CHAPTER

ADJUSTING THE ACCOUNTS

1. It assumes that the economic life of a business can be divided into artificial time periods
— generally a month, a quarter, or a year?
A. Measurement
B. Going Concern
C. Periodicity
D. Monetary Value

2. Accrual Basis of Accounting adheres to the:

A. Revenue Income Principle
B. Systematic and Rational Allocation
C. Matching
D. Direct Cause and Effect

 Basic Principle of Bookkeeping?

A. Principle of Balance
B. Principle of Matching
C. Principle of Going Concern
D. Principle of Monetary Value
4. Expense recorded only when cash paid
A. Measurement
B. Going Concern
C. Cash Basis
D. Accrual Basis

5. It dictates that efforts (expenses) be matched with accomplishments (revenues).

A. Revenue Income Principle
B. Systematic and Rational Allocation
C. Matching
D. Direct Cause and Effect

6. Adjusting Entries make it happen because of this two principles, except?

A. Matching
B. Revenue Recognition
C. Revenue Income
D. Both A and B
7. It is advanced payments of business expenses or supplies to be used in a business
operation.
A. Pre-collection
B. Prepayments
C. Estimates
D. Deferrals

8. It is type of prepayments wherein the adjustment is the unexpired portion

A. Asset Method
B. Liability Method
C. Revenue Method
D. Expense Method

9. It is type of pre-collection wherein the adjustment is the earned portion.

A. Asset Method
B. Liability Method
C. Revenue Method
D. Expense Method
10. It is type of Estimates of adjusting wherein allocation of the cost of capital assets
to expense over their useful lives with systematic and rational allocation expense
principle of accounting
A. Pre-collection
B. Prepayments
C. Estimates
D. Depreciation
 TIME
TIME PERIOD
PERIOD ASSUMPTION
ASSUMPTION

 The time period (or periodicity) assumption assumes

that the economic life of a business can be divided into
artificial time periods — generally a month, a quarter,
or a year.
 Periods of less than one year are called
interim periods.
 The accounting time period of one year in
length is usually known as a fiscal year.
 Measuring
Measuring Business
Business Income
Income

 The main objective of a Business – ASCERTAIN THE

RESULTS OF OPERATION WHETHER THE
BUSINESS EARNED PROFIT OR SUFFERED LOSS
DURING ACCOUNTING PERIOD
 The Measurement of Business Income and the
preparation of FS are greatly affected by accounting
method used by the business:

 1. Accrual Basis
 2. Cash Basis
 ACCRUAL BASIS OF
ACCOUNTING

 Adheres to the

GAAP
 Revenue recognition principle
 Matching principle
 Revenue recorded when earned, not only
when cash received.
 Expense recorded when services or
goods are used or consumed in the
generation of revenue, not only when
cash paid.
 CASH BASIS OF
ACCOUNTING

 Revenue recorded
only when cash

NO
received.

T
 Expense recorded

GA
only when cash
paid.

AP
 REVENUE RECOGNITION
PRINCIPLE
 The revenue recognition principle states that
revenue should be recognized in the accounting
period in which it is earned.
 In a service business, revenue is usually considered
to be earned at the time the service is performed.
 In a merchandising business, revenue is usually
earned at the time the goods are delivered.
 THE MATCHING PRINCIPLE

 The practice of expense recognition is

referred to as the matching principle.
 The matching principle dictates that efforts
(expenses) be matched with
accomplishments (revenues).

Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
 ADJUSTING ENTRIES

 Adjusting entries make the revenue

recognition and matching principles

HAPPEN!
 ILLUSTRATION 3-3
TRIAL BALANCE
Pioneer Advertising Agency
Trial Balance
October 31, 2002
Debit Credit
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance The Trial Balance 600
Office Equipment 5,000
Notes Payable
is analysed to $ 5,000
Accounts Payable determine the 2,500
Unearned Revenue 1,200
C.R. Byrd, Capital
need for adjusting 10,000
C.R. Byrd, Drawings entries. 500
Service Revenue 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700
 ADJUSTING PROCESS
 Adjusting Process is made in order to comply with the
Generally Accepted Accounting Principles regarding Revenue
Recognition and Matching Principles.
 Adjusting entries are required each time financial statements
are prepared.
- Adjusting entries are adjustments used to bring the assets,
liabilities, revenues and expenses up-to-date at the end of accounting
period.
- Adjusting entries are usually made at the end of the accounting
period to be recognized within the period they are earned and for
expenses to be recognized within the period they are incurred.
 Basic Adjusting Entries

Adjusting entries can be classified as

1. Prepayments (prepaid expenses)
2. Pre-collection (unearned revenues)
3. Accruals (accrued revenues or accrued expenses), or
4. Estimates (amortization, depreciation, estimated
uncollectible accounts).
5. Ending Inventory (applicable to Merchandising and
Manufacturing).
6. Bank Reconciliation Account
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business
expenses or supplies to be used in a business
operation.
1. Prepaid Expenses — Expenses paid in cash and
recorded as assets before they are used or
consumed.
2. Unearned Revenues — Revenues received in cash
and recorded as liabilities before they are earned.
 PREPAYMENTS

 Prepayments are either prepaid expenses

or unearned revenues.
 Adjusting entries for prepayments are
required to record the portion of the
prepayment that represents
1. the expense incurred or,
2. the revenue earned in the current
accounting period.
 PREPAID EXPENSES

 Prepaid expenses are expenses paid in cash

and recorded as assets before they are used
or consumed.
 Prepaid expenses expire with the passage of
time or through use and consumption.
 An asset-expense account relationship exists
with prepaid expenses.
 PREPAID EXPENSES

 Prior to adjustment, assets are overstated and

expenses are understated.
 The adjusting entry results in a debit to an
expense account and a credit to an asset
account.
 Examples of prepaid expenses include
supplies, rent, insurance, and property tax.
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses
or supplies to be used in a business operation.
1. Asset Method of Recording Prepayments
- Asset Method of SFP (Balance Sheet) method of recording
prepayments initially records the advanced payments as
ASSET.
- Thus, at the end of an accounting period, the asset is
OVESTATED.
- Accordingly the expired portion - EXPENSE
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses or
supplies to be used in a business operation.
1. Asset Method of Recording Prepayments
Initial Entry
1/1 Prepaid Asset Account xx
Cash/Accounts Payable xx
Adjusting Entry
12/31 Expense Account xx
Prepaid Asset Account xx
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses or
supplies to be used in a business operation.
2. Expense Method of Recording Prepayments.
- The expense method or SCI (Income Statement) method of
recording prepayments initially records the total amount of
advanced payments as EXPENSE.
- Thus, at the end of the accounting period, the expense is
OVERSTATED.
- Accordingly, the portion of such expense that has not yet expired
should be recorded as ASSET.
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses or
supplies to be used in a business operation.
2. Expense Method of Recording Prepayments.
Initial Entry
1/1 Expense Account xx
Cash/Accounts Payable xx
Adjusting Entry
12/31 Prepaid Asset Account xx
Expense Account xx
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses or
supplies to be used in a business operation.
Illustration:
On September 1, 2016, Miguel Enterprise paid in advance rent for 12,000 covering
a period of one year. The initial recording of prepayments would be as follows:
Asset Method: Expense Method:
9/1 Prepaid Rent 12,000 Rent Expense 12,000
Cash 12,000 Cash 12,000
Adjusting Entries
12/31 Rent Expense 4,000 Prepaid Rent 8,000
Prepaid Rent 4,000 Rent Expense 8,000
 TYPES OF ADJUSTING ENTRIES
Prepayments – advanced payments of business expenses or
supplies to be used in a business operation.
Illustration:
On September 1, 2016, Miguel Enterprise paid in advance rent for 12,000 covering a
period of one year. The initial recording of prepayments would be as follows:
Asset Method: Expense Method:
Adjusting Entries
12/31 Rent Expense 4,000 Prepaid Rent 8,000
Prepaid Rent 4,000 Rent Expense 8,000
Recorded Prepaid Rent 12,000 Recorded Rent Expense 12,000
Less: Expired portion (12,000 x 4/12) 4,000 Less: Unexpired Portion 10,000
Required Prepaid Insurance (12k x 10/12) P10,000 Required Rent Expense P2,000
 TYPES OF ADJUSTING ENTRIES

Prepayments – advanced payments of business

expenses or supplies to be used in a business
operation.
Asset Method: Expense Method:

Prepaid Rent Prepaid Rent

9/1 12,000 12/31 4,000 12/31 8,000

12/31 8,000 12/31 8,000

Rent Expense Rent Expense

12/31 4,000 9/1 12,000 12/31 8,000

12/31 4,000 12/31 4,000

 TYPES OF ADJUSTING ENTRIES
Pre-collections – or Deferred Revenue
- advance collection of business revenues
from customers
- These cash collections or cash payments by
the customers are not yet earned by the business
Unearned Revenues — Revenues received in cash
and recorded as liabilities before they are earned.
 UNEARNED REVENUES

 Unearned revenues are revenues received

and recorded as liabilities before they are
earned.
 Unearned revenues are subsequently
earned by performing a service or
providing a good to a customer.
 A liability-revenue account relationship
exists with unearned revenues.
 UNEARNED REVENUES

 Prior to adjustment, liabilities are

overstated and revenues are understated.
 The adjusting entry results in a debit to a
liability account and a credit to a revenue
account.
 Examples of unearned revenues include
rent, magazine subscriptions, airplane
tickets, and tuition.
 2 Methods in Pre-Collection
1. Liability Method of Recording Pre-Collection:
- Also called Statement of Financial Position Method
- Records the advance collection as liability by using an
“Unearned Revenue Account”
- At the end of accounting period, the liability is
OVERSTATED when portion of the collection has
been earned.
- Logically, it is necessary to reduce the recorded liability
and recognize the portion of revenue earned during
the period.
 2 Methods in Pre-Collection
1. Liability Method of Recording Pre-Collection:

Initial Entry
1/1 Cash xx
Unearned Revenue xx
Adjusting Entry
12/31 Unearned Revenue xx
Revenue Account xx
 2 Methods in Pre-Collection
2. Revenue Method of Recording Pre-Collection:
- Also called Statement of Comprehensive Income Method
- Initially records the entire amount of the advanced
collection as income earned.
- At the end of accounting period, the revenue account
is OVERSTATED when portion of the collection has not been
fully earned.
- Accordingly, the related revenue account must be
reduced and the corresponding unearned revenue must be
recognized.
 2 Methods in Pre-Collection
2. Revenue Method of Recording Pre-Collection:
Initial Entry
1/1 Cash xx
Revenue Account xx
Adjusting Entry
12/31 Revenue Account xx
Unearned Revenue xx
 2 Methods in Pre-Collection
Illustration:
On October 1, 2016, Lebron James Pension House received in advance
a rent income of Php60,000 covering a period of one year.
Liability Method: Expense Method:
10/1 Cash 60,000 Cash 60,000
Unearned Rent 60,000 Rent Income 60,000

Adjusting Entries
12/31 Unearned Rent 15,000 Rent Income 45,000
Rent Income 15,000 Unearned Rent 45,000
Recorded Unearned Rent 60,000 Recorded Rent Income 60,000
Less: Earned portion (60,000 x 3/12) 15,000 Less: Unexpired Portion 45,000
Required Prepaid Insurance (12k x 9/12) P45,000 Required Rent Income P15,000
 TYPES OF ADJUSTING ENTRIES

Pre-collections
Liability Method: Revenue Method:

Unearned Rent Unearned Rent

12/31 15,000 10/31 60,000 12/31 45,000

12/31 45,000 12/31 45,000

Rent Income Rent Income

12/31 15,000 12/31 45,000 10/31 60,000
12/31 15,000 12/31 15,000
 ILLUSTRATION 3-4
ADJUSTING ENTRIES FOR
PREPAYMENTS
Adjusting Entries
Prepaid Expenses
Asset Expense
Unadjusted Credit Debit
Balance Adjusting Adjusting
Entry (-) Entry (+)
Unearned Revenues
Liability Revenue
Debit Unadjusted Credit
Adjusting Balance Adjusting
Entry (-) Entry (+)
 TYPES OF ADJUSTING ENTRIES

Accruals – means to recognize (to accrue) revenue earned

regardless of when it was collected, and to record expenses
incurred whether paid or not.
1. Accrued Revenues — Revenues earned but not yet received
in cash or recorded.
2. Accrued Expenses — Expenses incurred but not yet paid in
cash or recorded.
 ACCRUALS

 A different type of adjusting entry is

accruals.
 Adjusting entries for accruals are required
to record revenues earned and expenses
incurred in the current period.
 The adjusting entry for accruals will
increase both a balance sheet and an
income statement account.
 ACCRUED REVENUES

 Accrued revenues may accumulate with the

passing of time or through services performed but
not billed or collected.
 An asset-revenue account relationship exists with
accrued revenues.
 Prior to adjustment, assets and revenues are
understated.
 The adjusting entry requires a debit to an asset
account and a credit to a revenue account.
 Examples of accrued revenues include accounts
receivable, rent receivable, and interest
receivable.
 ACCRUED EXPENSES
 Accrued expenses are expenses incurred but not
yet paid.
 A liability-expense account relationship exists.
 Prior to adjustment, liabilities and expenses are
understated.
 The adjusting entry results in a debit to an
expense account and a credit to a liability
account.
 Examples of accrued expenses include accounts
payable, rent payable, salaries payable, and
interest payable.
 ILLUSTRATION 3-6
FORMULA TO CALCULATE
INTEREST

Face Annual Time

Value of x Interest x (in Terms of = Interest
Note Rate One Year)

$5,000 x 6% x 1/12 = $25

 ILLUSTRATION 3-5
ADJUSTING ENTRIES FOR ACCRUALS
Adjusting Entries

Accrued Revenues
Asset Revenue
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
Accrued Expenses
Expense Liability
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
 TYPES OF ADJUSTING ENTRIES

Accruals – means to recognize (to accrue) revenue earned

regardless of when it was collected, and to record expenses
incurred whether paid or not.
1. Accrued Revenues — Revenues earned but not yet received in
cash or recorded.
Adjusting Entries
12/31 Accrued Receivable Account XXX
Appropriate Income Account XXX
 TYPES OF ADJUSTING ENTRIES

Accruals – means to recognize (to accrue) revenue earned

regardless of when it was collected, and to record expenses
incurred whether paid or not.
2. Accrued Expenses — Expenses incurred but not yet paid in
cash or recorded.
Adjusting Entries
12/31 Appropriate Expense Account XXX
Accrued Liability Account XXX
 TYPES OF ADJUSTING ENTRIES

Estimates
1. Depreciation— Allocation of the cost of
capital assets to expense over their useful
lives with systematic and rational
allocation expense principle of accounting.
- Subject for Depreciation:
Property, Plant and Equipment, Fixed
Assets except Land.
 TYPES OF ADJUSTING ENTRIES
Estimates
1. Depreciation— Since they are expected to
provide benefit over several years to the
business, they should first be recorded as
assets and their cost is gradually expensed
over its useful life. – “Depreciation Expense”
Adjusting Entries:
12/31 Depreciation Expense XXX
Accumulated Depreciation XXX
 TYPES OF ADJUSTING ENTRIES
Estimates
1. Depreciation: Methods
a. Straight Line
b. Sum-of-years-digit
c. Declining and Double Declining

Straight Line Method:

Annual Depreciation Expense = Acquisition Cost – Salvage Value

Estimated Useful Life in years
 TYPES OF ADJUSTING ENTRIES
Estimates
1. Depreciation: Methods

Straight Line Method:

Annual Depreciation Expense = Acquisition Cost – Salvage Value
Estimated Useful Life in years
Acquisition Cost – Historical Cost
- Purchase Price and other incidental cost to acquire and prepare fixed
assets for its intended use.
Salvage Value – Scrap or Residual Value of the fixed asset at the end of
its useful life
Estimated Useful Life – is the estimated economic life of the fixed asset.
 AMORTIZATION

 Amortization / Depreciation is the process

of allocating the cost of certain capital
assets to expense over their useful life in a
rational and systematic manner.
 Amortization attempts to match the cost of
a long-term, capital asset to the revenue it
generates each period.
 AMORTIZATION

 Amortization is an estimate rather

than a factual measurement of the cost
that has expired.

We’re not attempting to reflect the

actual change in value of an asset!
 DEPRECIATION
 In recording amortization, Amortization
Expense is debited and a contra asset account,
Accumulated Amortization, is credited.
 The difference between the cost of the asset and
its related accumulated amortization is referred
to as the net book value of the asset.

Amortization Expense Accumulated Amortization

xxx xxx
 DEPRECIATION

Balance Sheet Presentation

Office equipment $5,000 Estimate

Less: Accumulated
amortization 83
Net book value $4,917
 AMORTIZATION
 Is the allocation of the acquisition costs of an intangible asset
over its legal or accounting estimated life.
 Intangible Asset is an asset that has no physical existence but
provides the owner some selling and operational advantages
over competitors.
 Goodwill, Franchise, Copyright, Patent, Trade Names

Straight Line Method:

Annual Amortization Expense = Acquisition Cost
Legal Life or useful life in years
 ESTIMATED UNCOLLECTIBLE
ACCOUNTS
 When accounts receivable are already long overdue – some
portion will be adjusted as “UNCOLLECTIBLE ACCOUNTS,”
“BAD DEBTS,” OR “DOUBTFUL ACCOUNTS”
 Why there is an adjustment? – The assets could no longer
provide present and future economic benefits.
 Two Methods:
1. Direct Method – FS is for BIR Purposes
2. Allowance Method – for GAAP
 ESTIMATED UNCOLLECTIBLE
ACCOUNTS

Two Methods:
1.Direct Method – FS is for BIR Purposes
- Recording uncollectible accounts records Bad Debts
expense only when specific Accounts Receivable is
ascertained to be worthless.
- “Actual Written-Off Method”
 ESTIMATED UNCOLLECTIBLE
ACCOUNTS
Two Methods:
2. Allowance Method – FS is for GAAP
- Recording uncollectible accounts records Bad Debts
expense even if the uncollectible is only estimated
- This method does not remove the amount of deemed
uncollectible account, but only provides for allowance to
reduce it at the end of the period.
 ESTIMATED UNCOLLECTIBLE
ACCOUNTS
Illustration:
1.Total Sales on account, P60,000
2.Amount estimated to be uncollectible, P8,000
3.Actual amount ascertained to be worthless and was eventually written-off P3,000
4.Highland was able to recover P2,500 of accounts previously written-off
5.To record collection of P2,500
 ESTIMATED UNCOLLECTIBLE
ACCOUNTS
Methods of Estimating Doubtful Accounts:
1. Statement of Comprehensive Income Method
a. Percentage of Sales
2. Statement of Financial Position Methods
a. Statement of Accounts Receivable
b. Aging the Accounts Receivable
 ENDING INVENTORY
Merchandise Inventory refers to the goods purchased intended for resale.
At the end of the accounting period – Internal Control - Conduct Physical Count.
The unsold merchandise at the end – Ending Inventory
Adjustment of Ending Inventory
Adjusting Entries:
12/31 Merchandise Inventory, End XXX
Income Summary XXX
 ENDING INVENTORY
Income Summary – temporary opposite account in adjusting inventory
accounts.
To adjust for the beginning inventory:

Adjusting Entries:
12/31 Income Summary XXX
Merchandise Inventory, beg. XXX
 BANK RECONCILIATION
 To safeguard the money of the business – Internal Control –
Mechanism is to account the
 Cash Receipts are deposited in the Bank (Checking Account)
 Payments are made through issuance of checks.
 The Bank maintains records of the depositor’s account
 Due to timing difference and clerical errors in recording
either in the bank or book = BANK RECONCILIATION
 BANK RECONCILIATION
 Common reconciling items are:
1. Deposits in transit – Business collections which are deposited in the bank
but normally not yet reflected in the bank statement. – These did not catch
up with the cut-off period during the month.
- It will only be reported in bank statement for the following month.
2. Outstanding Check – These are checks written but not yet reported in the
bank statement maybe because the holder of the check did not present it yet
to the bank or already presented to the bank but still within clearing period.
- This will appear in the next month’s bank statement
 BANK RECONCILIATION
 Common reconciling items are:
3. Bank Credit Note – Written advice from the bank that the amount of depositor’s
cash in bank increased maybe because of the interest earned or collection made by
the bank for the depositor’s favor.
- At the time the bank statement was received, this may not be recorded yet
in the books of the depositor.

4. Bank Debit Note – Written advice from the bank that the amount of depositor’s cash
in bank decreased maybe because of the charges made by the bank for its services in
maintaining depositors account

5. Clerical Error – Committed either in the bank records or in the depositor’s records
 ILLUSTRATION 3-8
SUMMARY OF ADJUSTING ENTRIES
Type of Account Accounts before Adjusting
Adjustment Relationship Adjustment Entry

1.Prepaid Assets and Assets overstated Dr. Expenses

Dr.
expenses expenses Expenses understated Cr. Cr. Assets
2.Unearned Liabilities and Liabilities overstated Dr.Dr. Liabilities
revenues revenues Revenues understated Cr. Cr. Revenues
3.Accrued Assets and Assets understated Dr. Dr. Assets revenues
revenues Revenues understated Cr. Cr. Revenues
4.Accrued Expenses and Expenses understated Dr. Dr. Expenses
expenses liabilities Liabilities understated Cr.
Cr. Liabilities
5.AmortizationExpense and Expenses understated Dr. Dr. Amort. Exp
contra asset Assets overstated Cr.Cr. Accum. Amortization
 ADJUSTED TRIAL BALANCE
 An Adjusted Trial Balance is prepared after all
adjusting entries have been journalized and posted.
 It shows the balances of all accounts at the end of the
accounting period and the effects of all financial
events that have occurred during the period.
 It proves the equality of the total debit and credit
balances in the ledger after all adjustments have
been made.
 Financial statements can be prepared directly from
the adjusted trial balance.
 ILLUSTRATION 3-11
TRIAL BALANCE AND ADJUSTED TRIAL BALANCE COMPARED
Pioneer Advertising Agency
Trial Balance
October 31, 2002
Before Adjustment After Adjustment
Debit Credit Debit Credit
Cash $ 15,200 $ 15,200
Accounts Receivable 200
Advertising Supplies 2,500 1,000
Prepaid Insurance 600 550
Office Equipment 5,000 5,000
Accumulated Amort'n. $ 83
Notes Payable $ 5,000 5,000
Accounts Payable 2,500 2,500
Unearned Revenue 1,200 800
Salaries Payable 1,200
Interest Payable 25
C.R. Byrd, Capital 10,000 10,000
C.R. Byrd, Drawings 500 500
Service Revenue 10,000 10,600
Adv. Supplies Expense 1,500
Amortization Expense 83
Insurance Expense 50
Salaries Expense 4,000 5,200
Rent Expense 900 900
Interest Expense 25
$ 28,700 $ 28,700 $ 30,208 $ 30,208
 PREPARING
PREPARING FINANCIAL
FINANCIAL STATEMENTS
STATEMENTS
Financial statements can be prepared directly from
an adjusted trial balance.
1. The income statement is prepared from the revenue
and expense accounts.
2. The statement of owner’s equity is derived from the
owner’s capital and drawings accounts and the net
income (or net loss) shown in the income statement.
3. The balance sheet is then prepared from the asset
and liability accounts and the ending owner’s capital
balance as reported in the statement of owner’s equity.
 ILLUSTRATION 3-12
PREPARATION OF THE INCOME STATEMENT AND THE
STATEMENT OF OWNER’S EQUITY FROM THE
ADJUSTED TRIAL BALANCE
Pioneer Advertising Agency Pioneer Advertising Agency
Adjusted Trial Balance Income Statement
October 31, 2002 For the Month Ended October 31, 2002
Debit Credit Revenues
Cash $ 15,200 Service Revenue $ 10,600
Accounts Receivable 200
Expenses
Advertising Supplies 1,000
Adv. Supplies Expense $ 1,500
Prepaid Insurance 550
Office Equipment 5,000
Amortization Expense 83
Accumulated Amort'n. $ 83 Insurance Expense 50
Notes Payable 5,000 Salaries Expense 5,200
Accounts Payable 2,500 Rent Expense 900
Unearned Revenue 800 Interest Expense 25
Salaries Payable 1,200 Total Expenses 7,758
Interest Payable 25 Net Income $ 2,842
C.R. Byrd, Capital 10,000
C.R. Byrd, Drawings 500 Pioneer Advertising Agency
Service Revenue 10,600 Statement of Owner's Equity
Adv. Supplies Expense 1,500 For the Month Ended October 31, 2002
Amortization Expense 83 C.R. Byrd, Capital, October 1 $ -
Insurance Expense 50
Add: Investments 10,000
Salaries Expense 5,200
Net income 2,842
Rent Expense 900
Interest Expense 25 12,842
$ 30,208 $ 30,208 Less: Drawings 500
C.R. Byrd, Capital, October 31 $ 12,342
 ILLUSTRATION 3-13
PREPARATION OF THE BALANCE SHEET
FROM THE ADJUSTED TRIAL BALANCE
Pioneer Advertising Agency Pioneer Advertising Agency
Adjusted Trial Balance Balance Sheet
October 31, 2002 October 31, 2002
Debit Credit Assets
Cash $ 15,200
Cash $ 15,200
Accounts Receivable 200
Accounts Receivable 200
Advertising Supplies 1,000
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000 Prepaid Insurance 550
Accumulated Amort'n. $ 83 Office Equipment $ 5,000
Notes Payable 5,000 Less: Accumulated Amortization 83 4,917
Accounts Payable 2,500 Total Assets $ 21,867
Unearned Revenue 800
Salaries Payable 1,200 Liabilities and Owner's Equity
Interest Payable 25 Liabilities
C.R. Byrd, Capital 10,000 Notes Payable $ 5,000
C.R. Byrd, Drawings 500 Accounts Payable 2,500
Service Revenue 10,600
Unearned Revenue 800
Adv. Supplies Expense 1,500
Salaries Payable From 1,200
Amortization Expense 83
Insurance Expense 50
Interest Payable Statement 25
Salaries Expense 5,200 Total Liabilities of Owner’s $ 9,525
Rent Expense 900 Owner's Equity Equity
Interest Expense 25 C.R. Byrd, Capital 12,342
$ 30,208 $ 30,208 Total Liabilities and Owner's Equity $ 21,867
STEPS IN THE ACCOUNTING CYCLE
1. Analyse
transactions 2. Journalize the
9. Coming transactions
next chapter
3. Post to ledger
accounts
8. Coming
4. Prepare a
next chapter
trial balance

7. Prepare 5. Journalize
financial and post
statements adjusting
6. Prepare
adjusted trial entries
balance