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:
- Collecting and analyzing data from transactions and events.
- Putting transactions into the general journal.
- Posting entries to the general ledger.
- Preparing an unadjusted trial balance.
- Adjusting entries appropriately.
- Preparing an adjusted trial balance.
- Organizing the accounts into the financial statements.
- Closing the books.
- 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.
- Sales revenue of $30,000 of which $20,000 was on credit.
- Collected $25,000 on accounts receivable; no discounts were taken.
- Purchased $40,000 of merchandise on account, terms 2/10, n/30;
- Returned $5,000 of merchandise (from the previous transaction) which did not meet our specifications.
- Paid for merchandise purchased above (less the merchandise returned). Payment was made within the discount period.
- Loaned $10,000 on a 30-day note to the CEO of the company. The interest rate was 12%.
- Paid Utilities Expense, $500.
The following month-end adjustments need to be made.
- The equipment had a 20-year life with no expected residual (salvage) value.
- The balance in the Prepaid Rent account at the end of November consisted of rent paid through February, 2000.
- Wages incurred but not paid at the end of December amounted to $5,500.
- 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 |