Chapter Outline
Teaching Notes
LO 4-5 Explain the closing process.
E. Closing Temporary Accounts
1. Last step of accounting cycle is referred to as closing
process; performed only at the end of the year after the
financial statements have been prepared.
2. Cleans up the records to get them ready to begin tracking
the results in the following year.
3. Closing Income Statement and Dividend Accounts
✓ Activity #4
a. Permanent accounts––Accounts that track financial
results from year to year by carrying their ending
balances into the next year; the Retained Earnings
account, like all other balance sheet accounts, is a
permanent account because its ending balance from
one year becomes its beginning balance for the
following year.
b. Temporary accounts––Accounts that track financial
results for a limited period of time by having their
balances zeroed out at the end of each accounting
year; all revenue, expense, and the dividends accounts
are temporary accounts because they are used to track
only the current period’s results and then are closed
before the next year’s activities are recorded.
c. Closing process serves two purposes:
i. Transfer net income (or loss) and dividends to
Retained Earnings. The balance in the Retained
Earnings account will then agree with the statement
of retained earnings and the balance sheet.
ii. Establish zero balances in all income statement and
dividend accounts. The balances in the temporary
accounts are reset to zero to start accumulating
next year’s results.
d. Two closing journal entries are needed:
Illustrated in Exhibit 4.13
i. Debit each revenue account for the amount of its
credit balance, credit each expense account for the
amount of its debit balance, and record the
difference in Retained Earnings. (If the company
has a net loss, Retained Earnings will be debited.)
Stress that the amount
credited to Retained Earnings
should equal net income on
the income statement.
ii. Credit the Dividends account for the amount of its
debit balance and debit Retained Earnings for the
same amount.
Chapter Outline
Teaching Notes
F. Post-Closing Trial Balance
1. After the closing journal entries are posted, all temporary
accounts should have zero balances. These accounts will
be ready for recording transactions next year.
Illustrated in Exhibit 4.14
2. The ending balance in Retained Earnings is now up to
date (it matches the year-end amount on the statement of
retained earnings and balance sheet) and is carried
forward as the beginning balance for the next year.
In this context, post means
3. Post-closing trial balance––An internal report prepared
to check that total debits still equal total credits and that
all temporary accounts have been closed.
“after,” so a post-closing
trial balance is an “after–
closing” trial balance.
III. Evaluate the Results
LO 4-6 Explain how adjustments affect financial results.
A. Adjusted Financial Results
1. Adjustments help to ensure that all revenues and expenses
are reported in the period in which they are earned and
incurred.
2. As a result of adjustments, the financial statements
present the best picture of whether the company’s
business activities were profitable that period and what
economic resources the company owns and owes at the
end of that period.
The “Spotlight on Financial
Reporting” feature addresses
the failure of Circuit City.
3. Without these adjustments, the financial statements
present an incomplete and misleading picture of the
company’s financial performance.
❖ Spotlight Video Series—
Chapter 4
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 4–1
Use Handout 4–1 for an in-class activity designed to review transaction analysis (preparation of
adjusting entries and impact on the accounting equation) and the posting to T-accounts. The solution
follows the handout master.
2. Handout 4–2
If you used Handout 4–1, use Handout 4-2 for an in-class activity designed to review the preparation
of an adjusted trial balance. The solution follows the handout master.
3. Handout 4–3
If you used Handout 4–2, use Handout 4–3 for an in-class activity designed to review the preparation
of financial statements. The solution follows the handout master.
4. Handout 4–4
If you used Handout 4–2, use Handout 4–4 for an in-class activity designed to review the preparation
of closing entries and a post-close trial balance. The solution follows the handout master.
HANDOUT 4–1
ADJUSTING ENTRIES AND
POSTING TO T-ACCOUNTS
Prepare the required adjusting journal entry for each situation as of December 31, 2016. See the last page
for the unadjusted account balances shown in T-accounts.
(a) Deana’s Decorating had $1,800 of supplies on hand on December 1, 2016. When counting the
supplies on December 31, 2016, Deana’s found only $800 worth of supplies on hand.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(b) Deana’s had paid $12,000 for six months’ rent on November 1, 2016. As of December, 31, 2016, two
months’ (November & December) prepaid rent has expired.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(c) Deana’s had paid $6,000 for one year’s insurance on June 1, 2016.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
HANDOUT 4–1, continued
(d) The company had acquired equipment costing $40,000 on January 1, 2016. The depreciation on this
equipment was calculated to be $2,000 for 2016.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(e) On December 1, 2016, the company had sold $500 in gift certificates for decorating services to a
customer. On December 31, 2016, the accountant received an envelope containing $400 worth of
redeemed gift certificates, not yet recorded in the company’s books.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(f) On June 30, 2016, the company invested $20,000 in a certificate of deposit that will yield 12% interest
at the end of one year.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
HANDOUT 4–1, continued
(g) The company borrowed a note payable from the bank for $30,000 on January 1, 2016, due with all
interest on June 30, 2017. The note payable requires 10% interest.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(h) The company calculated its income taxes as $26,110 for the year ended December 31, 2016.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
(i) On December 15, 2016, the company declared a $750 dividend, payable January 15, 2017.
Debit and credit the accounts affected.
Dec. 31
2016
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Post the adjusting entries above to the T-accounts on the following page.
HANDOUT 4-1, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
+ Supplies –
Unadj.
1,800
(a)
+ Accounts Receivable –
Unadj.
4,000
+ Prepaid Rent –
Unadj.
12,000
(b)
+ Prepaid Insurance –
Unadj.
6,000
(c)
+ Certificate of Deposit –
Unadj.
20,000
+ Interest Receivable –
Unadj.
0
+ Property, Plant & Equipment –
Unadj.
40,000
− Accumulated Depreciation +
0
Unadj.
− Accounts Payable +
250
Unadj.
− Dividend Payable +
0
Unadj.
− Unearned Revenue +
500
Unadj.
− Notes Payable +
30,000
Unadj.
− Interest Payable +
0
Unadj.
− Income Taxes Payable +
0
Unadj.
+ Contributed Capital –
10,000
Unadj.
− Retained Earnings +
0
Unadj.
+ Dividends –
Unadj.
0
− Service Revenue +
120,000
Unadj.
+ Interest Revenue –
+ Salaries and Wage Expense –
Unadj.
32,000
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
Unadj.
500
+ Supplies Expense –
+ Rent Expense –
+ Insurance Expense –
+ Depreciation Expense –
+ Interest Expense –
+ Income Tax Expense –
HANDOUT 4–1 SOLUTION
ADJUSTING ENTRIES AND
POSTING TO T-ACCOUNTS
Prepare the required adjusting journal entry for each situation as of December 31, 2016. See the last page
for the unadjusted account balances shown in T-accounts.
(a) Deana’s Decorating had $1,800 of supplies on hand on December 1, 2016. When counting the
supplies on December 31, 2016, Deana’s found only $800 worth of supplies on hand.
Debit and credit the accounts affected.
Dec. 31
1,000
2016
1,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Supplies
–1,000
Supplies
Expense
–1,000
(b) Deana’s had paid $12,000 for six months’ rent on November 1, 2016. As of December, 31, 2016, two
months’ (November & December) prepaid rent has expired.
Debit and credit the accounts affected.
Dec. 31
4,000
2016
4,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Prepaid
Rent
–4,000
Rent Expense
–4,000
(c) Deana’s had paid $6,000 for one year’s insurance on June 1, 2016.
Debit and credit the accounts affected.
Dec. 31
3,500
2016
3,500
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Prepaid
Insurance
–3,500
Insurance
Expense
–3,500
HANDOUT 4–1 SOLUTION, continued
(d) The company had acquired equipment costing $40,000 on January 1, 2016. The depreciation on this
Equipment was calculated to be $2,000 for 2016.
Debit and credit the accounts affected.
Dec. 31
2,000
2016
2,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Accumulated
Depreciation
–2,000
Depreciation
Expense
–2,000
(e) On December 1, 2016, the company had sold $500 in gift certificates for decorating services to a
customer. On December 31, 2016, the accountant received an envelope containing $400 worth of
redeemed gift certificates, not yet recorded in the company’s books.
Debit and credit the accounts affected.
Dec. 31
400
2016
400
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Unearned
Revenue
–400
Service
Revenue
+400
(f) On June 30, 2016, the company invested $20,000 in a certificate of deposit that will yield 12% interest
at the end of one year.
Debit and credit the accounts affected..
Dec. 31
1,200
2016
1,200
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Interest
Receivable
+1,200
Interest
Revenue
+1,200
HANDOUT 4–1 SOLUTION, continued
(g) The company borrowed a note payable from the bank for $30,000 on January 1, 2016, due with all
interest on June 30, 2017. The note payable requires 10% interest.
Debit and credit the accounts affected.
Dec. 31
3,000
2016
3,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Interest
Payable
+3,000
Interest
Expense
–3,000
(h) The company calculated its income taxes as $26,110 for the year ended December 31, 2016.
Debit and credit the accounts affected.
Dec. 31
26,110
2016
26,110
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Income Tax
Payable
+26,110
Income Tax
Expense
–26,110
(i) On December 15, 2016, the company declared a $750 dividend, payable January 15, 2017.
Debit and credit the accounts affected.
Dec. 31
750
2016
750
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
+
Stockholders’ Equity
Income Tax
Payable
+750
Dividends
–750
HANDOUT 4-1 SOLUTION, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
Adj.
43,450
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
+ Accounts Receivable –
Unadj.
4,000
Adj.
4,000
+ Prepaid Rent –
Unadj.
12,000
4,000
(b)
Adj.
8,000
+ Prepaid Insurance –
Unadj.
6,000
3,500
(c)
Adj.
2,500
+ Certificate of Deposit –
Unadj.
20,000
Adj.
20,000
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
+ Property, Plant & Equipment –
Unadj.
40,000
Adj.
40,000
− Accumulated Depreciation +
0
Unadj.
2,000
(d)
2,000
− Accounts Payable +
250
Unadj.
250
Adj.
− Dividend Payable +
0
Unadj.
750
(i)
750
Adj.
− Unearned Revenue +
500
Unadj.
(e)
400
Adj.
100
− Notes Payable +
30,000
Unadj.
30,000
Adj.
− Interest Payable +
0
Unadj.
3,000
(g)
3,000
Adj.
− Income Taxes Payable +
0
Unadj.
26,110
(h)
26,110
Adj.
+ Contributed Capital –
10,000
Unadj.
− Retained Earnings +
0
Unadj.
+ Dividends –
Unadj.
0
(i)
750
Adj.
750
− Service Revenue +
120,000
Unadj.
400
(e)
120,400
Adj.
+ Interest Revenue –
1,200
(f)
+ Salaries and Wage Expense –
Unadj.
32,000
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
Unadj.
500
+ Supplies Expense –
(a)
1,000
+ Rent Expense –
(b)
4,000
+ Insurance Expense –
(c)
3,500
+ Depreciation Expense –
(d)
2,000
+ Interest Expense –
(g)
3,000
+ Income Tax Expense –
(h)
26,110