Accounting Cycle

Accounting cycle is the series of steps which begin when a transaction occurs and end with its inclusion in the financial statements. The nine steps of the accounting cycle are:

  1. Collecting and analyzing data from transactions and events.
  2. Putting transactions into the general journal.
  3. Posting entries to the general ledger.
  4. Preparing an unadjusted trial balance.
  5. Adjusting entries appropriately.
  6. Preparing an adjusted trial balance.
  7. Organizing the accounts into the financial statements.
  8. Closing the books.
  9. Preparing a post-closing trial balance to check the accounts.

For example, a trial balance of Wilson Corporation as of November 30, 1999 included the following:

Acct No. Account Debit Credit
101 Cash $33,000
102 Accounts Receivable 21,000
103 Allowance for Doubtful Accounts $1,000
104 Inventory (periordic system) 35,000
105 Prepaid Rent 9,000
200 Equipment 50,000
201 Accumulated Appreciation, equipment 22,500
300 Accounts Payable 7,500
301 Wages Payable 0
400 Common stock, par $1 80,000
401 Retained Earnings 14,500
500 Sales Revenue 325,000
501 Sales returns and allowances 2,200
502 Sales discounts 11,300
600 Purchases 193,500
601 Purchase returns and allowances 3,500
602 Purchase discounts 8,400
603 Transportation-in 5,000
700 Salary Expense 60,500
701 Rent Expense 33,000
702 Utilities Expense 5,500
703 Depreciation Expenses 3,400
 .
$462,200
 $462,200

The following transactions occurred during December 1999.

  1. Sales revenue of $30,000 of which $20,000 was on credit.
  2. Collected $25,000 on accounts receivable; no discounts were taken.
  3. Purchased $40,000 of merchandise on account, terms 2/10, n/30;
  4. Returned $5,000 of merchandise (from the previous transaction) which did not meet our specifications.
  5. Paid for merchandise purchased above (less the merchandise returned). Payment was made within the discount period.
  6. Loaned $10,000 on a 30-day note to the CEO of the company. The interest rate was 12%.
  7. Paid Utilities Expense, $500.

The following month-end adjustments need to be made.

  1. The equipment had a 20-year life with no expected residual (salvage) value.
  2. The balance in the Prepaid Rent account at the end of November consisted of rent paid through February, 2000.
  3. Wages incurred but not paid at the end of December amounted to $5,500.
  4. Accrued interest on the note; the money was loaned on December 16.

General Journal

Date Account Titles and Explanations P.R. Debit Credit
1 cash 101 10,000
AR 102 20,000
sales revenue 500 30,000
2 cash 101 25,000
AR 102 25,000
3 purchase 600 40,000
AP 300 40,000
4 AP 300 5,000
purchase returns and allowances 601 5,000
5 AP 40,000 - 5,000 300 35,000
purchases discount 35,000 X 2% 602 700
cash 101 34,300
6 note receivable 801 10,000
cash 101 10,000
7 utilities exp 702 500
cash 101 500

Adjusting Entries

Date Account Titles and Explanations P.R. Debit Credit
12/31/99 Depreciation expense equipment 703 208
Accumulated depreciation equipment 50,000/20 = 2,500 X 1/12 = 208 201 208
12/31/99 rent expense 9,000/3 701 3,000
prepaid rent 105 3,000
12/31/99 salaries exp 700 5,500
wages payable 301 5,500
12/31/99 interest receivable 10,000 X 12% X 15/365 802 50
interest revenue 803 50

General Ledger

Account: Cash Account No. 101

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 33,000
12/01/99 1 10,000 43,000
12/01/99 1 25,000 68,000
12/05/99 1 34,300 33,700
12/06/99 1 10,000 23,700
12/07/99 1 500 23,200

Account: Accounts Receivable Account No. 102

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 21,000
12/01/99 1 20,000 41,000
12/02/99 1 25,000 16,000

Account: Allowance for Doubtful Accounts Account No. 103

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 1,000

Account: Inventory Account No. 104

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 35,000
info given 36,000 71,000
35,000 36,000
post closing 36,000 0

Account: Prepaid Rent Account No. 105

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 9,000
12/31/99 2 3,000 6,000

Account: Equipment Account No. 200

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 50,000

Account: Accumulated Depreciation - Equipment Account No. 201

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 22,500
12/31/99 2 208 22,708

Account: Accounts Payable Account No. 300

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 7,500
12/03/99 1 40,000 47,500
12/04/99 1 5,000 42,500
12/05/99 1 35,000 7,500

Account: Wages Payable Account No. 301

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 0
12/31/99 2 5,500 5,500

Account: Common Stock, $1 par Account No. 400

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 80,000

Account: Retained Earnings Account No.

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 14,500
Net Income 10,042 24,542

Account: Sales Revenue Account No. 500

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 325,000
12/01/99 1 30,000 355,000
post closing 355,000 0

Account: Sales Returns and Allowances Account No. 501

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 2,200
post closing 2,200 0

Account: Sales Discounts Account No. 502

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 11,300
post closing 11,300 0

Account: Purchases Account No. 600

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 193,500
12/03/99 40,000 233,500
post closing 233,500 0

Account: Purchase Returns and Allowances Account No. 601

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 3,500
12/04/99 1 5,000 8,500
post closing 8,500 0

Account: Purchase Discounts Account No. 602

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 8,400
12/05/99 700 9,100
post closing 9,100 0

Account: Transportation-in Account No. 603

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 5,000
post closing 5,000 0

Account: Salary Expense Account No. 700

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 60,500
12/31/99 5,500 66,000
post closing 66,000 0

Account: Rent Expense Account No. 701

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 33,000
12/31/99 2 3,000 36,000
post closing 36,000 0

Account: Utilities Expense Account No. 702

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 5,500
12/07/99 1 500 6,000
post closing 6,000 0

Account: Depreciation Expense Account No. 703

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 3,400
12/31/99 2 208 3,608
post closing 3,608 0

Account: Income Summary Account No. 800

Date Account Titles and Explanations P.R. Debit Credit Balance
11/30/99 0
12/31/99 408,650 408,650
12/31/99 398,608 10,042
post closing 10,042 0

Account: Note Receivable Account No. 801

Date Account Titles and Explanations P.R. Debit Credit Balance
12/06/99 10,000 10,000

Account: Interest Receivable Account No. 802

Date Account Titles and Explanations P.R. Debit Credit Balance
12/31/99 2 50 50

Account: Interest Receivable Account No. 803

Date Account Titles and Explanations P.R. Debit Credit Balance
12/31 50 50
post closing 50 0

Wilson Corporation
Income Statement
For the Year Ended December 31, 1999

Sales revenue 355,000
less: Sales returns and allowances 2,200
less: Sales discounts 11,300 (13,500)
Net sales
341,500
Cost of goods sold
Inventory (1/1/2000) 35,000
Purchases 233,500
Purchases returns and allowances (8,500)
Purchases discounts (9,100)
Transportation-in 5,000
Cost of goods available for sale
255,900
less: Inventory (12/31/1999) (36,000)
Cost of goods sold 219,900
Gross profit on sales
121,600
Operating expenses
salaries exp 66,000
rent exp 36,000
utilities exp 6,000
depreciation exp 3,608
Total operating expenses (111,608)
Income from operations
9,992
Other items
Interest revenue 50
Net Income 10,042
Earnings per share 10,042/80,000 0.1255

Wilson Corporation
Statement of Retained Earnings
For the Year Ended December 31, 1999

Retained earnings, 11/31/99 14,500
Add: Net income for 1999 10,042
24,540
less: Dividends for 1999 0
Retained earnings, 12/31/99 24,542

Wilson Corporation
Balance Sheet
As of December 31, 1999

Assets
Current assets
Cash 23,200
AR 16,000
less: Allowance for doubtful accounts (1,000) 15,000
Notes receivable
.		 10,000
Interest receivable 50
Inventory (12/31/99) 36,000
Prepaid rent 6,000
Total current assets
90,250
Property and equipment
Equipment 50,000
less: Accumulated depreciation (22,708)
 27,292
Total property and equipment 27,292
Total assets 117,542
Liabilities
Current liabilities
AP 7,500
Wage payable 5,500
Total current liabilities
13,000
Long-term liabilities
Total long-term liabilities 0
Total liabilities
13,000
Stockholders' Equity
Retained earnings 24,542
Common stock par $1 80,000
Total Stockholders' Equity 104,542
Total Stockholders' Equity & Liabilities 117,542

Wilson Corporation
Closing Entries
As of December 31, 1999

Sales revenue 355,000
Interest revenue 50
Purchases returns and allowances 8,500
Purchases discount 9,100
Inventory (12/31/1999) 36,000
Income summary 408,650
Income summary 398,608
Sales returns and allowances 2,200
Sales discount 11,300
Purchase 233,500
Transportation-in 5,000
Salaries exp 66,000
Rent exp 36,000
Utilities exp 6,000
Depreciation exp 3,608
Inventory (1/1/2000) 35,000
Income summary 10,042
Retained earnings 10,042
Retained earnings 0
Dividend distributed 0

Wilson Corporation
Post Closing Trial Balance
As of December 31, 1999

Cash 23,200
AR 16,000
less: allowance for doubtful 1,000
notes receivable 10,000
interest receivable 50
inventory (12/31/1999) 36,000
prepaid rent 6,000
equipment 50,000
accumulated depreciation 22,708
AP 7,500
salary payable 5,500
retain earnings 24,542
stock 80,000
141,250
 141,250