Chapter 1- Chapter 4 1

Accounting Cycle

Account Cycle Illustrative Problem

For the past several years, Kareem Ismail has operated a part-time consulting
business from his home. As of October 1, 2010, Kareem decided to move to rented
quarters and to operate the business, which was to be known as Iron Mountain
Consulting, on a full-time basis. Iron Mountain Consulting entered into the following
transactions during October:

Oct. 1. The following assets were received from Kareem Ismail: Cash, $18,000;
Account Receivable, $ 5,000; Supplies, $1,500; and Office Equipment,
$10,750.
1. Paid three months’ rent on a lease rental contract, $4,800.
2. Paid the premiums on property and casualty insurance policies, $2,700.
4. Received cash from clients as an advance payment for services to be provided
and recorded it as unearned fees, $3,150.
5. Purchased additional office equipment on account from Office Station Co.,
$1,250
6. Received cash from clients on account, $2,000.
10. Paid cash for a newspaper advertisement, $325.
12. Paid Office Station Co. for part of the debt incurred on Oct 5, $750.
12. Recorded services provided on account for the period Oct 1-12, $5,750.
14. Paid part-time receptionist for two weeks’ salary, $900.
17. Recorded cash from cash clients for fees earned during the period Oct 1-17,
$9,250.
18. Paid cash for supplies, $600.
20. Recorded services provided on account for the period Oct 13-20, $4,100.
24. Recorded cash from cash clients for fees earned for the period Oct 17-24,
$4,850.
26. Received cash from cash client on account, $3,450.
 Chapter 1- Chapter 4 2
Accounting Cycle

27. Paid part-time receptionist for two weeks’ salary, $900.

29. Paid telephone bill for Oct, $250.
31. Paid electricity bill for Oct, $300.
31. Recorded cash from cash clients for fees earned for the period Oct 25-31,
$3,975.
31. Recorded services provided on account for the remainder of Oct, $2,500.
31. Kareem withdraw $7,500 for personal use.
At the end of October, the following adjustment data were assembled.
a. Insurance expired during Oct is $225.
b. Supplies on hand on Oct 31 are $875.
c. Depreciation of office equipment for Oct is $400.
d. Accrued receptionist salary on Oct is $200.
e. Rent expired during Oct is $1,600.
f. Unearned fees on Oct 31 are $1,150.
Based on previous data, completing the accounting cycle.
Form 1. Chart of Accounts
Assets Owner’s Equity
11. Cash 31. Kareem Ismail, Capital

12. Accounts Receivable 32. Kareem Ismail, Drawing

14. Supplies 33. Income Summary

15. Prepaid Rent Revenues

16. Prepaid Insurance 41. Fees Earned

Expenses
18. Office Equipment
51. Salary Expense
19. Accumulated
Depreciation 52. Rent Expense
Liabilities 53. Supplies Expense
 Chapter 1- Chapter 4 3
Accounting Cycle

21. Accounts Payable 54. Depreciation Expense

22. Salaries Payable 55. Insurance Expense

23. Unearned Fees 59. Miscellaneous Expense

Form 2. Journalizing, Adjusting, and Closing

Journal Page 1
Date Descriptions Post Ref. Debit Credit
2010

Oct 1. Cash 11 $ 18,000

Account Receivable 12 5,000

Supplies 14 1,500

Office Equipment 18 10,750

Kareem Ismail, Capital 31 $ 35,250

1. Prepaid Rent 15 4,800

Cash 11 4,800
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Accounting Cycle

2. Prepaid Insurance 16 2,700

Cash 11 2,700
4. Cash 11 3,150

Unearned Fees 23 3,150

5. Office Equipment 18 1,250

Accounts Payable 21 1,250

6. Cash 11 2,000

Account Receivable 12 2,000

10. Miscellaneous Expense 59 325

Cash 11 325
12. Accounts Payable 21 750

Cash 11 750
12. Account Receivable 12 5,750

Fees Earned 41 5,750

14. Salary Expense 51 900

Cash 11 900
17. Cash 11 9,250

Fees Earned 41 9,250

18. Supplies 14 600

Cash 11 600
20. Accounts Receivable 12 4,100

Fees Earned 41 4,100

24. Cash 11 4,850

Fees Earned 41 4,850

26. Cash 11 3,450
 Chapter 1- Chapter 4 5
Accounting Cycle

Accounts Receivable 12 3,450

27. Salary Expense 51 900

Cash 11 900
29. Miscellaneous Expense 59 250
Cash
11 250
31. Miscellaneous Expense 59 300

Cash 11 300
31. Cash 11 3,975

Fees Earned 41 3,975

Journal Page 2
Date Descriptions Post Ref. Debit Credit
31. Accounts Receivable 12 2,500

Fees Earned 41 2,500

31. Kareem Ismail, Drawing 32 7,500

Cash 11 7,500
Adjusting Entries
31. Insurance Expense 55 225

Prepaid Insurance 16 225

31. Supplies Expense 53 1,225

Supplies 14 1,225
31. Depreciation Expense 54 400

Accumulated Depreciation

- office equipment 19 400

31. Salary Expense 51 200
 Chapter 1- Chapter 4 6
Accounting Cycle

Salaries Payable 22 200

31. Rent Expense 52 1,600

Prepaid Rent 15 1,600

31. Unearned Fees 23 2,000

Fees Earned 41 2,000

Closing Entries
31. Fees Earned 41 32,425

Income Summary 33 32,425

31. Income Summary 33 6,325

Salary Expense 51 2,000

Rent Expense 52 1,600

Supplies Expense 53 1,225

Depreciation Expense 54 400

Insurance Expense 55 225

Miscellaneous Expense 59 875

31. Income Summary 33 26,100

Kareem Ismail, Capital 31 26,100

31. Kareem Ismail, Capital 31 7,500

Kareem Ismail, Drawing 32 7,500

Form 3. Ledgers and Posting

Account Cash Account No.11
Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 18,000 $ 18,000

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Accounting Cycle

1 1 $ 4,800 13,200
2. 1 2,700 10,500
4. 1 3,150 13,650
6. 1 2,000 15,650
10 1 325 15,325
.
12 1 750 14,575
.
14 1 900 13,675
.
17 1 9,250 22,925
.
18 1 600 22,325
.
24 1 4,850 27,175
.
26 1 3,450 30,625
.
27 1 900 29,725
.
29 1 250 29,475
.
31 1 300 29,175
.
31 1 3,975 33,150
.
31 2 7,500 25,650
.

Account Accounts Receivable Account No. 12

 Chapter 1- Chapter 4 8
Accounting Cycle

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 5,000 $ 5,000

6. 1 $ 2,000 3,000
12. 1 5,750 8,750
20. 1 4,100 12,850
26. 1 3,450 9,400
31. 2 2,500 11,900

Account Supplies Account No.14

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 1,500 $ 1,500

18. 1 600 2,100
31. Adjusting 2 $ 1,225 875

Account Prepaid Rent Account No. 15

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 4,800 $ 4,800

31 Adjusting 2 $ 1,600 3,200
.

Account Prepaid Insurance Account No. 16

 Chapter 1- Chapter 4 9
Accounting Cycle

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct. 2. 1 $ 2,700 $ 2,700

31. Adjusting 2 $ 225 2,475

Account Office Equipment Account No. 18

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 10,750 $ 10,750

5. 1 1,250 12,000

Account Accumulated Depreciation Account No. 19

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. Adjusting 2 $ 400 $ 400

Account Accounts Payable Account No. 21

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 5. 1 $ 1,250 $ 1,250

12. 1 $ 750 500

Account Salaries Payable Account No. 22

Post Balance
Debit Credit
 Chapter 1- Chapter 4 10
Accounting Cycle

Date Items Reference Debit Credit

Oct 31. Adjusting 2 $ 200 $ 200

Account Unearned Fees Account No. 23

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 4. 1 $ 3,150 $ 3,150

31. Adjusting 2 $ 2,000 1,150

Account Kareem Ismail, Capital Account No. 31

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 1. 1 $ 35,250 $ 35,250

31. Closing 2 26,100 61,350
31. Closing 2 $ 7,500 53,850

Account Kareem Ismail, Drawing Account No. 32

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. 2 $ 7,500 $ 7,500

31. Closing 2 $ 7,500

Account Income Summary Account No. 33

Post Balance
Debit Credit
 Chapter 1- Chapter 4 11
Accounting Cycle

Date Items Reference Debit Credit

Oct 31. Closing 2 $ 32,425 $ 32,425
31. Closing 2 $ 6,325 26,100
31. Closing 2 26,100

Account Fees Earned Account No. 41

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 12. 1 $ 5,750 $ 5,750

17. 1 9,250 15,000
20. 1 4,100 19,100
24. 1 4,850 23,950
31. 1 3,975 27,925
31. 2 2,500 30,425
31. Adjusting 2 2,000 32,425
31. Closing 2 $ 32,425

Account Salary Expense Account No. 51

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 14. 1 $ 900 $ 900

27. 1 900 1,800
31. Adjusting 2 200 2,000
31. Closing 2 $ 2,000
 Chapter 1- Chapter 4 12
Accounting Cycle

Account Rent Expense Account No. 52

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. Adjusting 2 $ 1,600 $ 1,600

31. Closing 2 $ 1,600

Account Supplies Expense Account No. 53

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. Adjusting 2 $ 1,225 $ 1,225

31. Closing 2 $ 1,225

Account Depreciation Expense Account No. 54

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. Adjusting 2 $ 400 $ 400

31. Closing 2 $ 400

Account Insurance Expense Account No. 55

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 31. Adjusting 2 $ 225 $ 225

31. Closing 2 $ 225
 Chapter 1- Chapter 4 13
Accounting Cycle

Account Miscellaneous Expense Account No. 59

Post Balance

Date Items Reference Debit Credit Debit Credit

Oct 10. 1 $ 325 $ 325

29. 1 250 575
31. 1 300 875
31. Closing 2 $ 875

Form 4. Unadjusted Trial Balance

Iron Mountain Consulting

Unadjusted Trial Balance

Oct. 31, 2010

Debit Credit

Balance Balance

Cash ……………………………………………………….. $ 25,650

Account Receivable ……………………………………….. 11,900

Supplies …………………………………………………… 2,100

Prepaid Rent ………………………………………………. 4,800

Prepaid Insurance …………………………………………. 2,700

Office Equipment …………………………………………. 12,000

Account Payable ………………………………………….. $ 500

Unearned Fees …………………………………………….. 3,150

Kareem Ismail, Capital …………………………………….. 35,250

Kareem Ismail, Drawing …………………………………... 7,500

Fees Earned ……………………………………………….. 30,425

 Chapter 1- Chapter 4 14
Accounting Cycle

Salary Expense …………………………………………….. 1,800

Miscellaneous Expense ……………………………………. 875

69,325 69,325

Form 5: Financial Statements

Iron Mountain Consulting

Income Statement

For One Month Ended at Oct 31, 2010

Fees Earned ……………………………………………………………… $ 32,425

Expenses

Salary Expense …………………………………………….. $ 2,000

Rent Expense ………………………………………………. 1,600

Supplies Expense ………………………………………….. 1,225

Depreciation Expense ……………………………………… 400

Insurance Expense …………………………………………. 225

Miscellaneous Expense ……………………………………. 875

Total Expense ………………………………………………………. 6,325

Net Income ………………………………………………………………... $ 26,100

Iron Mountain Consulting

Statement of Owner’s Equity

For One Month Ended at Oct 31, 2010

Kareem Ismail, Capital, Oct 1, 2010 ……………………………………. $ 0

Additional Investment ……………………………………… $ 35,250

 Chapter 1- Chapter 4 15
Accounting Cycle

Net Income …………………………………………………... 26,100

61,350

Deduct Kareem Ismail, Drawing ……………………………………….. 7,500

Kareem Ismail, Capital, Oct 31, 2010 ………………………………….. $ 53,850

Iron Mountain Consulting

Balance Sheet

Oct 31, 2010

Assets Liabilities

Current Assets Current Liabilities

Cash …………….…. $ 25,650 Account Payable ……. $ 500

Account Receivable ... 11,900 Salary Payable ……… 200

Supplies …………… 875 Unearned Fees ……... 1,150

Prepaid Rent ………. 3,200 Total Liabilities ………… $ 1,850

Prepaid Insurance …. 2,475

Total Current Assets …………. $ 44,100 Owner’s Equity

Property, Plant and Equipment Kareem Ismail, Capital …. 53,850

Office Equipment ….. $ 12,000

Accumulated

Depreciation ……. 400

Total P.P.E. …………………... 11,600 Total Liabilities and

Total Assets …………………….. 55,700 owner’s equity …………..55,700

 Chapter 1- Chapter 4 16
Accounting Cycle

Form 6: Adjusted Trial Balance

Iron Mountain Consulting

Adjusted Trial Balance

Oct 31, 2010

Debit Credit

Balance Balance

Cash ……………………………………………………….. $ 25,560

Account Receivable ……………………………………….. 11,900

Supplies ……………………………………………………. 875

Prepaid Rent ……………………………………………….. 3,200

Prepaid Insurance ………………………………………….. 2,475

Office Equipment ………………………………………….. 12,000

Account Depreciation ……………………………………… $ 400

Account Payable …………………………………………… 500

Salary Payable ……………………………………………… 200

Unearned Fees ……………………………………………… 1,150

Kareem Ismail, Capital …………………………………….. 35,250

Kareem Ismail, Drawing …………………………………… 7,500

Fees Earned ………………………………………………… 32,425

Salary Expense ……………………………………………… 2,000

Rent Expense ……………………………………………….. 1,600

Supplies Expense …………………………………………… 1,225

Depreciation Expense ………………………………………. 400

Insurance Expense ………………………………………….. 225

 Chapter 1- Chapter 4 17
Accounting Cycle

Miscellaneous Expense …………………………………….. 875

69,925 69,925

Form 7: Post-Closing Trial Balance

Iron Mountain Consulting

Post-Closing Trial Balance

Oct 31, 2010

Debit Credit

Balance Balance

Cash …………………………………………………………… $ 25,650

Account Receivable …………………………………………... 11,900

Supplies ………………………………………………………. 875

Prepaid Rent ………………………………………………….. 3,200

Prepaid Insurance …………………………………………….. 2,475

Office Equipment …………………………………………….. 12,000

Accumulated Depreciation ……………………………………. $ 400

Account Payable ……………………………………………… 500

Salary Payable ……………………………………………….. 200

Unearned Fees ……………………………………………….. 1,150

 Chapter 1- Chapter 4 18
Accounting Cycle

Kareem Ismail, Capital ………………………………………. 53,850

56,100 56,100