Accounting: The Language of Business - Vol. 2 (Internediate: Part 35)

By the standards of honest, if unorthodox, accounting, government workers don't pay taxes, but are paid out of taxes. In other words, they pay taxes out of money confiscated from taxpayers, who, in turn, pay taxes twice: on their own income and on the income of members of the bureaucracy. At the very least, this should disqualify state workers from voting.

Ilana Mercer

Review of the Accounting Cycle (Part L)

by

Charles Lamson

Step 9: Prepare Cost-Closing Trial Balance

After journalizing and posting all closing entries (part 34), the company prepares a post-closing trial balance. Similar to any trial balance, the objective of the post-closing trial balance is to prove the equality, not the accuracy, of the debits and credits related to the remaining accounts with non-zero balances. The post-closing trial balance contains only permanent balance sheet accounts because all temporary accounts were closed out (in Step 8: Close Temporary Accounts) and have zero balances.

EXAMPLE 4.13 Post-Closing Trial Balance

PROBLEM: Prepare the post-closing trial balance for Plush Service Corporation using the information provided in the prior example (from part 34).

SOLUTION: The post-closing trial balance only includes the permanent accounts because the temporary accounts have all closed and now reflect zero balances. Plush updates the ending balances for retained earnings, a permanent account, to reflect the closing of all temporary accounts to retained earnings.

Comprehensive Example

Example 4.14 provides a comprehensive example of the complete illustration of the accounting cycle.

Example 4.14 Comprehensive Accounting Cycle Example

PROBLEM: The DS Wilson Company, which provides consulting services to major utility companies, was formed on January 2 of the current year. Transactions completed during the first year of operation are presented here.

January 2: Issued 600,000 shares of common stock for $10,000,000, which is the par value (the nominal value of a bond, share of stock, or a coupon as indicated in writing on the document or specified by charter) of the stock. 

January 10: Acquired equipment in exchange for $2,000,000 cash and a $6,000,000 note payable (Notes payable are long-term liabilities that indicate the money a company owes its financiers—banks and other financial institutions as well as other sources of funds such as friends and family. They are long-term because they are payable beyond 12 months, though usually within five years.) The note is due in 10 years.

February 1: Paid $24,000 for a business insurance policy covering the two-year period beginning on February 1.

February 22: Purchased $900,000 of supplies on account.

March 1: Paid wages of $185,600.

March 23: Billed $2,730,000 for services rendered on account.

April 1: Paid $100,000 of the amount due on the supplies purchased on February 22.

April 17: Collected $200,000 of the outstanding accounts receivable.

May 1: Paid wages of $200,000

May 24: Paid $42,500 for sales commissions.

June 1: Made the first payment on the note issued on January 10. The payment consisted of $60,000 of interest and $200,000 to be applied against the principal of the note.

June 16: Billed customers for $560,000 of services rendered.

June 30: Collected $300,000 on accounts receivable.

July 10: Purchased $155,000 of supplies on account.

August 25: Paid $160,000 for administrative expenses.

September 23: Paid $30,000 for warehouse repairs.

October 1: Paid wages of $90,000.

November 20: Purchased supplies for $560,000 with cash.

December 15: Collected $125,600 in advance for services to be provided in December and January of the following year.

December 30: Declared and paid a $50,000 dividend to shareholders.

The chart of accounts used by DS Wilson is presented here

1. Journalize the transactions for a year.

2. Post the journal entries to t-accounts.

3. Prepare an unadjusted trial balance as of December 31.

4. Journalize and post adjusting entries to t-accounts based on the following additional information.

1. Eleven months of the insurance policy expired by the end of the year.

2. Depreciation for the equipment is $400,000.

3. `The company provided a portion of the services related to the advanced collection of December 15. The company recognized $70,000 as service revenue earned.

4. There are $500,000 of supplies on hand at the end of the year.

5. An additional $170,000 of Interest has accrued on the note by the end of the year.

6. Wilson accrued wages in the amount of $200,000.

5. Prepare an adjusted trial balance as of December 31.

6. Prepare a single-step income statement and statement of stockholders' equity for the current year and a classified balance sheet as of the end of the year.

7. Journalize and post-closing entries.

8. Prepare a post-closing trial balance as of December 31.

SOLUTION

 A. We first analyze each transaction and then present journal entries. Note that the reference numbers would not be added until the entries are posted.

January 2: Wilson will increase cash with a debit and increase common stock with a credit.

January 10: Wilson will increase equipment with a debit, decrease cash with a credit, and increase notes payable with a credit.

February 1: In the journal entry, Wilson will increase prepaid insurance with a debit and decrease cash with a credit.

February 22: Wilson will increase supplies with a debit and increase accounts payable with a credit.

March 1: Wilson will increase wage expense with a debit and decrease cash with a credit in the journal entry.

March 23: Wilson will increase accounts receivable with a debit and increase service revenue with a credit.

April 1: Wilson will decrease accounts payable with a debit of $100,000 and decrease cash with a credit of the same amount. 

April 17: Wilson will increase cash with a debit of $210,000 and decrease accounts receivable with a credit score of the same amount.

May 1: Wilson will increase wage expense with a debit and decrease cash with a credit.

May 8: Wilson will increase utilities expense with a debit and decrease cash with a credit.

May 24: Wilson will increase selling expense with a debit and decrease cash with a credit.

June 1: Wilson will decrease the notes payable with a debit of $200,000, increase interest expense with debit of $60,000, and decrease cash with a credit of $260,000.

June 16: Wilson will increase accounts receivable with a debit and increase service revenue with a credit.

June 30: Wilson will increase cash with a debit and decrease accounts receivable with a credit.

July 10: Wilson will increase supplies with a debit and increase accounts payable with a credit.

August 25: Wilson will increase administrative expense with a debit and decrease cash with a credit.

September 23: Wilson will increase repair expense with a debit and decrease cash with a credit.

October 1: Wilson will increase wage expense with a debit and decrease cash with a credit.

November 20: Wilson will increase supplies with a debit and decrease cash with a credit.

December 15: Wilson will increase cash with a debit and increase unearned service revenue with a credit.

December 30: Wilson will increase dividends with a debit and decrease cash with a credit.

B. The t-accounts are as follows:

                                                                                                                         

In part 36, we continue with part C of Example 4.14 Comprehensive Accounting Cycle Example by preparing the unadjusted trial balance using the balances from the t-accounts in B.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 118-126*       

                         

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