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Chapter 03 - The Accounting Cycle: End of the Period
Solution
Adjusting entry type: Accrued revenue.
December 31 (adjusting entry)
Debit
Credit
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
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
2. Post-closing trial balance
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
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
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
(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
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
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
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
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
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
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
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
