Accounting Cycle (Part 2) - Service Business PDF

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ACCOUNTING CYCLE – Step 5. Preparationof the Worksheet including Adjusting Entriesa) On May 1, 2019, Wedding “R” Us paid P 8,000 for two-month rent in advance. b) On May 4, 2019, Wedding ”R” Us acquired a one-year comprehensive insurance coverage on the service vehicle and paid P 14, 400 premiums. c...

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ACCOUNTING CYCLE – Step 5. Preparation of the Worksheet including Adjusting Entries The Wedding “R” Us presented the following information pertaining to its accounts that will need adjustments for its May 31, 2019 month end financial statements:

a) On May 1, 2019, Wedding “R” Us paid P 8,000 for two-month rent in advance. b) On May 4, 2019, Wedding ”R” Us acquired a one-year comprehensive insurance coverage on the service vehicle and paid P 14, 400 premiums. c) On May 8, 2019, Wedding ‘’R” Us purchased supplies, P18, 000. At the end of the month, Gevera makes a careful physical inventory of supplies. The inventory count showed that supplies costing P15, 000 are still on hand. d) The service vehicle which was bought on May 4 for P420, 000 will last for seven years and with a salvage value of P 84,000. e) The office equipment that was acquired on May 5 for P60, 000 will have a useful life of 5 years and will worthless at that time. f) On May 15, Wedding “R” Us received P10, 000 as an advanced payment for referrals made. At the end of the month, one of the three couples referred has already taken their marriage vows and as a result the amount of P4, 000 pertaining to the referred event has been realized. g) At the month end, the two employees have worked for three days beyond the last pay period. Each of employee’s salary rate is P300 per day. h) On May 2, 2019, Gevera borrowed P210, 000 from Metrobank. She issued promissory note that carried a 20% interest per annum. i) Wedding “R” Us agreed to arrange a rush but simple civil wedding for a madly-in-love couple in the afternoon of May 31. The entity intended to charge fees of P5, 300 for the services which is earned but unbilled.

Journal Entry a. Prepaid Rent

Adjusting entry

8,000

Rent Expense (8,000÷2mos*1)

4,000 Cash

8,000

Prepaid Insurance

b. Prepaid Insurance 14,400

4,000

Ins. Exp. (144,000÷12mos*1)

1,200 Cash c. Supplies

14,400 18,000

Prepaid Insurance

1,200

Supplies Expense

3,000 Accts. Payable 15,000)

18,000

Supplies (18,000-

3,000

Financial Accounting and Reporting (Part 1)

d. Service Vehicle

420,000

Dep. Exp.-SV (48k÷12mos)

4,000 Cash

420,000

Acc. Depreciation-SV

4,000 Annual Depreciation: 420,000-84,000÷5years = 48,000 e. Office Equipment 60,000 1,000 Cash 15,000 1,000 Accounts Payable 45,000

Dep. Exp.- OE (12k÷12mos) Acc. Depreciation- OE

Annual Depreciation: 60,000-0÷5years = 12,000 f.

Cash

g. N/A h. Cash 3,500

10,000 Unearned Ref. Revenue 4,000 Unearned Ref. Rev. 10,000 Ref. Revenue 4,000 Salaries Expense (300*3*2) 1,800 Salaries Payable 1,800 210,000 Interest Expense (210k*20%*1/12) Notes Payable 3,500

i.

N/A

210,000

Interest Payable

Accounts Receivable Consulting Revenue 5,300

5,300

Accounting Cycle step 5. Preparation of worksheet Chart of Accounts

Balance sheet accounts Assets: Equity: 110 – Cash Capital 120 – Accounts Receivable With. 130 – Supplies Income Summary

Liabilities: 210 – Notes Payable 220 – Accounts Payable 230 – Salaries Payable

Owner’s 310 – Gevera, 320 – Gevera, 330 –

Financial Accounting and Reporting (Part 1)

140 150 160 165 170 175

– – – – – –

Prepaid Rent Prepaid Insurance Service Vehicle Acc. Depreciation – SV Office Equipment Acc. Depreciation – OE

240 – Utilities Payable 250 – Interest Payable 260 – Unearned Referral Revenue

Income Statement accounts Income: 410 – Consulting Revenues 420 – Referral Revenues

Expenses: 510 – Salaries Expense 520 – Supplies Expense 530 – Rent Expense 540 – Insurance Expense 550 – Utilities Expense 560 – Depreciation Expense – Service vehicle 570 – Depreciation Expense – Office Equipment 580 – Miscellaneous Expense 590 – Interest Expense

Accounting cycle – step 6. Preparing the financial statements

Statement of Profit or Loss (Income Statement) Format: (Example) Wedding “R” Us INCOME STATEMENT FOR THE MONTH ENDED MAY 31, 2019 Revenues (itemized) Expenses (Itemized) Profit (loss) Wedding “R” Us INCOME STATEMENT FOR THE MONTH ENDED MAY 31, 2019 Revenues: Consulting Revenues Referral Revenues Expenses: Salaries Expense Supplies Expense Rent Expense Insurance Expense

xx,xxx (xx,xxx) xx,xxx

4, 000

67,700 71, 700

15, 600 3, 000 4,000 1,200 Financial Accounting and Reporting (Part 1)

Depreciation Expense – SV 4,000 Depreciation Expense – OE 1,000 Interest Expense 3,500 Utilities Expense 4,400 36, 700 PROFIT 35, 000

Statement of Changes in Equity Format: Wedding “R” Us STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED MAY 31, 2019 Owner’s Equity, beginning xxx,xxx Add: Additional Investments xx Profit xx xx xxx TOTAL xxx,xxx Less: Withdrawals xx Loss xx xx, xxx Owner’s Equity, ending xxx,xxx ASSETS = LIABILITIES + EQUITY Liabilities = Interest of creditors ASSETS – LIABILITIES = EQUITY Equity = Interest of owners Wedding “R” Us STATEMENT OF CHANGES IN EQUITY FOR THE MONTH ENDED MAY 31, 2019 Gevera, Capital, May 1, 2019 (initial investment) Add: Additional Investments Profit TOTAL Less: Withdrawals Gevera, Capital, May 31, 2019 000

35,000

250,000 0 35,000 285,000 14,000 271,

Statement of Financial Position (Balance Sheet) Format (Report Form) Wedding “R” Us BALANCE SHEET MAY 31, 2019 ASSETS Current Assets (itemized) Noncurrent Assets (itemized) Total Assets LIABILITIES AND OWNER’S EQUITY

xx, xxx xxx,xxx xxx,xxx

Financial Accounting and Reporting (Part 1)

Current Liabilities Noncurrent Liabilities Total Liabilities Owner’s Equity Total Liabilities and Owner’s Equity

xx,xxx xxx,xxx xxx,xxx xx,xxx xxx,xxx

Format (Account Form) Wedding “R” Us BALANCE SHEET MAY 31, 2019 ASSETS Current Assets xx,xxx xx,xxx Noncurrent Assets xx,xxx xx,xxx

LIABILITIES AND OWNER’S EQUITY Current Liabilities Noncurrent Liabilities Total Liabilities Owner’s Equity

xx,xxx xx,xxx _____

TOTAL ASSETS xxx,xxx

xxx,xxx

TOTAL LIABILITIES & OWNER’S EQUITY

Wedding “R” Us BALANCE SHEET MAY 31, 2019 ASSETS Current Assets: Cash Accounts Receivable Supplies Prepaid Rent Prepaid Insurance Total Current Assets 71,700 Noncurrent Assets: Service Vehicle Less: Acc. Depreciation – SV Office Equipment Less: Acc. Depreciation – OE Total Noncurrent Assets TOTAL ASSETS

22,200 17,300 15,000 4,000 13,200

420,000 4,000 = 60,000 1,000 =

416,000 59,000 475,000 546,700

*The assets accounts was sort according to their liquidity (sa kung paano ito kadaling maconvert into cash) Financial Accounting and Reporting (Part 1)

LIABILITIES AND OWNER’S EQUITY Current Liabilities: Notes Payable 210,000 Accounts Payable 53,000 Salaries Payable 1,800 Utilities Payable 1,400 Interest Payable 3,500 Unearned Ref. Revenue 6,000 Total Current Liabilities 275,700 (interest or portion of creditors of Wedding “R” Us) *The liability accounts was sort according to their due date of pagkakautang

Gevera, Capital, 5/31/19

271,000 (amount computed on Statement of COE) & (interest of owner which is Gevera in her company, Wedding “R” Us)

Total Liabilities & Owner’s Equity

546,700

ACCOUNTING CYCLE – STEP 7. ADJUSTING JOURNAL ENTRIES ARE JOURNALIZED AND POSTED ADJUSTING ENTRIES: a) Rent Expense 4,000 f) Unearned Ref. Rev. 4,000 Pp. Rent 4,000 Ref. Revenue 4,000 b) Insurance Exp. 1,200 g) Salaries Expense 1,800 Pp. Insurance 1,200 Salaries Payable 1,800 c) Supplies Expense 3,000 h) Interest Expense 3,500 Supplies 3,000 Interest Payable 3,500

Financial Accounting and Reporting (Part 1)

d) Dep. Expense – SV 5,300 Acc. Dep.- SV 5,300 e) Dep. Expense – OE Acc. Dep. – OE

4,000

i) Accts. Receivable 4,000

Cons. Revenue

1,000 1,000

Posting adjusting entries to ledger CASH BALANCE 22,200 ADJUSTING BAL: 22,200 SUPPLIES BALANCE (c) 3,000 18,000 ADJUSTING BAL: 15,000 PREPAID INSURANCE BALANCE (b) 1,200 14,400 ADJUSTING BAL: 13,200

OFFICE EQUIPMENT BALANCE 60,000 ADJUSTING BAL: 60,000

ACCOUNTS RECEIVABLE BALANCE 12,000 (i) 5,30 0 ADJUSTING BAL: 17,300 PREPAID RENT BALANCE (a) 4,000 8,000 ADJUSTING BAL: 4,000 SERVICE VEHICLE BALANCE 420,000 ADJUSTING BAL: 420,000

NOTES PAYABLE BALANCE 210,000 ADJUSTING BAL: 210,000

ACCOUNTS PAYABLE BALANCE 53,000 ADJUSTING BAL; 53,000

UTILITIES PAYABLE BALANCE 1,400 ADJUSTING

UNEARNED REFERRAL REVENUE (f) 4,000 BALANCE 10,000

BAL: 1,400 GEVERA, CAPITAL BALANCE 250,000 ADJUSTING BAL: 250,000

ADJUSTING BAL: 6,000

GEVERA, WITHDRAWALS BALANCE 14,000 ADJUSTING BAL: 14,000

CONSULTING REVENUES BALANCE 62,400 (h) 5,300 Financial Accoun 1)

ADJUSTING BAL: 67,700

g (Part

SALARIES EXPENSE BALANCE 13,800 (g) 1,800 ADJUSTING BAL: 15,600

UTILITIES EXPENSE BALANCE 4,400 ADJUSTING BAL: 4,400

RENT EXPENSE (a) 4,000 ADJUSTING BAL: 4,000

INSURANCE EXPENSE (b) 1,200 ADJUSTING BAL: 1,200

SUPPLIES EXPENSE (d) 3,000

DEPRECIATION EXPENSE - SV (c) 4,000 ADJUSTING BAL: 4,000

ADJUSTING BAL: 3,000

ACC. DEPRECIATION - SV (d) 4,000 ADJUSTING BAL: 4,000

ACC. DEPRECIATION - OE (e) 1,000

DEPRECIATION EXPENSE- OE (e) 1,000 ADJUSTING BAL: 1,000

REFERRAL REVENUE (f) 4,000 ADJUSTING BAL: 4,000

ADJUSTING BAL: 1,000

SALARIES PAYABLE (h) 1,800 ADJUSTING BAL: 1,800

INTEREST EXPENSE (g) 3,500 ADJUSTING BAL: 3,500

INTEREST PAYABLE (h) 3,500 ADJUSTING BAL: 3,500

*every account’s adjusting balance should be equal to the amount on the balance sheet.

Financial Accounting and Reporting (Part 1)

Accounting cycle – step 8. Closing Journal entries are journalized and posted

STEPS IN PREPARING CLOSING ENTRIES 1. Close the following accounts to “Income Summary”  Income  Expense 2. Close “Income Summary” to “Capital Account” 3. Close “Withdrawals” to the “Capital Account” To close Income Accounts: Accounts: Consulting Revenues 67,700 Income Summary Referral Revenues 4,000 71,700 Income Summary To close Expense Accounts: Accounts: Income Summary Acc. 36,700 Salaries Expense 15,600 Income Summary Acc. 4,400 Utilities Expense Income Summary Acc. 1,200 Rent Expense 3,000 Income Summary Acc. 4,000

To close the Income 67, 700

Consulting Revenues

67, 700

Referral Revenues 4, 000 Income Sum.

4,000 To close Expense 15,600

Income Summary

15,600

Salaries Exp.

4,400

Utilities Exp.

4,400 4,000

Rent Exp. 4,000 Insurance Exp. 4,000

1,200

Supplies Exp. Dep. Exp. – SV

Financial Accounting and Reporting (Part 1)

Insurance Expense 1,000 Income Summary Acc. 3,500 Supplies Exp. Income Summary Acc. Dep’n Exp. – SV Income Summary Acc. Dep’n Exp. – OE

1,200

Dep. Exp. – OE

3,000

Interest Exp. 3,000

4,000 4,000 1,000 1,000

Income Summary Acc. 3,500 Interest Exp. 3,500 To close Income & Expense Accounts:

5/31 Consulting Revenue 67,700 Referral Revenue 4,000 Salaries Expense 15,600 Rent Expense 4,000 Utilities Expense 4,400 Insurance Expense 1,200 Supplies Expense 3,000 Dep. Exp. – SV 4,000 Dep. Exp. – OE 1,000 Interest Expense 3,500 Income Summary (71,700 – 36,700) 35,000 *Kapag credit ang balance ng Income Summary, ibig sabihin the company has a profit (mas malaki ang revenue kaysa expense) *Kapag debit naman, ibig sabihin the company has a loss (mas Malaki and expense kaysa revenue)

To close Income Summary to Capital Account

5/31 Income Summary Gevera, Capital

35,000 35,000

To close Withdrawals to Capital

5/31 Gevera, Capital 14,000 Gevera, Withdrawals 14,000

Posting Closing entries to General Ledger Gevera, Capital Gevera, Withdrawals CJE3 AB 250,000 AB 14,000 CJE3 14,000 CJE2 35,000 14,000 271,000 (Balance after 0 closing the journal entry) Financial Accounting and Reporting (Part 1)

Consulting Revenue CJE1 AB 67,700 67,700 0

Referral Revenue CJE1 4,000 AB 4,000 0

Salaries Expense AB 15,600

CJE1 15,600

Utilities Expense AB 4,400

CJE1 4,400

0

Rent Expense AB 4,000 CJE1 4,000 0 Supplies Expense AB 3,000 CJE1 3,000 0

Dep. Exp. – OE CJE1 1,000 AB 1,000 0 Income Summary CJE2 CJE1 35,000 35,000 0

0

Insurance Expense AB 1,200 CJE1 1,200 0 AB 4,000

Dep. Exp. – SV CJE1 4,000 0

Interest Expense CJE1 3,500 AB 3,500 0

Financial Accounting and Reporting (Part 1)

Accounting Cycle – Step 9. Preparation of PostClosing Trial Balance Procedures in Preparing of Trial Balance 1. 2. 3. 4.

List the account titles in numerical order (chart of accounts) Obtain the account balance from the ledger Add the debit and credit columns Compare the totals Wedding “R” Us Post-Closing Trial Balance May 31, 2019 Debit

Cash Accts. Receivable Supplies Prepaid Rent Prepaid Insurance Service Vehicle Accum. Depr. – SV Office Equipment Accum. Depr. – OE Notes Payable Accts. Payable Salaries Payable

Credit

22,200 17,300 15,000 4,000 13,200 420,000 4,000 60,000 1,000 210,000 53,000 1,800 Financial Accounting and Reporting (Part 1)

Utilities Payable Interest Payable Unearned Ref. Rev. Gevera, Capital

1,400 3,500 6,000 271,000 551,700

551,700

*obtain the figures from the ledger

Accounting Cycle – Step 10. Reversing journal entries are journalized and posted Review: Summary of Adjusting Entries: Deferrals  Prepaid Expense

 Deferred Income (Unearned Rev) xxx  Depreciation

Expense Method Pp. Expense Exp. Xxx

Asset Method

xxx Xxx

Exp. Xxx Pp. Exp.

Income Method

Liability Method

Income xxx Def. Inc.

xxx

Def. Income xxx Income

Dep. Exp. Acc. Dep.

Xxx Xxx

Accruals  Accrued Income  Accrued Expense  Accrual of Bad Debts

Receivable xxx Income

xxx

Expense xxx Payable xxx Doubtful Accts. Exp. xxx Allowance for Doubtful accts. Xxx Financial Accounting and Reporting (Part 1)

Adjusting balances THAT are subject to Reversing entry SHOWN IN RED. *Generally, a reversing entry should be made for any adjusting entry that increased an asset or a liability account.

ADJUSTING ENTRIES: a) Rent Expense 4,000 f) Unearned Ref. Rev. 4,000 Pp. Rent 4,000 Ref. Revenue 4,000 b) Insurance Exp.1,200 g) Salaries Expense 1,800 RJE Pp. Insurance 1,200 Salaries Payable 1,800 c) Supplies Exp. 3,000 h) Interest Expense 3,500 RJE Supplies 3,000 Interest Payable 3,500 d) Dep. Exp. – SV 4,000 i) Accts. Receivable 5,300 RJE Acc. Dep. - SV 4,000 Cons. Revenue 5,300 e) Dep. Exp. – OE 1,000 Acc. Dep. – OE 1,000 REVERSING JOURNAL ENTRY #1 6/1/19

Salaries Payable Salaries Expense

1,800 1,800

REVERSING JOURNAL ENTRY #2 6/1/19

Interest Payable Interest Expense

3,500 3,500

REVERSING JOURNAL ENTRY #3 6/1/19

Consulting Revenue Accts. Receivable

5,300 5,300 Financial Accounting and Reporting (Part 1)

Accounts Receivable A/B 17,300 RJE#3 6/1 5,300

Interest Payable RJE#2 6/1 A/B 5/31 3,500 3,500

Salaries Payable RJE #1 6/1 A/B 5/31 1,800 1,800

Consulting Revenues RJE #3 6/1 5/31 0 5,300

Interest Expense 5/31 0 RJE#2 6/1 3,500

Salaries Expense 5/31 0 RJE#1 6/1 1,800

Financial Accounting and Reporting (Part 1)...