Accounting Bank Reconciliation
Accounting Bank Reconciliation
Accounting Bank Reconciliation
NOTES
Accounting
Bank
Reconciliation
BY MABEL LAGE, CPA, MBA.
LPF NOTES
An imprint of LPF Group Ltd. Co.
Coral Gables, FL 33134
Copyright 2008 by Mabel Lage
All rights reserved.
No part of this work covered by
the copyright hereon may be
reproduced or used in any form
or by any means graphic, electronic,
or mechanical, including photocopying, recording,
Web distribution, or in any other
manner without the written permission
of the publisher.
For permission to use material
from this book, submit a request to
LPF NOTES
P.O. Box 530232
Henderson, NV 89053
Printed in the United States
of America.
98
ISBN: 978-0-9821668-0-2
ISBN-10: 0-9821668-0-X
CONTENTS
CHAPTER 1
Accounting Fundamentals
Assets, Liabilities and Equity
Transactions
Income and Expenses
Double-entry
Transaction Types
Accounts, Debits and Credits
Trial Balance
1
1
2
6
6
8
9
16
CHAPTER 2
41
INDEX
41
42
43
44
46
47
48
51
52
52
55
55
58
85
CHAPTER 1
ACCOUNTING FUNDAMENTALS
The purpose of bookkeeping and accounting is to provide
information regarding the financial affairs of a business.
This information is needed primarily by owners, banks
and the IRS.
Example
A business is opened having $8,000 in its bank account.
The money in the bank account comes $5,000 from a
loan, which at this moment is a debt for the business, and
$3,000 from an owners contribution. In this example
Assets:
$8,000
Liabilities:
$5,000
Equity:
$3,000
Applying previous figures to the accounting equation, we
have
Assets = Liabilities + Equity
$8,000 = $5,000 + $3,000
Transactions
A business is a living system, so it is assumed to live on
and on unless expressly stated otherwise. A transaction is
an action taken by someone in the business in order to
maintain it alive. The transactions are taken in specific
moments (time), so the date is an important characteristic
of a transaction.
The following are examples of typical transactions.
1. A bank deposit made on Jan 3.
2. The purchase of equipment on Jan 5.
3. The payment of the rent on Jan 8.
Also each transaction should be recorded in a way the
basic equation continues being true (in balance) after
each recording is made.
Example
Suppose during the month of January, McGuire
Computer Services made the following transactions:
1. (Jan 3) Invested $7,000 to open his service business.
Action: Investment.
2. (Jan 5) Bought supplies (stationeries, pencils, etc.),
$250. Action: Purchasing.
3. (Jan 6) Bought computers from Newhole Computers
on account, $2500. Action: Buying.
4. (Jan 10) Receive $3400 for service performed.
Action: Receiving.
5. (Jan 12) Paid Rent for January, $600. Action:
Payment.
6. (Jan 18) Paid Car Service, $450. Action: Payment.
7. (Jan 25) Paid Salary for part time help $300. Action:
Payment.
8. (Jan 28) Paid $1500 to Newhole Computers on
account. Action: Payment.
9. (Jan 31) Withdrew $800 for personal use. Action:
Withdrawing.
These transactions could be recorded as follows:
Transaction 1, January 3. The owner, John McGuire,
invested $7000 to open his service business. In this
transaction the asset Cash is increased (+), and the capital of
the business is also increased by the same amount (+).
Cash
1
+7000
Assets
=
=
Liabilities
Equity
J McGuire,
Capital
+7000
(-) the asset Cash. Note that the equity of $7000 remains
unchanged, and the equation is in balance.
Cash
2
7000
-250
6750
Assets
Supplies
+250
250
Liabilities
Equity
J McGuire,
Capital
7000
7000
6750
6750
Assets
Supplies
Equipment
+2500
2500
250
+
250
Liabilities
Accounts
Payable
+2500
2500
+
+
Equity
J McGuire,
Capital
7000
7000
6750
+3400
10150
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
7000
+3400
10400
10150
-600
9550
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
10400
-600
9800
9550
-450
9100
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
9800
-450
9350
9100
-300
8800
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
2500
2500
+
2500
Equity
J McGuire,
Capital
9350
-300
9050
8800
-1500
7300
Assets
Supplies
250
+
250
Equipment
2500
+
2500
Liabilities
Accounts
Payable
2500
-1500
1000
+
+
Equity
J McGuire,
Capital
9050
9050
7300
-800
6500
Assets
Supplies
250
+
250
Equipment
Liabilities
Accounts
Payable
2500
+
+
1000
2500
+
2500
Equity
J McGuire,
Capital
9050
-800
8250
Double-entry
Note that you must enter the same amount twice for each
and every transaction in a way that transactions have
always to be in balance. The ins have to be equal the
outs. This is called double-entry accounting.
A summary of all transactions for the month of January
could be shown as follows.
McGuire Computer Services
Month of January
Cash
1
2
3
4
5
6
7
8
9
7000
-250
6750
6750
+3400
10150
-600
9550
-450
9100
-300
8800
-1500
7300
-800
6500
Assets
Supplies
Equipment
+250
250
250
+2500
2500
250
250
Liabilities
Accounts
Payable
+
+
Equity
J McGuire,
Capital
7000
7000
+2500
2500
2500
2500
2500
2500
250
2500
2500
250
2500
250
2500
2500
-1500
1000
250
2500
1000
7000
+3400
10400
-600
9800
-450
9350
-300
9050
9050
-800
8250
Summary
How assets, liabilities and equity are affected on the
previous example.
1
2
3
Asset: Cash
Asset: Cash
Asset: Equipment
4
5
6
7
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Asset: Cash
Equity
Asset: Supplies
Liabilities: Accounts
Payable
Equity: Income
Equity: Expense
Equity: Expense
Equity :Expense
Liabilities: Accounts
Payable
Equity: Owners draw
Transaction Types
Depending on which parts of the basic equation (assets,
liabilities or equity) are affected when a transaction takes
place, there are several transaction types:
1. Transactions affecting only assets.
10
Category
Cash
Asset
Equipments
Asset
Supplies
Asset
Accounts Payable
Liabilities
J. McGuire Capital
Equity
Owners Withdrawal
Equity
Service Revenue
Income (Equity)*
Rent Expense
Expense (Equity)*
Salaries Expense
Expense (Equity)*
Automobile Expense
Expense (Equity)*
11
A Debit is an:
Increase in Assets Accounts.
A Credit is an:
Decrease in Assets Accounts.
Expenses
Cr
(Decreases)
12
13
Bal
Dr
+
7000
7000
Capital
Cr
-
Dr
Bal
Cr
+
7000
7000
Bal
Dr
+
7000
6750
Cr
250
Supplies
Bal
Dr
+
250
250
Cr
-
Bal
Dr
+
2500
2500
Accounts Payable
Cr
-
Dr
Bal
Cr
+
2500
2500
14
4
Bal
Dr
+
7000
3400
10400
10150
Service Revenues
Cr
250
Dr
Bal
Cr
+
3400
3400
250
Bal
Dr
+
7000
3400
10400
9550
Cr
250
600
850
Rent Expense
Bal
Dr
+
600
600
Cr
-
Dr
+
7000
3400
Bal
10400
9100
Cr
250
600
450
1300
Automobile Expense
Bal
Dr
+
450
450
Cr
-
Dr
+
7000
3400
Bal
10400
8800
Cr
250
600
450
300
1600
15
Salaries Expense
Bal
Dr
+
300
300
Cr
-
Dr
+
7000
3400
Bal
10400
7300
Cr
250
600
450
300
1500
3100
Accounts Payable
Bal
Dr
1500
Cr
+
2500
1000
Dr
+
7000
3400
Bal
10400
6500
Cr
250
600
450
300
1500
800
3900
Owners Withdraw
Bal
Dr
+
800
800
Cr
-
16
Note that there are equal debit and credit entries for
every transaction. Where only two accounts are affected,
the debit and credits amounts are equal. If more than two
accounts are affected, the total of the debit entries must
equal the total of the credit entries.
Trial Balance
A list of all accounts with their balances listed in a debit
or credit column is called a Trial Balance. It is used to
prove that debits do indeed equal credits. If they do not,
your trial did not work and you have some investigation
and adjustments of accounts to do.
The trial balance of McGuire Computer Services as of
January 31, 2010 can be seen on the following table:
Account Title
Cash
Equipment
Supplies
Accounts Payable
J. McGuire, Capital
Owners Withdrawal
Service Revenue
Automobile Expense
Rent Expense
Salary Expense
Totals
6,500
2,500
250
1,000
7,000
800
3,400
450
600
300
11,400
11,400
17
Example
Let us now examine another example. Jane Peterson
started her practice as a design consultant on June 1 of
the current year. She named the business Jane Peterson,
Designer. During the first month of operation, the
business completed the following transactions:
1. (June 1) Peterson transferred $30,000 cash from her
personal bank account to a business account titled Jane
Peterson, Designer.
2. (June 4) Purchased supplies (5 printer cartridges), $250
cash.
3. (June 4) Purchased furniture, $2,500, on account.
4. (June 6) Performed services for a legal firm and received
$4,500 cash.
5. (June 7) Paid $22,000 cash to acquire land for future
office site.
6. (June 10) Performed services for a hotel and received its
promise to pay $900 within one week.
7. (June 14) Paid for the furniture purchased June 4 on
account.
8. (June 17) Received cash on account, $500.
9. (June 20) Prepared a design for a school on account,
$1,000.
10. (June 28) Received $1,700 cash for designing consulting
with Einstein Bagels.
11. (June 30) Paid secretarys salary, $1,400.
12. (June 30) Took supply inventory (3 printer cartridges),
$150.
13. (June 30) Paid office rent, $550.
14. (June 30) Withdrew $2,300 for personal use.
18
Bal
Capital
30000
30000
30000
30000
Bal
30000
29750
250
Supplies (cartridges)
Bal
250
250
Bal
2500
2500
Accounts Payable
Bal
2500
2500
4
Bal
30000
4500
34500
34250
250
250
Service Revenues
Bal
4500
4500
19
Bal
30000
4500
34500
12250
250
22000
22250
Land
Bal
22000
22000
Bal
Service Revenues
4500
900
5400
900
900
Bal
30000
4500
Bal
34500
9750
250
22000
2500
24750
Accounts Payable
7
Bal
2500
0
2500
8
Bal
30000
4500
500
35000
10250
250
22000
2500
24750
Accounts Receivable
Bal
900
400
500
20
9
Bal
900
1000
1900
1400
Service Revenues
500
4500
900
1000
6400
500
Bal
10
Bal
30000
4500
500
1700
36700
11950
Service Revenue
250
22000
2500
4500
900
1000
1700
8100
Bal
24750
10
Bal
30000
4500
500
1700
36700
10550
250
22000
2500
1400
26150
Salaries Expense
11
Bal
1400
1400
11
Supplies (cartridges)
12
Bal
250
150
21
Supplies Expense
100
Bal
100
100
30000
4500
500
1700
Bal
36700
10000
250
22000
2500
1400
550
26700
Rent Expense
13
Bal
550
550
13
30000
4500
500
1700
Bal
36700
7700
250
22000
2500
1400
550
2300
29000
Owners Withdrawal
14
Bal
2300
2300
14
22
Account Title
Debit
Credit
Cash
7,700
Accounts Receivable
1,400
Furniture
2,500
Supplies (cartridges)
150
Accounts Payable
J. Peterson, Capital
Owners Withdrawal
30,000
2,300
Service Revenue
8,100
Rent Expense
550
100
Salary Expense
Totals
1,400
38,100
38,100
Solved Problems
1.1 Fill the blanks:
1. Money owed to an outsider is a(n) ________.
2. The accounting equation is ____________ = liabilities +
__________.
3. To purchase on account is to create a _______.
4. The difference between assets and liabilities is
____________.
5. An investment in the business increases _______ and
__________.
23
Credit
Cash is increased
Rent expense is increased
Money withdrawal
Fees earned is increased
Capital is increased
Equipment is increased
Cash is decreased
24
Cash
Accounts Receivable
Equipment
D
E
Supplies
Accounts Payable
F
G
H
Capital
Owners Withdrawal
Service Revenue
I
J
Rent Expense
Salary Expense
Supplies Expense
Transaction
1
Paid salaries
9
10
Debit
Credit
25
Solution 1.3
1
2
3
4
5
6
7
8
9
10
Transaction
Paid rent for month
Bought equipment on account
Received cash for services
Paid salaries
Invested cash in the business
Bought supplies on account
Paid balance on equipment
Received service revenue on account
Supplies inventory showed onefourth used during the month
Withdrew cash for personal use
Debit
I
C
A
J
A
D
E
B
K
Credit
A
E
H
A
F
E
A
H
D
Assets
Supplies
Equipment
=
=
=
=
=
Liabilities
Accounts
Payable
+
Equity
+ Corpus Christy
Band, Capital
26
Solution 1.4
Cash
1
2
3
4
5
6
7
8
19000
-3500
15500
-600
14900
+4000
18900
-1600
17300
-700
16600
-1500
15100
-2000
13100
Assets
Supplies
Equipment
+8000
8000
=
=
Liabilities
Accounts
Payable
+4500
4500
8000
+
Equity
+ Corpus Christy
Band, Capital
19000
+
19000
4500
19000
+4000
23000
-1600
21400
-700
20700
+600
600
600
8000
4500
600
8000
4500
600
8000
600
8000
4500
-1500
3000
600
8000
3000
20700
-2000
18700
27
W. Bronson Capital
Bal
Transaction 2, Aug 4.
Cash
Bal
Supplies
Bal
Transaction 3, Aug 6.
Cash
Furniture
Bal
Bal
Service Revenue
Bal
Bal
28
Rent Expense
Bal
Bal
Owners Withdrawal
Bal
Bal
b) Trial Balance
William Bronson, CPA
Trial Balance
August 31, 2010
Account Title
Cash
Furniture
Supplies
F. Turner, Capital
Owners Withdrawal
Service Revenue
Rent Expense
Totals
Debit
Balance
Credit
Solution 1.5
Transaction 1, Aug 3.
Cash
Bal
40000
40000
W. Bronson Capital
Bal
40000
40000
29
Transaction 2, Aug 4.
Cash
Bal
40000
39600
400
Supplies
Bal
400
400
Transaction 3, Aug 6.
Cash
40000
Bal
40000
33600
400
6000
6400
Furniture
Bal
6000
6000
Bal
40000
5500
45500
39100
400
6000
6400
Service Revenue
5500
5500
Bal
40000
5500
Bal
45500
38150
400
6000
950
7350
Rent Expense
Bal
950
950
40000
5500
Bal
45500
35650
400
6000
950
2500
9850
Owners Withdrawal
Bal
2500
2500
30
Account Title
Cash
Furniture
Supplies
F. Turner, Capital
Owners Withdrawal
Service Revenue
Rent Expense
Totals
Balance
Debit
35,650
6,000
400
2,500
950
45,500
Credit
40,000
5,500
45,500
a) Posting entries
March 3
Bal
Bal
March 5
Bal
31
March 10
Bal
Bal
March 25
Bal
Bal
March 31
Bal
Bal
c) Trial balance.
Account Title
Totals
32
Solution 1.6
a) Posting entries
March 3
Cash
Bal
12000
12000
Owners Capital
12000
12000
Bal
March 5
Cash
Bal
12000
12000
9500
2500
2500
Furniture
Bal
2500
2500
March 10
Equipment
Bal
8000
8000
Accounts Payable
8000
8000
Bal
March 25
Cash
Bal
12000
3500
15500
13000
2500
Service Revenue
3500
3500
Bal
2500
March 31
Cash
Bal
12000
3500
15500
11000
2500
2000
4500
Accounts Payable
Bal
2000
8000
6000
33
d) Trial Balance
Sunlight Cleaning Company
Trial Balance
March 31, 2010
Balance
Account Title
Debit
Credit
Cash
11,000
Furniture
2,500
Equipment
8,000
Accounts Payable
6,000
Owners Capital
12,000
Service Revenue
3,500
Totals
21,500
21,500
34
4.
5.
6.
7.
Bal
Bal
Bal
Bal
Bal
Bal
35
Bal
Bal
Bal
Bal
Bal
Bal
Bal
Bal
36
Bal
Bal
Bal
Bal
Bal
b) Trial balance.
Frank Turner, Home Remodeling
Trial Balance
April 30, 2010
37
Balance
Account Title
Debit
Credit
Totals
Solution 1.7
Now we record the transactions into accounts, taking the
initial balance of each account from the previous month trial
balance. So, we have
Apr 4 Turner collected $3,600 from a client on account.
Cash
Bal
3100
3600
6700
Accounts Receivable
Bal
8500
4900
3600
Bal
8500
6900
15400
11800
3600
3600
Service Revenues
Bal
6900
6900
38
Bal
3100
3600
6700
6615
85
Automobile Expense
85
85
Bal
85
Bal
3100
3600
3700
2515
85
1200
1285
Accounts Payable
Bal
1200
4000
2800
Bal
600
200
800
Accounts Payable
1200
1200
Bal
4000
200
4200
3000
3100
3600
Bal
6700
3915
85
1200
1500
2785
Owners Withdrawal
Bal
1500
1500
39
Bal
3100
3600
6500
13200
10415
85
1200
1500
2785
Service Revenue
6900
6500
13400
Bal
3100
3600
6500
Bal
13200
10325
85
1200
1500
90
2875
Automobile Expense
Bal
85
90
175
3100
3600
6500
Bal
13200
9575
85
1200
1500
90
750
3625
Rent Expense
Bal
750
750
40
3100
3600
6500
Bal
13200
7875
85
1200
1500
90
750
1700
5325
Salary Expense
Bal
1700
1700
Debit
7,875
11,800
800
15,700
1,500
175
750
1,700
40,300
Credit
3,000
23,900
13,400
40,300
41
CHAPTER 2
BANK RECONCILIATION AND
CLOSING PERIODS
Closing Periods
Regularly banks send monthly statements to entities that
have checking accounts with them. In these statements
are reflected all the ins and outs of the business money.
Periodical expenses (rent, telephone, utilities, etc.) have
also to be paid in monthly basis. So it is a common
practice to take a monthly period as a proper time to
check the business status. Prior to checking the business
performance it is necessary to adjust certain transactions
and check the status reported by the bank with the one
reported by our computer system.
On the other hand, at the end of the year the business has
to distribute its profits among partners or stockholders
and also but no less important, to report the IRS the net
profit or loss of the year.
For all the above, primarily, it has become a universal
practice to take month and year as the typical closing
accounting periods.
Income and expense account balances have also to be
closed-out to zero to start the new year with zero
balances on each group of accounts.
In this chapter, the main closing processes will be
presented.
42
Adjusting Entries
It is easier to make period-end entries for some items
instead of doing it every day or every week.
Example
Lets go back to the printer cartridge example on Chapter
1:
Jane Peterson, Designer purchased supplies (5 printer
cartridges) on June 4, $250. When she buys the
cartridges, they go into the office supply inventory as an
asset.
To record this transaction you credit Cash for $250 and
debit Supplies (cartridges) for $250.
Cash
250
Bal
Supplies (cartridges)
250
250
Bal
Supplies -cartridges
250 100
150
Bal
Supplies Expense
100
100
43
Debit
100
Credit
100
Prepaid expenses
Accrued expenses
Accrued revenues
Unearned revenues
Depreciation
Prepaid Expense
Prepaid expenses are advance payment of expenses. The
printer cartridges that Jane Peterson, Designer bought
to have in its office supply cabinet is an example of
prepaid expense. Prepaid rent and prepaid insurance are
also examples.
Example
Suppose that Neptune Enterprises prepays three-month
office rent on September 1, 2010. If the lease specifies a
44
Bal
Prepaid Rent
2100 700
1400
Bal
Rent Expense
700
700
Debit
700
Credit
Remember
Prepaid expenses are assets accounts.
Accrued Expenses
The term accrued expense refers to an expense the
business has incurred but not yet paid. An accrued
expense always creates a liability.
700
45
Example
Consider an employees salary. Neptune Enterprises
salary expense grows as the employee works.
Suppose that Neptune Enterprises pays its employee a
monthly salary of $1600, half on the 15th and half on the
last day of the month. If either payday falls on a
weekend, Neptune pays the following Monday.
In July, Neptune paid the first half-month salary on
Thursday, July 15.
Cash
800
Bal
Salary Expense
800
800
Bal
Salary Payable
800
800
Bal
Salary Expense
800
800
1600
Debit
800
Credit
800
46
Salary Payable
800 800
0
Accrued Revenues
Sometimes, business earns revenue before it receives the
cash. This is called accrued revenue, which is revenue
that has been earned but not yet collected in cash.
Example
Neptune Enterprises is hired on August 15 to perform
computer services for Toms Apparels. Under the
agreement, Neptune Enterprises will earn $900 monthly
for three months. During August, Neptune will earn half
month fee, $900/2 = $450, for work from August 16
through August 31.
On August 31 the adjusting entry is:
Aug 31
Bal
Accounts Receivable
450
450
Aug 31
Bal
Service Revenue
450
450
Debit
450
Credit
450
47
Cash
900
Sep 15
Bal
Sep 15
Bal
Accounts Receivable
450 450
0
Service Revenue
450
450
900
Unearned Revenues
When a client pays you in advance for the work you will
do for him, you owe the client services or products that
you have not yet delivered. A liability called unearned
revenue is created.
Example
On April 20 Neptune Enterprises signs a contract for one
month to perform computer services for Moonlight
Paradise. An advance payment, $600, its received.
The transaction is posted as follows:
Apr 20
Cash
600
Apr 20
Bal
Unearned Revenue
600
600
48
Unearned Revenue
200 600
400
Apr 30
Bal
Service Revenue
200
200
Unearned Revenue
Service Revenue
Credit
200
Unearned Revenue
400 400
0
May 20
Bal
Service Revenue
200
400
600
Debit
400
Credit
400
Depreciation
All of us know that a computer, for example, will last
about five years before it has to be replaced. It means
that a computer loses all of its value in five years, that is,
49
Example
On July 1, 2010, Neptune Enterprises buys a computer
costing $1800. This computer will last five years and will
be depreciated using the straight-line method, that is, it
will lose $1800/5 = $360 per year, or $360/12 = $30 per
month, of its original cost.
For keeping the original cost of the computer and also
maintaining a running total of the depreciation, a new
account called Accumulated Depreciation is created. This
account is a contra asset (which is the opposite balance
of its asset), and it summarizes and accumulates the
amount of depreciation over the computers total useful
life.
On December 31, 2010 the computer will lose $30 x 6
months = $180. The adjusting entry is
Dec 31
Bal
Accum. Depreciation
180
180
Dec 31
Bal
Depreciation Expense
180
180
Debit
180
Credit
180
50
1,800
180
1,620
Remember
Adjusting entries are made at the end of a period
in order that accounts will reflect the correct
balance in the financial statements.
An Asset that has expired is an Expense.
Supplies used
Supplies Expense
during a period
Prepaid Rent at the
Rent Expense
end of a period
Salary Payable
yet paid
51
Bank Reconciliation
Before making the main financial statements, you have to
be assured that all transactions already entered have been
posted without mistakes.
However, mistakes are made. For finding these mistakes,
you need to have something from which you compare
your posted transactions.
This checking process called bank reconciliation is
mainly applied to any of your banking accounts, or to
your credit card accounts.
In the coming sections the reconciliation process will be
applied to the operating account. Most transactions
involving are shown in the operating account statement.
Bank account statements show the cash balance from the
beginning of a month, all the deposits and payments
recorded during the month, daily balances, and the
ending balance.
Because you deposit, pay and withdraw money from a
bank, you can compare or reconcile your records to
52
theirs. Once you have done this, you can be assured that
your current check register balance is correct.
The first thing to do is the account reconciliation of the
checking account. This is a process by which you
compare the business cash, shown in your computer
accounting system, with the bank cash balance as of a
given monthly period to detect any discrepancies.
Note: You dont have to wait until the end of the month to
reconcile your accounts. You can open your bank account
statement through the Internet at any moment and print a copy
of it.
At the end of the month, when you receive a mail
statement from your bank of credit card supplier, you have
only to search for the ending balance and check again your
figures with the statement.
Outstanding Checks
When you check your bank statement at the end of the
month, or check your bank account through the Internet
every day to find out what your cash balance is, you have
to take account of what is called outstanding checks. You
may have written checks or have made Internet payments
that the bank has not yet received. What happens when
those checks or payments hit the bank? You must have
enough deposits to cover them.
Deposit-in-Transit
When you make deposits on the last day of the month,
the bank records your deposits on the following month
bank statement. However, you record those deposits in
your computer accounting system in the current month,
but the bank doesnt record them in the same month, the
bank records those deposits in the following month.
Those deposits have been called deposits-in-transit.
53
Example
During July 2010, Sunrise Auto Repairs made the
following bank deposits and payments:
Deposits
Date
7/8/10
7/15/10
7/23/10
7/31/10
Total Deposits
Description
Bank Deposit
Bank Deposit
Bank Deposit
Bank Deposit
Amount
780
850
650
320
2,600
Payments
Check No.
1025
1026
1027
1028
INT710-31
Date
7/5/10
7/16/10
7/26/10
7/26/10
7/30/10
Total Paymt.
Description
Supplies
Supplies
Mechanic Work
Supplies
Cable (Internet
Payment)
Amount
40
150
425
310
240
1,165
54
Date
7/8/10
7/15/10
7/23/10
Total Deposits
Description
Deposit
Deposit
Deposit
Amount
780
850
650
2,280
Withdrawals
Check No.
1025
1026
Total Paymt.
Date
7/5/10
7/16/10
Amount
40
150
190
55
2,655
+320
425
310
240
-975
2,000
Closing Entries
The purpose of closing entries is that the new fiscal year
starts with zero balances in the revenue and expense
accounts, and owners contributions and withdrawals
accounts start the new fiscal year also with zero balances.
At the end of a fiscal year, for example, December 31,
after preparing the Income Statement, Balance Sheet and
Owners Equity Statement, a summary account, known
as Income Summary, is created. All the revenue accounts
are closed-out, and the total amount is credited to the
Income Summary account. Each expense account is
credited to produce a zero balance, and the total amount
for the closed-out accounts is debited to the Income
Summary account. Then the Income Summary account
balance gives the net income or loss for the year.
Retained Earnings
The Income Summary account will be closed-out the
balance to zero. It needs a new equity account, Retained
Earnings account, where to transfer the net income for
the year. On the other hand, the other equity accounts,
56
57
Example
The trial balance of Malcolm Printing as of December
31, 2010 is:
Malcom Printing
Trial Balance
December 31, 2010
Balance
Debit
Credit
8,300
2,300
200
400
9,000
2200
1,700
9,100
4,200
2,400
600
20,200
20,200
Account Title
Cash
Equipment
Supplies
Accounts Payable
Malcolm Smith, Capital
Owners Withdrawal
Owners Contribution
Fees Revenues
Rent Expense
Salaries Expense
Supplies Expense
Totals
Fees Revenue
9100 9100
0
Clos
Bal
Income Summary
9100
9100
Rent Expense
4200 4200
0
Clos
Bal
Income Summary
4200 9100
4900
58
Clos
Bal
Clos
Bal
Clos
Supplies Expense
600 600
0
Clos
Bal
Bal
Income Summary
2400 4900
2500
Income Summary
600 2500
1900
Income Summary
1900 1900
0
Clos
Bal
Retained Earnings
1900
1900
Owners Contribution
1700 1700
0
Clos
Bal
Clos
Bal
Owners Withdrawal
2200 2200
0
Clos
Bal
Retained Earnings
1900
1700
3600
Retained Earnings
2200 3600
1400
59
YY
Balance
Account Title
Cash
Equipment
Supplies
Accounts Payable
Malcolm Smith, Capital
Retained Earnings
Totals
Debit
8,300
2,300
200
10,800
Credit
400
9,000
1,400
10,800
Solved Problems
2.1 Fill the blanks:
1. A process by which to compare a business cash or credit
card balance with the bank cash or credit card account
statement is called ________________________.
2. Checks that are sent to vendors but not cleared on the
bank statement are called ________________________.
3. _______________________ are deposits made at the end
of the month that do not appear on the bank statement.
4. An expense paid in advance is known as a ___________
____________.
5. An adjusting entry that records the expired amount of
prepaid rent would create the ______________________
account.
6. An accrued salary expense creates a _______________
called salary payable account.
7.
60
7
6
61
3
4
Solution
5 a
d
j
6
1 a c c u m l a t e d
s
e
t
p
i
2 c l o
n
s
g
i
t
3 p o s t i
n
4 a c c o u n t t
r
a
n
s
i
t
7
8
p
o
r
u
- d e p r e c i a t i o n
p
s
a
t
s i n g
i
a
d
n
d
i
c l o s i n g
n
g
r e c o n c i l i a t i o n
62
=
per
month
=
a) T-accounts
Insurance Expense
Prepaid Insurance
Dec 31
Dec 31
Bal
Bal
b) General Journal
Debit
Insurance Expense
Prepaid Insurance (Asset)
Credit
Solution 2.3
Insurance expense for a month
period
Insurance expense for a threemonth period (Oct. Dec.)
= 480 / 12
= 40 x 3
= 40 per
month
= 120
a) T-accounts
Dec 31
Bal
Insurance Expense
120
120
Dec 31
Bal
Prepaid Insurance
480 120
360
63
b) General Journal
Debit
120
Insurance Expense
Prepaid Insurance (Asset)
Credit
120
a) T-accounts
Supplies Expense
Supplies
Mar 31
Mar 31
Bal
Bal
b) General Journal
Supplies Expense
Supplies (Asset)
Debit
Credit
Solution 2.4
Amount of supplies used
during the month of March
= 1200 - 800
= 400
64
a) T-accounts
Mar 31
Bal
Supplies Expense
400
400
Supplies
1200 400
800
Mar 31
Bal
b) General Journal
Debit
400
Supplies Expense
Supplies (Asset)
Credit
400
Salary Expense
Salary Payable (Liability)
Debit
Credit
Solution 2.5
Amount of salary payable
per day
Liability of salary on
Wednesday
= 3000/5 days
= 600 x 3 days
= 600 per
day
= 1800
65
Debit
1800
Salary Expense
Salary Payable (Liability)
Credit
1800
=
per day
=
Salary Expense
Salary Payable (Liability)
Debit
Credit
Solution 2.6
Salary payable per day
= 2100/14 days
= 5 (days) x 150
= 150
per day
= 750
= 2100 - 750
= 1350
66
Debit
1350
Salary Expense
Salary Payable (Liability)
Credit
1350
Debit
Credit
Solution 2.7
The adjusting entry is
Debit Credit
400
400
=
per
year
=
per
month
=
67
Depreciation Expense
Accumulated Depreciation (Asset)
Debit
Credit
Solution 2.8
Depreciation per year
= 10% x 12000
= 1200 / 12
= 100 x 8
= 1200
per year
= 100 per
month
= 800
Depreciation Expense
Accumulated Depreciation (Asset)
Debit Credit
800
800
=
per
year
=
per
month
=
68
Accumulated Depreciation
Dec 31
Dec 31
Bal
Bal
Depreciation Expense
Accumulated Depreciation (Asset)
Debit
Credit
Solution 2.9
Depreciation per year
= 72000 / 5
= 14400 / 12
= 1200 x 10
= 14400
per year
= 1200 per
month
= 12000
Depreciation Expense
12000
12000
Dec 31
Bal
Accumulated Depreciation
12000
12000
Depreciation Expense
Accumulated Depreciation (Asset)
Debit Credit
12000
12000
69
=
per
month
November 1
Cash
Nov 1
December 31
Project revenue after two months
(November December)
Dec 31
Bal
Project Revenue
4000
4000
Dec 31
Bal
February 28
Project revenue two months later
(January February)
Project Revenue
Bal
Feb 28
Bal
70
Solution 2.10
Monthly project revenue
= 8000 / 4
months
= 2000
per month
November 1
Nov 1
Cash
8000
Nov 1
Bal
December 31
Project revenue after two months
(November December)
Dec 31
Bal
Project Revenue
4000
4000
Dec 31
Bal
= 2000 x 2
= 4000
February 28
Project revenue two months later
(January February)
Feb 28
Bal
Project Revenue
4000
4000
8000
Feb 28
Bal
= 2000 x 2
= 4000
71
November 1
No transaction is made
December 31
Project revenue after two months
(November December)
Project Revenue
=
Accounts Receivable
Dec 31
Dec 31
Bal
Bal
February 28
Project revenue two months later
(January February)
Cash
Feb 28
=
Accounts Receivable
Feb 28
Bal
Project Revenue
Feb 28
Bal
Solution 2.11
Monthly project revenue
November 1
No transaction is made
= 8000 / 4
months
= 2000
per month
72
December 31
Project revenue after two months
(November December)
Dec 31
Bal
Project Revenue
4000
4000
= 2000 x 2
= 4000
Accounts Receivable
4000
4000
Dec 31
Bal
February 28
Project revenue two months later
(January February)
Feb 28
Cash
8000
= 2000 x 2
Feb 28
Bal
Feb 28
Bal
= 4000
Accounts Receivable
4000 4000
0
Project Revenue
4000
4000
8000
Description
Bank Deposit
Bank Deposit
Bank Deposit
Transfer from
Personal account
Bank Deposit
Amount
150
375
240
500
215
1,480
73
Check Payments
Check No.
621
622
623
624
625
626
Total Paymt.
Date
4/5/10
4/11/10
4/13/10
4/21/10
4/28/10
4/30/10
Description
Rent
Supplies
Printer Cartridge
Truck Repair
Cell Phone
Employee Wages
Amount
400
275
50
580
170
600
2,075
2,580
1,265
1,305
2,540
Deposits
Date
4/3/10
4/17/10
4/22/10
4/25/10
Total Deposits
Description
Deposit
Deposit
Deposit
Deposit
Amount
150
375
240
500
1,265
Withdrawals
Check No.
621
622
623
Date
4/12/10
4/16/10
4/15/10
Amount
400
275
50
74
624
Total Withdr.
4/27/10
580
1,305
Outstanding Checks
Check
Check
Total Outstanding Checks
Solution 2.12
Actual operating cash balance
Bank Balance
2,540
Deposits-in-Transit
+215
Outstanding Checks
Check 625
170
Check 626
600
-770
1,985
Cash
Equipment
Supplies
Accounts Receivable
Prepaid Insurance
Accounts Payable
Harley, Capital
Owners Withdrawal
Owners Contribution
Fees Revenues
Utilities Expense
Salaries Expense
5,105
5,000
925
1,690
1,865
2,325
845
16,280
75
635
14,000
19,400
a) Adjusting Entries
1.
Cash
Fees Revenue
Dec 31
Dec 31
Bal
Bal
76
2.
Utilities Expense
Accounts Payable
Dec 31
Dec 31
Bal
Bal
3.
Salaries Expense
Salaries Payable
Dec 31
Dec 31
Bal
Bal
4.
Depreciation Expense
Accumulated Depreciation
Dec 31
Dec 31
Bal
Bal
5.
Dec 31
Supplies
450
Bal
6.
Supplies Expense
Dec 31
Bal
Insurance Expense
Prepaid Insurance
Dec 31
Dec 31
Bal
Bal
b) Trial balance
77
Harley Consulting
Trial Balance
December 31, 2010
Balance
Debit
Credit
Account Title
Cash
Equipment
Accumulated Depreciation
Supplies
Prepaid Insurance
Accounts Receivable
Accounts Payable
Salaries Payable
Harley, Capital
Owners Withdrawal
Fees Revenues
Depreciation Expense
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Totals
Solution 2.13
a) Adjusting Entries
1.
Dec 31
Bal
Cash
5105
3275
8380
Dec 31
Bal
Fees Revenue
19400
3275
22675
78
2.
Dec 31
Bal
3.
Dec 31
Bal
4.
Dec 31
Bal
5.
Dec 31
Bal
6.
Dec 31
Bal
Utilities Expense
845
230
1075
Salaries Expense
16280
840
17120
Dec 31
Bal
Dec 31
Bal
Depreciation Expense
700
700
Dec 31
Supplies
925 450
475
Dec 31
Insurance Expense
475
475
Dec 31
b) Trial balance
Bal
Bal
Bal
Accounts Payable
635
230
865
Salaries Payable
840
840
Accumulated Depreciation
700
700
Supplies Expense
450
450
Prepaid Insurance
1865 475
1390
79
Harley Consulting
Trial Balance
December 31, 2010
Account Title
Cash
Equipment
Accumulated Depreciation
Supplies
Prepaid Insurance
Accounts Receivable
Accounts Payable
Salaries Payable
Harley, Capital
Owners Withdrawal
Fees Revenues
Depreciation Expense
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Totals
Balance
Debit
Credit
8,380
5,000
700
475
1,390
1,690
865
840
14,000
2,325
22,675
700
475
17,120
450
1,075
39,080
39,080
Debit
Credit
80
b)
Debit
Income Summary
Depreciation Expense
Insurance Expense
Credit
Salaries Expense
Supplies Expense
Utilities Expense
Balance of Income Summary
account
c)
Income Summary
Retained Earnings
Debit
Credit
Debit
Credit
d)
Retained Earnings
Owners Withdrawal
Balance of Retained
Earnings account
81
Harley Consulting
Post-Closing Trial Balance
December 31, 2010
Balance
Account Title
Cash
Accounts Receivable
Equipment
Accumulated Depreciation
Supplies
Prepaid Insurance
Accounts Payable
Salaries Payable
Harley, Capital
Retained Earnings
Totals
Debit
Credit
Solution 2.14
a)
Fees Revenues
Income Summary
b)
Income Summary
Depreciation Expense
Insurance Expense
Salaries Expense
Supplies Expense
Utilities Expense
Balance of Income Summary
account
Debit Credit
22675
22675
Debit Credit
19820
700
475
17120
450
1075
= 22675 - 19820
= 2855
82
c)
Income Summary
Retained Earnings
Debit Credit
2855
2855
d)
Retained Earnings
Owners Withdrawal
Balance of Retained
Earnings account
Debit Credit
2325
2325
= 2855 - 2325
= 530
Debit
8,380
1,690
5,000
475
1,390
16,935
Credit
700
865
840
14,000
530
16,935
Notes
83
84
Notes
______INDEX
85
INDEX
Account
Depreciation
48-50
Account reconciliation
51-55
Double-entry accounting
Accounting, Double-entry
Accounting equation
Equipment
2, 50
Accounts payable
5, 15
Equity
Accounts receivable
19
Expense account
10
Accrued expenses
43, 44
Expenses
Accrued revenue
43, 46
Accumulated depreciation
49, 50, 51
General Journal
43
Adjusting entries
42-51
Assets
Income
Automobile expenses
10
55
Investment
Liabilities
Bank deposit
Bank statement
51, 53
Buying
3
Outstanding checks
52, 54
Capital
3, 6
Owner's contribution
56
Cash
Owner's withdrawal
56
Cash withdrawal
Check, Outstanding
52, 54
Payment
2, 3
Check payment
54
58
Closed-out account
55
Prepaid insurance
43
Closing entries
55
Prepaid rent
43
Closing periods
41
Purchase
Contra-asset
49, 51
Credits
9-12
Receiving
Reconciliation, Account
51-55
Debits
9-12
Rent
Deposits-in-transit
52, 54
Rent expense
4, 44
86
Retained earnings
55
Transactions
Revenue
Transaction types
8-9
Trial balance
16-17
58-59
Unearned revenues
43, 4748
Withdrawal, Owner's
56
Withdrawing
Salary
44
Salary expense
5, 44-46
Salary payable
45
Supplies
3, 4
T-accounts
11