expense)

• Supplies Expense is an expense account. Since the supplies has used, the balance of expense is increased. So, Supplies Expense account is debited.
• Supplies is an asset account. Since the supplies of $1,500 are used, the value of assets is decreased. So, credit Supplies account.

5)

Record the adjustment entry for Salaries and Wages expense.

J2
Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
31July	Salaries and Wages Expense	726	1,000
	Salaries and Wages Payable	212		1,000
	(To record the accrued interest expense)

• Salaries and Wages Expense is an expense account. Since expenses reduce equity, Salaries and Wages Expense account is debited.
• Salaries and Wages Payable is a liability account. Since the expense is accrued, the liability to pay money has increased. So, credit Salaries and Wages Payable account.

To determine

To Post: the entries into ledgers

(f)

To determine

To Journalize: the closing entries.

(g)

To determine

To Prepare: the post-closing trial balance.