Double-entry Accounting System T-account, debit, credit, and account balance; double entry bookkeeping system; general journals,

ledgers, posting process; closing entries. 1. Introduction to double-entry accounting system This tutorial is devoted to the technique used by most accountants in the world. The technique is called the double-entry recording system. To understand it better we are introducing a T account: T account is an individual accounting record that shows information about increases and decreases in one balance sheet or income statement account. T account is so called because it has the form of letter T. On the top of the horizontal bar there is the account title. Account decreases and increases are placed on the either side of the vertical bar: Account Title Decreases Increases & & Increases Decreases The left side of the T account is called a debit, and the right side is called a credit. Debit is the left side of a T account. Credit is the right side of a T account. Often these two terms are abbreviated as Dr and Cr. It is common to say that an account has been debited when an amount is placed on the left side of an account, and credited if an amount is placed on the right side of the account. Account balance is the difference between the debit side and the credit side of a T account. Now we can define the double-entry system: Double-entry recording system provides for the equality of total debits and total credits.

2. Double-entry accounting system and its rules

The double-entry rules can be helpful when we need to find a mistake in financial records. If total debits do not equal total credits, there must be a mistake. However, this system cannot ensure complete accuracy. For example, even if debit balances equal credit ones, an error may still be present because a wrong account was debited (or credited) when the entry was made. The two important rules about the double-entry recording system are as follows: Assets = Claims (Liabilities and Owner's Equity) and Total Debits = Total Credits 3. Effects of debits and credits on accounts Let us see how debits and credits affect accounts. As we mentioned earlier, a debit is the left side and a credit is the right side of an account. Increases and decreases are recorded differently for asset and claim accounts. Here is what we mean: 1. Debit entries increase asset accounts, and decrease liability and equity accounts. 2. Credit entries increase liability and equity accounts, and decrease asset accounts. Illustration 1: Effects of debits and credits in T accounts

An easy way to remember these rules is to learn that increases are posted on the outsides (see plus signs above) and decreases are posted on the insides (see minus signs above). That rule holds true for asset as well as liability and equity accounts.

4. Illustration of applying double-entry accounting system

Let's use an illustration. A company, called Huske's Consultants, started its operations on January 1, 20X6 when the owner, Mrs. Huske, contributed cash to the business. All accounts had zero beginning balances before this capital contribution. We will see how each transaction affects T accounts and the accounting equation. Transaction impacts on the financial statements will be shown in a horizontal statements model. All events are numbered and their numbers are used as recording references. Recall that there are four types of accounting events:

Asset source transactions Asset use transactions Asset exchange transactions Claims exchange transactions

The transaction type will be indicated for each accounting event. All transactions took place during 20X6. Due to the space limitations, we will not show all accounts while explaining a transaction. Only those accounts that are affected by a particular transaction will be shown in the accounting equation. In the cash flow section of the horizontal model, OA, FA and IA stand for operating, financing and investing activities, respectively. 4.1. Analysis of cash contribution transaction Event No. 1: On January 1, 20X6 the owner made a $10,000 cash contribution. This accounting event acts to increase both assets (Cash) and equity (Contributed Capital). The increase in the Cash account is recorded as a debit and the increase in the Contributed Capital account (equity) is recorded as a credit: Illustration 2: Effect of a capital contribution in T accounts Assets Cash Debit (1) + 10,000 This is an asset source transaction: Illustration 3: Effect of a capital contribution in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 10,000 = n/a + 10,000 n/a - n/a = n/a 10,000 FA = Liabilities + Equity Contributed Capital Credit (1) + 10,000

4.2. Analysis of supplies purchase on account transaction

Event No. 2: On May 15, Huske's Consultants purchased $400 worth of office supplies from a local supply company on account (i.e., agreed to pay for them on a later date). Purchasing supplies on account acts to increase assets (Supplies) and liabilities (Accounts Payable). The Supplies account is debited and the Accounts Payable account is credited: Illustration 4: Effect of a supplies purchase in T accounts Assets Supplies Debit (2) + 400 This is an asset source transaction: Illustration 5: Effect of a supplies purchase in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 400 = 400 + n/a n/a - n/a = n/a n/a 4.3. Analysis of providing services on account transaction Event No. 3: On May 20, 20X6 the company provided services on account (i.e., the company will collect cash later) to Mandy Food Store. The client, Mr. Mandy's business, was billed for $2,600. The transaction acts to increase assets (Accounts Receivable) and equity (by increasing Consulting Revenue). The asset is debited and the equity account is credited: Illustration 6: Effect of recording revenue in T accounts Assets Accounts Receivable Debit (3) + 2,600 This is an asset source transaction. Illustration 7: Effect of recording revenue in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 2,600 = n/a + 2,600 2,600 - n/a = 2,600 n/a Note that no cash flow is shown at this point because the customer agreed to pay the $2,600 later. 4.4. Analysis of paying cash for expenses transaction Event No. 4: On May 25, 20X6 the company paid $600 cash for operating expenses. The expense recognition acts to decrease assets (Cash) and equity (Operating Expenses). The Cash account is credited and the Operating Expense account is debited: = Liabilities + Equity Consulting Revenue Credit (3) + 2,600 = Liabilities + Accounts Payable Credit (2) + 400 Equity

Illustration 8: Effect of paying operating expenses in T accounts Assets = Cash Credit (4) - 600 Liabilities + Equity Operating Expense Debit + Expense [ - Equity] (4) - 600

An increase in expenses results in a decrease in equity. That's why we showed expenses with a plus sign and equity underneath them with a minus sign. This is an asset use transaction: Illustration 9: Effect of paying operating expenses in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (600) = n/a + (600) n/a - (600) = (600) (600) OA Note the $600 cash outflow. The company paid cash for expenses so there is a cash decrease related to this transaction. 4.5. Analysis of taking a loan transaction Event No. 5: On June 1, 20X6, due to liquidity concerns, Huske's Consultants decided to borrow $4,000 from Local Business Bank. The company issued a note that had a 1-year term and carried 7% annual interest rate. The transaction increases assets (Cash) and liabilities (Note Payable). The asset increase is recorded as a debit and the liability increase is recorded as a credit: Illustration 10: Effect of taking a loan in T accounts Assets Cash Debit (5) + 4,000 This is an asset source transaction: = Liabilities + Note Payable Credit (5) + 4,000 Equity

Illustration 11: Effect of taking a loan in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 4,000 = 4,000 + n/a n/a - n/a = n/a 4,000 FA There is a cash inflow of $4,000 from financing activities in this transaction because the company received cash from the bank.

4.6. Analysis of rent prepayment transaction Event No. 6: On June 1, 20X6 Mrs. Huske realized that the business was growing and in this connection rented a larger office. $2,400 cash was paid in advance for a 1-year rent of the new office. The transaction decreases one asset account (Cash) and increases another (Prepaid Rent). To increase the Prepaid Rent account it is debited and to decrease the Cash account it is credited: Illustration 12: Effect of rent payment in T accounts Assets = Claims Cash + Prepaid Rent Credit Debit (6) (6) + 2,400 2,400 This is an asset exchange transaction. Illustration 13: Effect of rent payment in the horizontal model Assets Cash + Prepaid Rent = Claims Rev. - Exp. = Net Inc. Cash Flow (2,400) + 2,400 = n/a n/a - n/a = n/a (2,400) OA There is a cash outflow of $2,400 from operating activities because the company paid cash for the rent.

4.7. Analysis of cash collection transaction Event No. 7: On June 15, 20X6 Huske's Consultants received $1,500 cash from Mandy Food Store for the services provided before (see Event No. 3). Cash collection increases one asset account (Cash) and decreases the other (Accounts Receivable). The Cash account is debited and the Accounts Receivable account is credited: Illustration 14: Effect of cash collection in T accounts

Cash Debit (7) + 1,500 This is an asset exchange transaction:

Assets = Claims + Accounts Receivable Credit (7) - 1,500

Illustration 15: Effect of cash collection in the horizontal model Assets Cash + Accounts = Claims Rev. - Exp. = Net Inc. Cash Flow Receivable 1,500 + (1,500) = n/a n/a - n/a = n/a 1,500 OA Note the $1,500 cash inflow from operating activities in this transaction. This cash collection resulted in cash inflow from the customer. 4.8. Analysis of cash advance receipt transaction Event No. 8: On June 30, 20X6 Mrs. Huske signed a contract with Mining Company to perform consulting services. The services are to be provided during the 12 months starting on July 1, 20X6. Huske's Consultants received an advance cash payment in amount of $3,600 for services to be performed under this contract. The transaction acts to increase assets (Cash) and liabilities (Unearned Revenue). The asset is debited and the liability is credited: Illustration 16: Effect of cash advance receipt in T accounts Assets Cash Debit (8) + 3,600 This is an asset source transaction: Illustration 17: Effect of cash advance receipt in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 3,600 = 3,600 + n/a n/a - n/a = n/a 3,600 OA The $3,600 cash received is shown as a cash inflow from operating activities. 4.9. Analysis of cash revenue transaction Event No. 9: On June 30, 20X6 Huske's Consultants represented Mr. Debret (a client) in a court hearing, for what the company received $700 cash. The increase in assets (Cash) is recorded as a debit. The increase in equity (by increasing Consulting Services) is recorded as a credit: = Liabilities + Unearned Revenue Credit (8) + 3,600 Equity

Illustration 18: Effect of cash revenue in T accounts Assets Cash Debit (9) + 700 This is an asset source transaction: Illustration 19: Effect of cash revenue in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 700 = n/a + 700 700 - n/a = 700 700 OA The $700 cash received is shown as a cash inflow from operating activities. 4.10. Analysis of cash investment transaction Event No. 10: On August 1, 20X6, Huske's Consultants provided a loan to Jak Building Company in amount of $3,000. Jak Building Company issued a 1-year, 8% note. The transaction acts to increase one asset (Notes Receivable) and decrease another asset (Cash). An increase in the Notes Receivable account is recorded as a debit, and a decrease in the Cash account is recorded as a credit: Illustration 20: Effect of cash investment in T accounts Assets = Cash + Notes Receivable Credit Debit (10) (10) + 3,000 3,000 This is an asset exchange transaction: Illustration 21: Effect of cash investment in the horizontal model Assets Cash + Notes = Claims Rev. - Exp. = Net Inc. Cash Receivable Flow (3,000) + 3,000 = n/a n/a - n/a = n/a (3,000) IA Note the decrease in cash from this transaction. This cash outflow represents an investing activity. 4.11. Analysis of furniture purchase transaction Event No. 11: New furniture was required for the recently rented office (Event No. 6). On August 1, 20X6 Mrs. Huske paid $2,000 cash to purchase a new office table and chairs. The office equipment is expected to have a useful life of 2 years and a salvage value of $400. The purchase acts to increase one asset account Claims = Liabilities + Equity Consulting Revenue Credit (9) + 700

(Office Equipment) and to decrease another (Cash). The Office Equipment account is debited and the Cash account is credited: Illustration 22: Effect of furniture purchase in T accounts Assets = Claims Cash + Office Equipment Credit Debit (11) (11) + 2,000 2,000 This is an asset exchange transaction: Illustration 23: Effect of furniture purchase in the horizontal model Assets Cash + Office = Claims Rev. - Exp. = Net Inc. Cash Equipment Flow (2,000) + 2,000 = n/a n/a - n/a = n/a (2,000) IA The transaction results in a $2,000 cash outflow from investing activities.

4.12. Analysis of cash payment on account transaction Event No. 12: On August 14, 20X6, Huske's Consultants paid the $400 owed to the local supply company (see Event No. 2). The cash payment acts to decrease assets (Cash) and liabilities (Accounts Payable). The decrease in assets is recorded as a credit, and the decrease in liabilities is recorded as a debit: Illustration 24: Effect of cash payment on account in T accounts Assets = Liabilities + Cash Accounts Payable Credit Debit (12) - 400 (12) - 400 This is an asset use transaction: Illustration 25: Effect of cash payment on account in the horizontal model Equity

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (400) = (400) + n/a n/a - n/a = n/a (400) OA Note the cash outflow of $400 as the company paid cash in this transaction. 4.13. Analysis of cleaning services on account transaction Event No. 13: On September 18, 20X6 Huske's Consultants received a $800 bill from SuperCleaners for cleaning the office. Mrs. Huske plans to pay the bill later. The event acts to increase liabilities and decrease equity. The increase in liabilities (Accounts Payable) is recorded as a credit, and the decrease in equity (by increasing Office Maintenance Expense) is recorded as a debit: Illustration 26: Effect of cleaning services on account in T accounts Assets = Liabilities + Equity Accounts Payable Office Maintenance Expense Credit Debit (13) + + Expense 800 [ - Equity] (13) - 800

This is a claims exchange transaction: Illustration 4-27: Effect of cleaning services on account in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow n/a = 800 + (800) n/a - (800) = (800) n/a

4.14. Analysis of cash distribution transaction Event No. 14: On November 30, 20X6 Huske's Consultants distributed $300 in cash to the owner. The distribution acts to decrease assets and equity. The decrease in assets (Cash) is recorded as a credit, and the decrease in equity (Distribution) is recorded as a debit: Illustration 28: Effect of cash distribution in T accounts Assets = Liabilities + Equity Cash Distribution Credit Debit (14) + Dist. 300 [ - Equity] (14) - 300 This is an asset use transaction: Illustration 29: Effect of cash distribution in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (300) = n/a + (300) n/a - n/a = n/a (300) FA This transaction results in a cash outflow of $300 from financing activities. 4.15. Analysis of interest payable and expense adjusting entry After we have reviewed all transactions pertaining to the accounting period, we need to make adjusting entries. Recall that adjusting entries are those made at the year end (or any other fiscal period) to adjust revenues or expenses. Adjustment No. 1: On June 1, 20X6 Huske's Consultants borrowed $4,000 cash from the bank and agreed to repay the loan in a year and pay 7% annual interest (see Event No. 5). For the current accounting period, the interest expense amounted to $163 = $4,000 x 7% x (7 months 12 months), rounded. The adjustment acts to increase liabilities and decrease equity. The increase in liabilities (Interest Payable) is recorded as a credit, and the decrease in equity (by increasing Interest Expense) is recorded as a debit: Illustration 30: Effect of interest expense in T accounts Assets = Liabilities + Equity Interest Payable Interest Expense Credit Debit (A1) + + Expense 163 [- Equity] (A1) - 163

This is a claims exchange transaction: Illustration 31: Effect of interest expense in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow n/a = 163 + (163) n/a - (163) = (163) n/a 4.16. Analysis of prepaid rent adjusting entry Adjustment No. 2: On June 1, 20X6 Huske's Consultants prepaid rent for 12 months in amount of $2,400 (see Event No. 6). The rent expense to be recognized at the end of the period is calculated as follows: $1,400 = $2,400 x (7 months 12 months). Recognition of the rent expense acts to decrease assets and equity. The decrease in assets (Prepaid Rent) is recorded as a credit, and the decrease in equity (by increasing Rent Expense) is recorded as a debit: Illustration 32: Effect of rent expense in T accounts Assets Prepaid Rent Credit (A2) 1,400 =Liabilities+ Equity Rent Expense Debit + Expense [- Equity]

(A2) 1,400 This is an asset use transaction: Illustration 33: Effect of rent expense in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (1,400) = n/a + (1,400) n/a - (1,400) = (1,400) n/a

4.17. Analysis of unearned and earned revenue adjusting entry Adjustment No. 3: On June 30, 20X6 Huske's Consultants received a $3,600 advance cash payment for services to be performed within a year starting on July 1, 20X6 (see Event No. 8). By December 31, 20X6 the company had provided 6 months of service, so the amount to be recorded as revenue is $1,800 = $3,600 x (6 months 12 months). This amount is transferred from liabilities (Unearned Revenue) to equity (Consulting Revenue). This revenue recognition acts to decrease liabilities and increase equity. The decrease in liabilities is recorded as a debit and the increase in equity is recorded as a credit: Illustration 34: Effect of revenue recognition in T accounts Assets = Liabilities + Equity Unearned Revenue Consulting Revenue Debit Credit (A3) -1,800 + Revenue [+ Equity] (A3) + 1,800

This is a claims exchange transaction: Illustration 35: Effect of revenue recognition in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow n/a = (1,800) + 1,800 1,800 - n/a = 1,800 n/a 4.18. Analysis of interest receivable and revenue adjusting entry Adjustment No. 4: On August 1, 20X6 Huske's Consultants loaned $3,000 to Jak Building Company. In return, Huske's Consultants received a one-year, 8% note (see Event No. 10). In this connection, Huske's Consultants should record $100 = $3,000 x 8% x (5 months 12 months) as interest revenue for the year ending December 31, 20X6. The adjustment acts to increase assets and equity. The increase in assets (Interest Receivable) is recorded as a debit, and the increase in equity (Interest Revenue) is recorded as a credit: Illustration 36: Effect of interest revenue in T accounts Assets Interest Receivable Debit (A4) +100 = Liabilities + Equity Interest Revenue Credit + Revenue [+ Equity] (A4) +100

This is an asset source transaction: Illustration 37: Effect of interest revenue in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow 100 = n/a + 100 100 - n/a = 100 n/a 4.19. Analysis of fixed assets depreciation adjusting entry Adjustment No. 5: On August 1, 20X6 office equipment costing $2,000 was purchased (see Event No. 11). The useful life of these assets is expected to be 2 years with a salvage value of $400. Huske's Consultants has to recognize the office equipment cost used during 20X6 as a depreciation expense. The amount to be recorded is $800 = ($2,000 - $400) 2 years. The adjustment acts to decrease assets and equity. The decrease in assets (Accumulated Depreciation) is recorded as a credit, and the decrease in equity (by increasing Depreciation Expense) is recorded as a debit: Illustration 38: Effect of depreciation expense in T accounts Assets = Liabilities + Equity Accumulated Depreciation Depreciation Expense Credit Debit + Acc. Depr. + Expense [ - Assets] [ - Equity] (A5) - 800 (A5) - 800 This is an asset use transaction:

Illustration 39: Effect of depreciation expense in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (800) = n/a + (800) n/a - (800) = (800) n/a

4.20. Analysis of salaries payable and expense adjusting entry Adjustment No. 6: At the end of the period, Huske's Consultants accrued $600 salaries that will be paid to employees in the next accounting period (20X7). The adjustment acts to increase liabilities and decrease equity. The increase in liabilities (Salaries Payable) is recorded as a credit, and the decrease in equity (by increasing Salaries Expense) is recorded as a debit: Illustration 40: Effect of salaries expense in T accounts Assets = Liabilities + Equity Salaries Payable Salaries Expense Credit Debit (A6) + Expense +600 [ - Equity] (A6) - 600

This is a claims exchange transaction: Illustration 41: Effect of salaries expense in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow n/a = 600 + (600) n/a - (600) = (600) n/a 4.21. Analysis of supplies expense adjusting entry Adjustment No. 7: On May 15, Huske's Consultants acquired supplies for $400 (see Event No. 2). At the end of the accounting period $100 of supplies remained on hand. The difference of $300 (i.e., $400 - $100) shows the amount of supplies used during the year that should be recognized as a supplies expense. The

adjustment decreases assets and equity. The decrease in assets (Supplies) is recorded as a credit, and the decrease in equity (by increasing Supplies Expense) is recorded as a debit: Illustration 42: Effect of supplies expense in T accounts Assets = Liabilities + Equity Supplies Supplies Expense Credit Debit (A7) + Expense 300 [ - Equity] (A7) - 300 This is an asset use transaction:

Illustration 43: Effect of supplies expense in the horizontal model Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow (300) = n/a + (300) n/a - (300) = (300) n/a 4.22. Presentation of T-accounts for accounting period We are now going to transfer all transactions to T accounts. Note that we meet the two requirements of the double-entry recording system: Total Debits = Total Credits and Total Assets = Total Liabilities + Total Equity If the two requirements are satisfied, we are sure that all amounts were posted. Illustration 44: Summary of all accounts with transactions
Assets Cash (1) 10,000 (4) 600 (6) 2,400 (10) 3,000 (5) 4,000 (11) 2,000 (7) 1,500 (12) 400 (14) 300 (8) 3,600 (9) 700 Bal. 1,800 Bal. 5,100 = Liabilities Accounts Payable (12) 400 (2) 400 (13) 800 Bal. 800 Unearned Revenue (A3) 1,800 (8) 3,600 + Equity Contributed Capital (1) 10,000 Bal. 10,000 Consulting Revenue (3) 2,600 (9) 700 (A3) 1,800

Bal. 11,100

Accounts Receivable (3) 2,600 (7) 1,500 Bal. 1,100 Supplies 400 (A7) 300 100

Notes Payable (5) 4,000 Bal. 4,000 Interest Payable (A1) 163 Bal. 163

Interest Revenue (A4) 100 Bal. 100 Operating Expense (4) 600 Bal. 600

(2) Bal.

Prepaid Rent (6) 2,400 (A2) 1,400 Bal. 1,000 Notes Receivable (10) 3,000 Bal. 3,000 Interest Receivable (A4) 100 Bal. 100 Office Equipment (11) 2,000 Bal. 2,000 Accum. Depreciation (A5) 800 Bal. 800

Salaries Payable (A6) 600 Bal. 600

Salaries Expense (A6) 600 Bal. 600 Office Maint. Expense (13) 800 Bal. 800 Interest Expense (A1) 163 Bal. 163 Depreciation Expense (A5) 800 Bal. 800 Supplies Expense (A7) 300 Bal. 300 Rent Expense (A2) 1,400 Bal 1,400 Distributions (14) 300 Bal. 300

Assets 17,600 Assets 17,600

= =

Liabilities 7,363

+ Claims 17,600

Equity 10,237

5. Effects of debits and credits on accounts For your convenience we provide a table of account types with indication of how they are increased or decreased: Illustration 45: Summary of debit and credit impacts Account Assets Contra Assets Liabilities Equity Contributed Capital Revenue Expenses Distributions 6. Recording process steps T accounts and the double-entry system provide accountants with a sophisticated means of record-keeping. Nevertheless, drawing T accounts is only one step in a sequence of steps accountants take from initiating a transaction to including it into the financial statements. In general, all steps of the recording process are performed in the following order: Illustration 46: The accounting recording process Debit Increase Decrease Decrease Decrease Decrease Decrease Increase Increase Credit Decrease Increase Increase Increase Increase Increase Decrease Decrease

6.1. Analysis of source (business) documents First, there should be a document showing that an accounting event took place. Such a document is usually called a source document: Source document serves as a basis for an accounting entry. Source documents are what accountants use to record accounting transactions. Source documents are also called business documents. Source documents vary. Some examples of source documents are invoices, material requisition forms, bank statements, and credit memos. 6.2. Recording transactions in general journal Second, source documents are the basis for recording transactions in a chronological order in a journal. Each company has what is called the general journal or the book of original entry: General journal (book of original entry) contains records about all transactions of an entity. In particular, the journal includes such data as the event date, accounts involved, explanations and amount(s). In addition to the general journal, an entity may have other journals that relate to specific areas, like a cash journal (includes information on cash transactions only) or a sales journal (includes information about sales transactions only).

6.3. Example of transactions in general journal Let's look at the general journal containing transactions from our illustration above: Illustration 47: General Journal for Huske's Consultants Trans. No 1 2 3 4 5 6 7 8 9 Date Account titles Jan 1 Cash Contributed Capital May 15 Supplies Accounts Payable May 20 Accounts Receivable Consulting Revenue May 25 Operating Expense Cash Jun 1 Cash Notes Payable Jun 1 Prepaid Rent Cash Jun 15 Cash Accounts Receivable Jun 30 Cash Unearned Revenue Jun 30 Cash Debit 10,000 400 400 2,600 2,600 600 600 4,000 4,000 2,400 2,400 1,500 1,500 3,600 3,600 700 Credit 10,000

Date Account titles Consulting Revenue 10 Aug 1 Notes Receivable Cash 11 Aug 1 Office Equipment Cash 12 Aug 14 Accounts Payable Cash 13 Sep 18 Office Maintenance Expense Accounts Payable 14 Nov 30 Distributions Cash Adjusting entries A1 Dec 31 Interest Expense Interest Payable A2 Dec 31 Rent Expense Prepaid Rent A3 Dec 31 Unearned Revenue Consulting Revenue A4 Dec 31 Interest Receivable Interest Revenue A5 Dec 31 Depreciation Expense Accumulated Depreciation A6 Dec 31 Salaries Expense Salaries Payable A7 Dec 31 Supplies Expense Supplies Totals of debits and credits

Trans. No

Debit 3,000

Credit 700 3,000

2,000 2,000 400 400 800 800 300 300 163 163 1,400 1,400 1,800 1,800 100 100 800 800 600 600 300 37,463 300 37,463

In addition to adjusting entries, closing entries must be made at the end of an accounting period: Closing entries are made to free up (to zero) the nominal (temporary) accounts so that they are prepared to be used in the next accounting period. Nominal accounts are revenue, expense, and distribution accounts. All nominal accounts are closed to the Retained Earnings account. The general journal with closing entries is presented below: Illustration 48: Closing entries for Huske's Consultants Account titles Closing entries Dec 31 Consulting Revenue Interest Revenue Date Debit 5,100 100 Credit

Account titles Retained Earnings Dec 31 Retained Earnings Operating Expense Office Maintenance Expense Interest Expense Rent Expense Depreciation Expense Salaries Expense Supplies Expense Dec 31 Retained Earnings Distributions

Date

Debit 4,663

Credit 5,200 600 800 163 1,400 800 600 300

300 300

6.4. Posting of accounting information from journals to the ledger Next, after complete transaction data are recorded, portions of the data are summarized and transferred to another journal, called the ledger: The ledger is a collection of all accounts a business maintains in its accounting system. With the development of computerized accounting systems, ledgers are often in the form of electronic records (databases). So, the ledger is where information about all accounts is kept. In order for the information to get to the ledger, it must be posted from journals. Posting is the process of transferring the accounting information from journals to the ledger. For example, all information from a cash journal is posted to the ledger to update the cash account(s). Sometimes information in journals is summarized into homogeneous groups before posting to the ledger. For instance, if there are a lot of cash payments for supplies during a period, such payments may be summarized to limit the number of records in the ledger. Note that only homogeneous transactions are summarized before posting. After posting has been completed, all debit and credit balances are compared to ensure they balance.

6.5. Preparing trial balances When all entries are posted, a trial balance is prepared: A trial balance is a list of all accounts with their balances at a point in time. Trial balances can be prepared at any time (before or after adjusting or closing entries). However, it is considered a good practice to have a trial balance before preparing financial statements because a trial balance shows accounts with their balances. Such information greatly facilitates preparation of financial statements. The trial balance for our example before and after all closing entries is shown below: Illustration 49: Before closing trial balance for Huske's Consultants Account Titles Cash Supplies Accounts Receivable Interest Receivable Prepaid Rent Notes Receivable Office Equipment Accumulated Depreciation Accounts Payable Salaries Payable Interest Payable Notes Payable Unearned Revenue Contributed Capital Distributions Consulting Revenue Interest Revenue Depreciation Expense Interest Expense Office Maintenance Expense Operating Expense Debit 11,100 100 1,100 100 1,000 3,000 2,000 Credit

(800) (800) (600) (163) (4,000) (1,800) (10,000) 300 (5,100) (100) 800 163 800 600

Account Titles Rent Expense Salaries Expense Supplies Expense Grand Total

Debit 1,400 600 300 23,363

Credit

(23,363)

Illustration 4-50: Post closing trial balance for Huske's Consultants Account Titles Cash Supplies Accounts Receivable Interest Receivable Prepaid Rent Notes Receivable Office Equipment Accumulated Depreciation Accounts Payable Salaries Payable Interest Payable Notes Payable Unearned Revenue Contributed Capital Retained Earnings Grand Total 6.6. Preparing financial statements (conclusion only) After the post-closing trial balance is prepared and checked to ensure credit balances equal debit balances, financial statements are prepared. We will skip preparation of financial statements in this tutorial. Note that preparation of financial statements is the final step in the sequence that was started by analyzing source documents. Debit 11,100 100 1,100 100 1,000 3,000 2,000 Credit

18,400

(800) (800) (600) (163) (4,000) (1,800) (10,000) (237) (18,400)