Chapter 03 – The Accounting Cycle: End of the Period
Solution
Adjusting entry type: Accrued revenue.
December 31 (adjusting entry)
Debit
Credit
January 9 (external transaction)
Chapter 03 – The Accounting Cycle: End of the Period
Problem #3
Below is the adjusted trial balance of Swan Dance Academy for December 31.
Swan Dance Academy
Adjusted Trial Balance
December 31
Account Title
Debit
Credit
Cash
$ 3,400
Accounts Receivable
6,200
Accounts Payable
Utilities Payable
Common Stock
Retained Earnings
Dividends
1,300
Service Revenue
Salaries Expense
6,300
Supplies Expense
2,800
Advertising Expense
5,700
Required:
1. Prepare closing entries.
2. Prepare a post-closing trial balance.
3. Compare the balances of retained earnings in the adjusted trial balance and the post-closing
trial balance.
Chapter 03 – The Accounting Cycle: End of the Period
Solution:
1. Closing entries
December 31
Debit
Credit
Service Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,200
Retained Earnings . . . . . . . . . . . . . . . . . .
17,200
Salaries Expense . . . . . . . . . . . . . . . . . . .
Supplies Expense . . . . . . . . . . . . . . . . . .
Advertising Expense . . . . . . . . . . . . . . . .
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . .
2. Post-closing trial balance
Accounts Payable
Common Stock
3. The balance of retained earnings increases by $1,100 from the adjusted trial balance to the
Swan Dance Academy
Post-Closing Trial Balance
December 31
Account Title
Debit
Credit
Cash
$3,400
Chapter 03 – The Accounting Cycle: End of the Period
Common Mistakes
Common Mistakes made by students are highlighted in each of the chapters. With greater
awareness of the potential pitfalls, student can avoid making the same mistakes and gain a deeper
understanding of the chapter material.
Common Mistake
customers, regardless of when cash is received from those customers. Similarly, you might think
that expenses can be recorded only when cash is paid, but we record expenses when costs are
presumed to have been used to help generate revenues, regardless of when cash is paid.
It’s easy at first to think that revenue should be recorded only when cash is received. However,
Common Mistake
When a cash prepayment has occurred, students sometimes confuse the initial cash entry (the
prepayment) with the adjusting entry that follows. The cash flow is not the adjusting entry. The
adjusting entry is to recognize the expense that has occurred after the cash flow.
Common Mistake
When recording the interest payable on a borrowed amount, students sometimes mistakenly
Common Mistake
entries will never include the Cash account. Note that no adjusting entries are posted to the Cash
account in Illustration 3–9.
Students sometimes mistakenly include the Cash account in an adjusting entry. Typical adjusting
Common Mistake
Students sometimes believe that closing entries are meant to reduce the balance of Retained
Chapter 03 – The Accounting Cycle: End of the Period
Decision Points and Decision Maker’s Perspective
Decision Points and Decision Maker’s Perspectives are provide throughout each chapter to give
insight into how measurement and communication of financial accounting information help
decision makers.
Decision Points
Question
Accounting Information
Analysis
The amounts reported
Income statement
Revenue and expense accounts
Decision Maker’s Perspective
Is the Balance Sheet Like a Photo or an MRI?
In Chapter 1, we mentioned that a balance sheet is like a photograph since it shows events at a
point in time, whereas an income statement is like a video since it shows events over time. This
Chapter 03 – The Accounting Cycle: End of the Period
Ethical Dilemma
You have recently been employed by a large clothing retailer. One of your tasks is to help
prepare financial statements for external distribution. The company’s lender, National Savings &
Loan, requires that financial statements be prepared according to generally accepted accounting
principles (GAAP). During the months of November and December 2021, the company spent $1
million on a major TV advertising campaign. The $1 million included the costs of producing the
commercials as well as the broadcast time purchased to run them. Because the advertising will be
aired in 2021 only, you charge all the costs to advertising expense in 2021, in accordance with
requirements of GAAP.
Key Issues
• Recording all advertising expense in 2021 (instead of delaying a portion until 2022) has
the effect of reducing net income.
• Since the bank requires the company to maintain profitability, recording all advertising
expenses in 2021 causes the company to lose good standing.
• Strictly following the rules of accounting vs. the use of discretion
• What is the role of an employee? Do the right thing or do what your boss tells you?
Option 1: Expense advertising costs immediately per GAAP
• GAAP guidelines are in place for accountants to follow, and the correct action is to
Option 2: Establish a prepaid advertising account to delay the recognition of some expenses
• Why do I have to be the employee to take on the burden of standing up to the CFO? Is
my job not to do as I am told?
Chapter 03 – The Accounting Cycle: End of the Period
Chapter 03 – The Accounting Cycle: End of the Period
EAGLE SOCCER ACADEMY
Worksheet
December 31
Unadjusted
Trial Balance
Adjusting
Entries
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Accounts
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
Cash
$ 6,900
$ 6,900
$ 6,900
Accounts Receivable
2,000
(h) 700
2,700
2,700
Supplies
2,300
(b) 1,000
1,300
1,300
Prepaid Rent
6,000
(a) 500
5,500
5,500
Equipment
24,000
24,000
24,000
Accumulated Depreciation
(c) 400
Accounts Payable
Salaries Payable
(e) 300
Utilities Payable
900
900
Deferred Revenue
(d) 200
Interest Payable
(g) 100
Notes Payable
Common Stock
Retained Earnings
Dividends
200
200
200
Service Revenue
(d) 200
(h) 700
Rent Expense
(a) 500
500
$ 500
Supplies Expense
(b) 1,000
1,000
1,000
Depreciation Expense
(c) 400
400
400
Salaries Expense
2,800
(e) 300
3,100
3,100
Utilities Expense
(f) 900
900
Interest Expense
(g) 100
100
$4,100
$6,000
Net Income
1,200
$7,200
Chapter 03 – The Accounting Cycle: End of the Period
General Ledger of Eagle Soccer Academy After Adjusting Entries
(Illustration 3-9, page 124)
ASSETS
Account: Cash
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Issue common stock for cash
25,000
25,000
Dec. 1
Borrow by signing three-year note
Dec. 1
Purchase equipment for cash
11,000
Dec. 1
Prepay rent with cash
5,000
Dec. 23
Receive cash in advance from customers
9,900
Dec. 28
Pay salaries to employees
7,100
Dec. 30
Pay cash dividends
6,900
Account: Accounts Receivable
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 17
Provide services to customers on account
2,000
2,000
Dec. 31
Bill customers for services during the month
700
2,700
Account: Supplies
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 6
Purchase supplies on account
2,300
2,300
Dec. 31
Consume supplies during the current period
1,300
Account: Prepaid Rent
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Prepay rent with cash
6,000
Dec. 31
Reduce prepaid rent due to passage of time
5,500
Account: Equipment
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Purchase equipment for cash
24,000
24,000
Account: Accumulated Depreciation
Chapter 03 – The Accounting Cycle: End of the Period
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Depreciate equipment
400
400
LIABILITIES
Account: Accounts Payable
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 6
Purchase supplies on account
2,300
Account: Deferred Revenue
Date
Description
Debit
Credit
Dec. 1
Beginning balance
Dec. 23
Receive cash in advance from customers
Dec. 31
Provide services to customers who paid in advance
200
400
Account: Salaries Payable
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Owe for salaries earned in the current period
300
300
Account: Utilities Payable
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Owe for utilities costs in the current period
Account: Interest Payable
Date
Description
Debit
Credit
Balance
Dec. 1
0
Dec. 31
100
Account: Notes Payable
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Borrow by signing three-year note
10,000
10,000
Chapter 03 – The Accounting Cycle: End of the Period
STOCKHOLDERS’ EQUITY
Account: Common Stock
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 1
Issue common stock for cash
25,000
25,000
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
Account: Dividends
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
Dec. 30
Pay cash dividends
200
Account: Service Revenue
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 12
Providing training to customers for cash
4,300
4,300
Dec. 17
Providing training to customers on account
2,300
6,300
Dec. 31
Provide services to customers who paid in advance
200
6,500
Dec. 31
Bill customers for services during the month
700
7,200
Account: Rent Expense
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Reduce prepaid rent due to passage of time
500
Account: Supplies Expense
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Consume supplies during the period
1,000
Account: Depreciation Expense
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 31
Depreciate equipment
400
400
Chapter 03 – The Accounting Cycle: End of the Period
Account: Salaries Expense
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
0
Dec. 6
Pay salaries to employees
2,800
2,800
Dec. 31
Owe for salaries earned in the current period
300
3,100
Date
Description
Debit
Credit
Dec. 1
Beginning balance
Dec. 31
Owe for utilities costs in the current period
Account: Interest Expense
Date
Description
Debit
Credit
Balance
Dec. 1
Beginning balance
Dec. 31
Owe for interest charges in the current period