Download After posting this adjusting entry, the ledger accounts would look like

Chapter 4
Adjustments, Financial Statements,
and the Quality of Financial
Reporting
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Supercuts’ Situation
Supercuts needs to
update or adjust their
financial information,
such as the amount of
supplies inventory on
hand and interest owed
on debt, to ensure the
financial statements
include the financial
results of all the
company’s activities for
the period.
SUPERCUTS
Unadjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$
6,100
Supplies
630
Accounts Receivable
200
Prepaid Rent
7,200
Prepaid Insurance
3,600
Equipment
60,000
Accounts Payable
$
1,030
Unearned Revenues
300
Notes Payable
20,000
Contributed Capital
50,000
Haircut Revenue
15,500
Wages Expense
8,100
Utilities Expense
600
Advertising Expense
400
Total
$ 86,830 $ 86,830
4-2
Learning Objective 1
Explain why
adjustments are
needed.
4-3
Why Adjustments Are Needed
Accounting systems are
designed to record most
recurring daily transactions,
particularly any involving
cash.
The problem is that cash is
not always received or paid
in the period when the
revenue is earned or when
the expense is incurred.
The solution for this timing difference is to record adjusting
entries at the end of the period to get the amounts reported
as revenues and expenses up to date.
4-4
Why Adjustments Are Needed
For example, at the end of
September, does Supercuts
still have $7,200 of Prepaid
Rent to use in the future?
No, because Supercuts used
1/ of the Prepaid Rent in
3
September.
During September,
Supercuts incurred Rent
Expense of $2,400.
Supercuts needs to adjust
or update the balances in
both the Prepaid Rent
account and the Rent
Expense account.
SUPERCUTS
Unadjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$
6,100
Supplies
630
Accounts Receivable
200
Prepaid Rent
7,200
Prepaid Insurance
3,600
Equipment
60,000
Accounts Payable
$
1,030
Unearned Revenues
300
Notes Payable
20,000
Contributed Capital
50,000
Haircut Revenue
15,500
Wages Expense
8,100
Utilities Expense
600
Advertising Expense
400
Total
$ 86,830 $ 86,830
4-5
Deferral Adjustments
(a) What we want to
accomplish:
(b) How do we
accomplish it?
Report up-to-date information.
Income Statement
Cost of Goods Sold
Supplies Expense
Rent Expense
Ticket Sales Revenue
Subscriptions Revenue
In
R
In
P
Revenues
Liabilities
(c) What accounts do
they affect?
Balance Sheet
Inventories
Supplies
Prepaid Rent
Unearned Ticket
Revenue
Subscriptions
Paid in Advance
Expenses
Assets
Update what's already recorded.
W
In
Deferral adjustments are needed when:
(a) some or all of an asset’s future
benefits have expired or been used
up in the current period,
or
(b)the company provides goods or
services in the current period to
satisfy an existing liability.
The accounts in a deferral
adjustment always go in
opposite directions. That is, a
decrease in an asset goes with
an increase in an expense, and
a decrease in a liability goes
with an increase in a revenue.
4-6
Accrual Adjustments
(a) What we want to
accomplish:
(b) How do we
accomplish it?
Report complete information.
Income Statement
Interest Revenue
Rent Revenue
Income Taxes Payable
Income Tax Expense
Wages Payable
Wages Expense
Interest Payable
Interest Expense
Liabilities
(c) What accounts do
they affect?
Revenues
Balance Sheet
Interest Receivable
Rent Receivable
Expenses
Assets
Include what's not yet recorded.
Accrual adjustments are needed when:
The accounts in an accrual
adjustment always go in same
direction. That is, an increase
in an asset goes with an
increase in a revenue, and an
increase in a liability goes with
an increase in an expense.
(a) assets and revenues are generated in
the current period but haven’t been
recorded as of the end of the period,
or
(b) liabilities and expenses are incurred
in the current period but haven’t been
recorded as of the end of the period.
4-7
Types of Adjustments
Report complete information.
Update what's already recorded.
Include what's not yet recorded.
Ticket Sales Revenue
Subscriptions Revenue
Liabilities
Income Statement
Cost of Goods Sold
Supplies Expense
Rent Expense
Balance Sheet
Interest Receivable
Rent Receivable
Income Statement
Interest Revenue
Rent Revenue
Income Taxes
Payable
Income Tax Expense
Wages Payable
Wages Expense
Interest Payable
Interest Expense
Expenses
Balance Sheet
Inventories
Supplies
Prepaid Rent
Unearned Ticket
Revenue
Subscriptions
Paid in Advance
Assets
Report up-to-date information.
Revenues
Liabilities
Accrual Adjustments
Expenses Revenues
(c) What accounts do
they affect?
Assets
(a) What we want to
accomplish:
(b) How do we
accomplish it?
Deferral Adjustments
The accounts in any adjustment always include one
balance sheet account (an asset or liability) and one
income statement account (revenue or expense).
4-8
Learning Objective 2
Prepare adjustments
needed at the end of
the period.
4-9
Making Required Adjustments
Timing
Daily
(1) Analyze
Transactions
(2) Record
Journal entries (JEs)
(3) Summarize
Ledgers (T-Accounts)
Unadjusted Trial Balance
Month-end
Adjustments
Year-end
Closing
Adjusting journal entries Ledgers (T-Accounts)
(AJEs)
Adjusted Trial Balance
Financial Statements
Closing journal entries
Ledgers (T-Accounts)
(CJEs)
Post-Closing Trial Balance
4-10
Deferral Adjustments
Remember this entry we made in Chapter 2 to record
the receipt of hair supplies?
Accounts
Supplies (+A)
Accounts Payable (+L)
Debit
630
Credit
630
During September, Supercuts used supplies but their
use wasn’t recorded simply because it wasn’t
efficient to record a journal entry each day when
supplies were used.
Let’s see how to record the
necessary adjustment.
4-11
Deferral Adjustments
Step 1 At the end of September, by counting the bottles of
shampoo and tubes of gel on hand, your salon manager
determined that $400 of supplies were left. That means we
used $230 of supplies this month.
Step 2 Prepare the adjusting entry to record the use of $230 of
supplies.
Step 3 The Supplies T-account currently has an unadjusted
balance of $630, but the desired balance is $400 (from Step
2). To go from $630 to $400, we need an adjustment to
decrease (credit) this asset by $230.
Unadj. Bal.
Adj. Bal.
Supplies
630
Supplies Expense
Unadj. Bal.
Adj. Bal.
4-12
Deferral Adjustments
Step 1 At the end of September, by counting the bottles of
shampoo and tubes of gel on hand, your salon manager
determined that $400 of supplies were left. That means we
used $230 of supplies this month.
Step 2 Prepare the adjusting entry to record the use of $230 of
supplies.
Step 3 The Supplies T-account currently has an unadjusted
balanceAccounts
of $630, but the desired balance isDebit
$400 (from StepCredit
2). To
go from $630(+E,
to $400,
we need an adjustment
Supplies
Expense
-SE)
230to
decrease (credit) this asset by $230.
Supplies (-A)
Unadj. Bal.
Adj. Bal.
Supplies
630
230
Supplies Expense
Unadj. Bal.
Adj. Bal.
4-13
Deferral Adjustments
Step 1 At the end of September, by counting the bottles of
shampoo and tubes of gel on hand, your salon manager
determined that $400 of supplies were left. That means we
used $230 of supplies this month.
Step 2 Prepare the adjusting entry to record the use of $230 of
supplies.
Step 3 The Supplies T-account currently has an unadjusted
balance of $630, but the desired balance is $400 (from Step
2). To go from $630 to $400, we need an adjustment to
decrease (credit) this asset by $230.
Unadj. Bal.
Adj. Bal.
Supplies
630
400
230 Adj. Entry
Supplies Expense
Unadj. Bal.
Adj. Entry
230
Adj. Bal.
230
4-14
Deferral Adjustments
SUPERCUTS
Unadjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$
6,100
Supplies
630
Accounts Receivable
200
Prepaid Rent
7,200
Prepaid Insurance
3,600
Equipment
60,000
Accounts Payable
$
1,030
Unearned Revenues
300
Notes Payable
20,000
Contributed Capital
50,000
Haircut Revenue
15,500
Wages Expense
8,100
Utilities Expense
600
Advertising Expense
400
Total
$ 86,830 $ 86,830
Take a minute and look at
this Unadjusted Trial
Balance. In addition to
Supplies, other assets we
need to adjust include
Prepaid Rent, Prepaid
Insurance, and
Equipment.
First, let’s look at how to
adjust the Prepaid Rent
and Prepaid Insurance
accounts.
4-15
Deferral Adjustments
Recall that the Prepaid Rent of $7,200 was for
September, October, and November rent. So, during
September, we used 1/3 of the rent, or $2,400.
Accounts
Rent Expense (+E, -SE)
Prepaid Rent (-A)
Debit
2,400
Credit
2,400
After posting this adjusting entry, the ledger accounts
would look like this:
Unadj. Bal.
Adj. Bal.
Prepaid Rent
7,200
2,400 Adj. Entry
4,800
Unadj. Bal.
Adj. Entry
Adj. Bal.
Rent Expense
2,400
2,400
4-16
Deferral Adjustments
Recall that the Prepaid Insurance of $3,600 was for
12 months of insurance. So, during September, we
used 1/12 of the insurance, or $300.
Accounts
Insurance Expense (+E, -SE)
Prepaid Insurance (-A)
Debit
300
Credit
300
After posting this adjusting entry, the ledger accounts
would look like this:
Prepaid Insurance
Unadj. Bal.
3,600
300 Adj. Entry
Adj. Bal.
3,300
Insurance Expense
Unadj. Bal.
Adj. Entry
300
Adj. Bal.
300
4-17
Deferral Adjustments
Notice:
Deferral adjustments
have two effects:
Carrying value simply means the
amount an asset or liability is
reported at (“carried at”) in the
financial statements. It is also
known as “net book value” or
simply “book value.”
1) They reduce the carrying
value of assets on the balance
sheet, and
2) They transfer the amount of
the reductions to related
expense accounts.
4-18
Deferral Adjustments—Depreciation
Recording Depreciation Expense and Accumulated Depreciation
Depreciation is the process of
allocating the cost of property and
equipment to the accounting
periods in which they are used to
generate revenues.
A contra-account is an account that
is an offset to, or reduction of,
another account.
4-19
Deferral Adjustments—Depreciation
Your salon manager determined that depreciation on
the equipment for this month should be $1,000.
Accounts
Depreciation Expense (+E, -SE)
Accumulated Depreciation (+xA, -A)
Debit
1,000
Credit
1,000
After posting this adjusting entry, the ledger accounts
would look like this:
Accumulated Depreciation
Unadj. Bal.
1,000 Adj. Entry
1,000 Adj. Bal.
Unadj. Bal.
Adj. Bal.
Depreciation Expense
Unadj. Bal.
Adj. Entry
1,000
Adj. Bal.
1,000
Equipment
60,000
60,000
4-20
Deferral Adjustments—Depreciation
Depreciation
 Market Value
In accounting,
depreciation is never
intended to show a
reduction in
market value.
4-21
Deferral Adjustments
During September, stylists accepted $175 of gift
certificates to pay for haircuts.
Accounts
Unearned Revenue (-L)
Haircut Revenue (+R, +SE)
Debit
175
Credit
175
After posting this adjusting entry, the ledger accounts
would look like this:
Unearned Revenue
300 Unadj. Bal.
Adj. Entry
175
125 Adj. Bal.
Haircut Revenue
15,500 Unadj. Bal.
175 Adj. Entry
15,675 Adj. Bal.
4-22
Accrual Adjustments
On September 30, Supercuts provided $40 of haircut
services to the salon manager, with payment to be
received in October.
Let’s see how to record the
necessary adjustment.
4-23
Accrual Adjustments
Step 1
Step 2
Step 3
Analyze the transactions and see that Supercuts provided
$40 of haircut services that have not been recorded. And,
the salon manager owes Supercuts $40 for the haircut
services received.
Record the adjusting journal entry by debiting Accounts
Receivable and crediting Haircut Revenue for $40.
Post the adjusting entry to the Accounts Receivable and
Haircut Revenue accounts.
Accounts Receivable
Unadj. Bal.
200
Adj. Bal.
Haircut Revenue
15,500 Unadj. Bal.
175 Adj. Entry
Adj. Bal.
4-24
Accrual Adjustments
Step 1
Step 2
Step 3
Analyze the transactions and see that Supercuts provided
$40 of haircut services that have not been recorded. And,
the salon manager owes Supercuts $40 for the haircut
services received.
Record the adjusting journal entry by debiting Accounts
Receivable and crediting Haircut Revenue for $40.
Post the adjusting entry to the Accounts Receivable and
Haircut Revenue accounts.
Accounts
Accounts Receivable (+A)
Haircut Revenue (+R)
Accounts Receivable
Unadj. Bal.
200
Adj. Bal.
Debit
40
Credit
40
Haircut Revenue
15,500 Unadj. Bal.
175 Adj. Entry
Adj. Bal.
4-25
Accrual Adjustments
Step 1
Step 2
Step 3
Analyze the transactions and see that Supercuts provided
$40 of haircut services that have not been recorded. And,
the salon manager owes Supercuts $40 for the haircut
services received.
Record the adjusting journal entry by debiting Accounts
Receivable and crediting Haircut Revenue for $40.
Post the adjusting entry to the Accounts Receivable and
Haircut Revenue accounts.
Accounts
Accounts Receivable (+A)
Haircut Revenue (+R)
Accounts Receivable
Unadj. Bal.
200
Adj. Entry
40
Adj. Bal.
240
Debit
40
Credit
40
Haircut Revenue
15,500
175
40
15,715
Unadj. Bal.
Adj. Entry
Adj. Entry
Adj. Bal.
4-26
Accrual Adjustments
Supercuts owes $900 of wages to stylists for work
done in the last three days of September.
Accounts
Wages Expense (+E, -SE)
Wages Payable (+L)
Debit
900
Credit
900
After posting this adjusting entry, the ledger accounts
would look like this:
Wages Payable
Unadj. Bal.
900 Adj. Entry
900 Adj. Bal.
Wages Expense
Unadj. Bal.
Adj. Entry
900
Adj. Bal.
900
4-27
Accrual Adjustments
Supercuts has not paid or recorded the $100 interest
that it owes for this month on its note payable to the
bank.
Accounts
Interest Expense (+E, -SE)
Interest Payable (+L)
Debit
100
Credit
100
After posting this adjusting entry, the ledger accounts
would look like this:
Interest Payable
Unadj. Bal.
100 Adj. Entry
100 Adj. Bal.
Interest Expense
Unadj. Bal.
Adj. Entry
100
Adj. Bal.
100
4-28
Accrual Adjustments
Supercuts pays income tax at an average rate equal
to 40% of the salon’s income before taxes ($1,685).
Accounts
Income Tax Expense (+E, -SE)
Income Taxes Payable (+L)
Debit
674
Credit
674
After posting this adjusting entry, the ledger accounts
would look like this:
Income Taxes Payable
Unadj. Bal.
674 Adj. Entry
674 Adj. Bal.
Income
Unadj. Bal.
Adj. Entry
Adj. Bal.
Tax Expense
674
674
4-29
Final Comments
Adjusting journal entries
never involve cash
Dividends are not
expenses of the business.
4-30
Dividends
Supercuts declares and pays a $500
cash dividend.
Accounts
Dividends Declared (+D, -SE)
Cash (-A)
Debit
500
Credit
500
After posting this adjusting entry, the ledger accounts
would look like this:
Unadj. Bal.
Cash
6,100
500 Adj. Entry
Adj. Bal.
5,600
Dividends Declared
Unadj. Bal.
Adj. Entry
500
Adj. Bal.
500
4-31
Learning Objective 3
Prepare an adjusted
trial balance.
4-32
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
The adjusted trial
balance is a list of all
accounts and their
adjusted balances to
check on the equality of
recorded debits and
credits.
Here is the adjusted
trial balance for
Supercuts. The
amounts were taken
from the balances in
the ledger accounts
after adjusting entries
were made.
4-33
Learning Objective 4
Prepare adjusted
financial statements.
4-34
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
Now let’s prepare the
financial statements for
Supercuts.
Let’s prepare the
financial statements
in this order:
1. Income Statement
2. Statement of
Retained Earnings
3. Balance Sheet
4-35
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
SUPERCUTS SUPER SALON
Income Statement
For the Month Ended September 30, 2008
Revenues
Haircuts
Total Revenue
Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Advertising Expense
Insurance Expense
Supplies Expense
Interest Expense
Income Tax Expense
Total Expenses
Net Income
$
$
15,715
15,715
9,000
2,400
1,000
600
400
300
230
100
674
14,704
1,011
4-36
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
SUPERCUTS SUPER SALON
Income Statement
For the Month Ended September 30, 2008
Revenues
Haircuts
Total Revenue
Expenses
Wages Expense
Rent Expense
Depreciation Expense
Utilities Expense
Advertising Expense
Insurance Expense
Supplies Expense
Interest Expense
Income Tax Expense
Total Expenses
Net Income
$
$
15,715
15,715
9,000
2,400
1,000
600
400
300
230
100
674
14,704
1,011
SUPERCUTS SUPER SALON
Statement of Retained Earnings
For the Month Ended September 30, 2008
Retained Earnings, September 1
$
Net Income
1,011
Dividends Declared
(500)
Retained Earnings, September 30
$
511
4-37
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
SUPERCUTS SUPER SALON
Statement of Retained Earnings
For the Month Ended September 30, 2008
Retained Earnings, September 1
$
Net Income
1,011
Dividends Declared
(500)
Retained Earnings, September 30
$
511
SUPERCUTS SUPER SALON
Balance Sheet
At September 30, 2008
Assets
Current Assets
Cash
Supplies
Accounts Receivables
Prepaid Rent
Prepaid Insurance
Total Current Assets
Equipment
Accumulated Depreciation
Equipment, net
Total Assets
$
5,600
400
240
4,800
3,300
14,340
$ 60,000
(1,000)
$
59,000
73,340
Liabilities
Current Liabilities
Accounts Payable
Unearned Revenues
Wages Payable
Income Tax Payable
Interest Payable
Total Current Liabilities
Notes Payable
Total Liabilities
Stockholders' Equity
Contributed Capital
Retained Earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
1,030
125
900
674
100
2,829
20,000
22,829
50,000
511
50,511
73,340
4-38
Learning Objective 5
Explain the closing
process.
4-39
Closing Temporary Accounts
Timing
Daily
(1) Analyze
Transactions
(2) Record
Journal entries (JEs)
Month-end
Adjustments
Year-end
Closing
Adjusting journal entries Ledgers (T-Accounts)
(AJEs)
Adjusted Trial Balance
Financial Statements
Closing journal entries
Ledgers (T-Accounts)
(CJEs)
Post-Closing Trial Balance
Transfers net income
(or loss) and dividends
to Retained Earnings.
(3) Summarize
Ledgers (T-Accounts)
Unadjusted Trial Balance
Establishes zero
balances in all income
statement and dividend
accounts.
4-40
Closing Temporary Accounts
Temporary accounts
track financial
results for a limited
period of time.
Liabilities
Permanent
Accounts
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
Permanent accounts
track financial
results from year to
year.
4-41
Recording Closing Entries
 Debit Revenue accounts
and credit Expense
accounts. Debit or
credit the difference to
Retained Earnings.
Let’s prepare the
closing entries for
Supercuts!
 Credit Dividends
Declared and debit
Retained Earnings.
4-42
SUPERCUTS
Adjusted Trial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
Dividends Declared
500
Haircut Revenue
15,715
Wages Expense
9,000
Rent Expense
2,400
Depreciation Expense
1,000
Utilities Expense
600
Advertising Expense
400
Insurance Expense
300
Supplies Expense
230
Interest Expense
100
Income Tax Expense
674
Total
$ 89,544 $ 89,544
Accounts
Haircut Revenue (-R)
Wages Expense (-E)
Rent Expense (-E)
Depreciation Expense (-E)
Utilities Expense (-E)
Advertising Expense (-E)
Insurance Expense (-E)
Supplies Expense (-E)
Interest Expense (-E)
Income Tax Expense (-E)
Retained Earnings (+SE)
Debit
15,715
Accounts
Retained Earnings (-SE)
Dividends Declared (-D)
Debit
500
Credit
9,000
2,400
1,000
600
400
300
230
100
674
1,011
Credit
500
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Accounts
Haircut Revenue (-R)
Wages Expense (-E)
Rent Expense (-E)
Depreciation Expense (-E)
Utilities Expense (-E)
Advertising Expense (-E)
Insurance Expense (-E)
Supplies Expense (-E)
Interest Expense (-E)
Income Tax Expense (-E)
Retained Earnings (+SE)
Debit
15,715
Accounts
Retained Earnings (-SE)
Dividends Declared (-D)
Debit
500
Closing Entry
Credit
9,000
2,400
1,000
600
400
300
230
100
674
1,011
Haircut Revenue
15,715 Adj. Bal.
15,715
- Closing Bal.
After posting these closing
entries, all the income
statement accounts and the
dividend account will have a
zero balance.
Below is an example of how
two accounts would look after
posting the closing entries.
Credit
500
Adj. Bal.
Closing Bal.
Wages Expense
9,000
9,000 Closing Entry
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Post-Closing Trial Balance
SUPERCUTS
Post-ClosingTrial Balance
As of September 30, 2008
Debit
Credit
Cash
$ 5,600
Supplies
400
Accounts Receivable
240
Prepaid Rent
4,800
Prepaid Insurance
3,300
Equipment
60,000
Accumulated Depreciation
$
1,000
Accounts Payable
1,030
Unearned Revenues
125
Wages Payable
900
Income Taxes Payable
674
Interest Payable
100
Notes Payable
20,000
Contributed Capital
50,000
Retained Earnings
511
Total
$ 74,340 $ 74,340
Final check that all debits still
equal credits and that all
temporary accounts have been
closed.
Contains only permanent
accounts.
Is the last step in the
accounting process.
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Learning Objective 6
Explain how
adjustments affect
information quality.
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Adjustments and Information Quality
If a company bases its adjustments on honest but optimistic
estimates that lead to a higher net income, most people will refer to
the company as “aggressive” and its earnings as “lower quality”—
having been influenced by management’s optimism about the
future.
Accounting research studies
have found that, overall,
adjustments significantly
improve the quality of
financial statements by
ensuring that revenues are
recognized when they are
earned and expenses are
recorded when incurred.
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End of Chapter 4
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