Chapter 3

Accounting Cycle

Cash basis method of accounting

Accrual basis method of accounting

If rent for May is paid on June 1, in which month will it be reported as an expense under the CASH
BASIS method of accounting?

If rent for May is paid on June 1, in which month will it be reported as an expense under the ACCRUAL
BASIS method of accounting?

If a university received cash in August for football season tickets, when should this be reported as
revenue under the CASH BASIS method of accounting?

If a university received cash in August for football season tickets, when should this be reported as
revenue under the ACCRUAL BASIS method of accounting?

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 Matching concept

Accruals

Deferrals

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 Katherine Lenton owns a delivery service. The following events occurred during the month of
February. Determine her net income for the month of February using the accrual basis of accounting.
• Made 50 deliveries for $1,000 during February. These deliveries were paid for as each
delivery was completed.
• Pre-sold 25 deliveries to a customer for $500. Katherine collected cash for deliveries to be
made in March.
• Made 10 deliveries for $200 on credit. Katherine will be paid by her customers in March.
• Purchased gas for use during February’s deliveries. $400 paid in cash during February.
• $150 purchase using cash for March’s supply of delivery receipts – none of which needed to
be used during February.
• Used $250 worth of packaging materials during February that had been paid for in January.

On December 5, Purcell’s Plowing Co. purchased and paid for $250 in supplies. As of December 31,
only $50 worth of those supplies were left.
Record the original entry (December 5) and the adjusting entry (December 31). Post to the Supplies t-
account.

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 On December 1 Purcell’s Plowing Co. purchased a six-month insurance policy for $600. As of
December 31, one month ($100) of that coverage had expired.
Record the original entry (December 1) and the adjusting entry (December 31). Post to the Prepaid
Insurance t-account.

On November 2, Wilson’s Family Trust received three months’ rent, totaling $2,400, in advance for
one of its commercial farming properties. As of December 31, two months’ worth of this rent had
been earned.
Record the original entry (November 2) and the adjusting entries for November and December. Post
to the Unearned Rent t-account.

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 Compare/contrast Prepaid and Unearned

Two Rules of Thumb

Assume that December 31 is a Wednesday. On that date, “Mini’s” Labor Contracting Service owes
$500 in wages to employees. Total wages of $833 will be paid on Friday January 2, the usual payday.
Record the adjusting entry (December 31) and the payday entry (January 2). Post to the Wages
Payable t-account.

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 A florist purchases a delivery van for $12,000 cash. The van will last three years.
What is the florist’s cost per year for this van?

Depreciation

Contra Accounts

A florist purchases a delivery van for $12,000 cash. The van will last three years.
Record the original entry (purchase) and the adjusting entry (depreciation) for one year. Post to the
Asset t-accounts.

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 The balance in the prepaid rent account before adjustment at the end of the year is $24,000, which
represents four months’ rent paid on December 1.
Record the adjusting entry required on December 31.

The balance in the office supplies account on June 1 was $6,300, supplies purchased during June were
$3,100, and the supplies on hand at June 30 were $2,500.
Record the appropriate adjusting entry.

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 A business pays weekly salaries of $20,000 on Friday for a five-day week ending on that day.
Record the adjusting entry necessary at the end of the fiscal period ending on Tuesday and the
journal entry for Friday (payday).

A point of purchase computer system is purchased for $6,000 and is expected to be obsolete in 5
years.
Record the original purchase transaction and the adjusting entry necessary for the first full year of
depreciation.

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 At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted.
Will the following categories be understated or overstated?
• Assets
• Liabilities
• Equity
• Revenue
• Expense

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Padlo Corporation needs to record the following adjusting entries:

a) Supplies on hand on Dec. 31 were $20.

b) Fees earned but not billed on Dec. 31 were $65.
c) Depreciation of equipment was estimated to be $15 for the year.
d) Employees worked in December but won’t be paid until January: $35.

Record the adjusting journal entries and determine the Adjusted Trial Balance

Padlo Corporation Unadjusted Adjusted

Trial Balance
December 31 Dr. Cr. Dr. Cr.
Cash 310
Accounts Receivable 30
Supplies 100
Equipment 500
Accumulated
30
Depreciation
Accounts Payable 250
Wages Payable 0
Stock 120
Fees Earned 750
Wage Expense 140
Supplies Expense 70
Depreciation Expense 0
Total 1,150 1,150

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The trial balance and the adjusted trial balance for Gallentine Corporation are
presented below. Compare the numbers on these trial balances to determine
what adjusting entries were prepared by Gallentine’s accountant. Journalize
the four adjusting entries. You may assume none of the accounts were
affected by more than one adjusting entry.

Gallentine Corporation Unadjusted Adjusted

Trial Balance
December 31 Dr. Cr. Dr. Cr.
Cash 1,200 1,200
Accounts Receivable 700 700
Supplies 200 135
Prepaid Insurance 400 210
Accounts Payable 900 900
Wages Payable 0 125
Unearned Revenue 300 200
Stock 500 500
Fees Earned 9,500 9,600
Wage Expense 7,200 7,325
Rent Expense 1,200 1,200
Supplies Expense 100 165
Insurance Expense 200 390
Total 11,200 11,200 11,325 11,325

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