Chapter 5 — Completing the Accounting Cycle
The module's primary reading · ~35–45 minutes · Objective 4 (complete the accounting cycle: prepare an income statement, a statement of retained earnings, and a classified balance sheet, journalize closing entries, and prepare a post-closing trial balance), with Objective 3 (apply accrual accounting: recognize revenue and expenses in the right period, prepare adjusting entries for deferrals and accruals, and prepare an adjusted trial balance) and Objective 2 (analyze business transactions with the accounting equation and record them in a journal using double-entry bookkeeping, post them to the ledger, and prepare a trial balance) called back · Read it first this week; the lecture, the slides, the tutorial, the quiz, and the workshop all build on it.
In plain language
At the end of a month, a business owner wants three answers: how much did we earn, what do we own and owe, and how do we start next month fresh? This week you answer all three for the bicycle shop. You prepare its financial statements (the reports that tell outsiders what the business earned and where it stands) in a fixed order. Then you make closing entries (entries that reset the month's revenue, expense, and dividend accounts to zero) so the shop can start Month 2 with a clean slate. Last, you check the books one more time and see the whole accounting cycle from start to finish.
Why you already care about this
Picture the bicycle shop on the last day of Month 1, after Week 4's six adjustments. Its adjusted trial balance shows $37,650 on each side. Every balance is up to date. A founder walks in and asks, "So, did we make money?" Nothing on that trial balance answers the question directly. It is a list of 17 accounts, not a report.
You have seen this gap before. A dog-grooming service owner reaches the end of the year with a drawer full of receipts and wants one number: the year's profit. A farmers' market stall finishes its first season and the bank asks what the stall owns and what it owes. A list of balances does not answer either question. A short set of statements does.
By the end of this chapter you will be able to:
- prepare the income statement, the statement of retained earnings, and the balance sheet, in that order;
- tell net income from the cash a business has;
- sort the balance sheet into current and long-term groups;
- sort any account into a temporary account or a permanent account;
- journalize the four closing entries through Income Summary;
- prepare a post-closing trial balance and explain its total;
- list the steps of the accounting cycle in order.
Carry this sentence with you: close the month, not the business; keep the balance sheet.
Where we are
- Already covered: Week 1 named the four financial statements and their readers. Week 2 analyzed the shop's twelve Month 1 transactions in the accounting equation. Week 3 journalized and posted them and proved the unadjusted trial balance at $36,800. Week 4 made six adjusting entries and proved the adjusted trial balance at $37,650.
- This week: the three statements prepared in order, the classified balance sheet, temporary and permanent accounts, the closing entries, the post-closing trial balance, and the full accounting cycle.
- How they connect: every figure on this week's statements comes straight from Week 4's adjusted trial balance, and every closing entry is a journal entry that uses Week 3's debits and credits.
- Where we're going next: Week 6, Merchandising Operations, starts a new unit. The shop begins to buy and resell bicycles, and its income statement grows a new line, cost of goods sold.
Week 2 taught you that revenues increase retained earnings, and expenses and dividends decrease it. That rule is the heart of this week. The income statement measures the first two. The statement of retained earnings adds the third. The closing entries then move all three into Retained Earnings for real. Week 3 taught you that a debit is the left side and a credit the right side, and that a balanced trial balance proves only that debits equal credits. You will lean on both ideas again.
1. Prepare the statements in the right order
Think about baking a layer cake. You cannot frost the top layer before you bake the bottom one. Each layer sits on the one below it. The financial statements work the same way.
The financial statements are prepared from the adjusted trial balance in order: the income statement first, then the statement of retained earnings, then the balance sheet. Each one hands a figure to the next:
- The income statement finds net income for the period.
- The statement of retained earnings uses that net income to find ending retained earnings.
- The balance sheet uses that ending retained earnings in its equity section.
The adjusted trial balance is the only source you need, and you already built it. Every number on all three statements is already sitting on it, in Week 4's $37,650 list. Your job is to sort those balances into the right report, in the right order.
Worked example — the hand-offs. For the bicycle shop (illustrative), the income statement will produce net income of $1,400. The statement of retained earnings takes that $1,400 and produces ending Retained Earnings of $900. The balance sheet takes that $900 and places it in stockholders' equity. If you tried to build the balance sheet first, you would have no Retained Earnings figure to put in it, because the trial balance shows no Retained Earnings balance at all. The shop is new, so the account started at $0.
Misconception check. Students often think the statements can be prepared in any order, since they all come from the same trial balance. It is tempting, because the balances are all there at once. The cure is to follow the hand-offs. The balance sheet needs ending Retained Earnings, which needs net income. Skip a step and the balance sheet will not balance.
2. Prepare the income statement and read net income
Picture the dog-grooming owner from the hook, adding up the year's grooming fees and then subtracting the rent, the wages, and the shampoo. What is left is the year's profit. That is the income statement's whole job.
The income statement reports a business's revenues and expenses for a period and the result. When revenues are larger, the result is net income: a period's revenues minus its expenses. Net income is a measure of what the business earned, not the cash it has.
Worked example — the shop's Month 1 income statement. You take the six income statement accounts from the adjusted trial balance. Service Revenue is $5,850. The five expenses are Wages Expense 2,000 + Rent Expense 1,500 + Supplies Expense 550 + Insurance Expense 200 + Depreciation Expense 200 = $4,450. Net income is 5,850 − 4,450 = $1,400.
The bicycle shop
Income Statement
For Month 1
| Line | Amount | Total |
|---|---|---|
| Service Revenue | $5,850 | |
| Wages Expense | 2,000 | |
| Rent Expense | 1,500 | |
| Supplies Expense | 550 | |
| Insurance Expense | 200 | |
| Depreciation Expense | 200 | |
| Total expenses | 4,450 | |
| Net income | $1,400 |
Notice what you do not see. Dividends are not on this statement, and neither is Cash. The income statement holds only revenues and expenses.
In words: the shop earned $1,400 in Month 1, because the $5,850 of repair work it did was more than the $4,450 of resources it used to do that work.
Misconception check. Students often think net income is the cash the business has. The shop's own numbers show the gap. Its Cash is $17,100 versus net income of $1,400, more than 12 times as large. Most of that cash came from the founders' $30,000 investment, which is not revenue. And some of the $5,850 of revenue has not been collected yet. Net income answers "what did we earn?" Cash answers "what is in the bank?"
3. Carry net income into the statement of retained earnings
Think of a household savings jar. It starts the month with some amount, the month's earnings go in, and anything handed out to family members comes out. The jar's ending amount depends on all three.
The statement of retained earnings shows how retained earnings changed during the period. It starts with the beginning balance, adds net income, and subtracts dividends. Retained earnings is the part of equity the business has earned and kept.
Worked example — the shop's Month 1 retained earnings. The shop is brand new, so its beginning Retained Earnings is $0. You add the $1,400 of net income from Section 1's hand-off. You subtract the $500 dividend the shop paid on Day 30. So 0 + 1,400 − 500 = $900.
The bicycle shop
Statement of Retained Earnings
For Month 1
| Line | Amount |
|---|---|
| Retained earnings, beginning | $0 |
| Add: net income | 1,400 |
| Less: dividends | (500) |
| Retained earnings, end of Month 1 | $900 |
The parentheses around 500 mean you subtract it.
In words: the shop earned $1,400, paid $500 of it to its owners, and kept $900 in the business.
Misconception check. Students often put dividends on the income statement as an expense, because dividends reduce retained earnings the way expenses do. But a dividend is a distribution to the owners, not an expense. It does not help the shop earn any revenue. That is why it appears here, on the statement of retained earnings, and never on the income statement.
4. Classify the balance sheet: current versus long-term
Picture the farmers' market stall at the end of its first season. Its owner has cash in a lockbox, a booth fee paid ahead for next season, a folding canopy that will last several seasons, a bill from a seed supplier due next month, and a small loan due in three years. A banker wants those items sorted by time: which turn into cash or come due soon, and which stretch out over years.
A classified balance sheet sorts assets and liabilities into groups, separating current items from long-term ones. The groups you need this week are:
- Current assets — cash and the items a business expects to turn into cash or use up within one year or the operating cycle, such as Accounts Receivable, Supplies, and Prepaid Insurance.
- Property, plant, and equipment — the long-term group of assets a business uses for years, such as equipment, shown at cost less Accumulated Depreciation.
- Current liabilities — the obligations a business expects to pay or settle within one year or the operating cycle, such as Accounts Payable, Wages Payable, and Unearned Revenue.
- Long-term liabilities — the obligations a business does not expect to pay or settle within one year or the operating cycle, such as a loan due in several years.
- Stockholders' equity — Common Stock and Retained Earnings.
The operating cycle is the time it takes a business to spend cash on what it sells, sell it, and collect the cash from its customers. For the market stall, the lockbox cash and the prepaid booth fee are current assets. The canopy belongs in property, plant, and equipment. The seed bill is a current liability, and the three-year loan is a long-term liability.
Worked example — the shop's classified balance sheet. You take the permanent accounts from the adjusted trial balance and the $900 of ending Retained Earnings from Section 3.
- Current assets: Cash 17,100 + Accounts Receivable 1,050 + Supplies 350 + Prepaid Insurance 2,200 = $20,700.
- Property, plant, and equipment: Equipment 12,000 − Accumulated Depreciation 200 = $11,800.
- Total assets: 20,700 + 11,800 = $32,500.
- Current liabilities: Accounts Payable 300 + Wages Payable 400 + Unearned Revenue 900 = $1,600. The shop has no long-term liabilities, so this is also total liabilities.
- Stockholders' equity: Common Stock 30,000 + Retained Earnings 900 = $30,900.
- The check: total liabilities 1,600 + total stockholders' equity 30,900 = $32,500, equal to total assets.
The bicycle shop
Balance Sheet
End of Month 1
| Line | Amount | Total |
|---|---|---|
| Current assets | ||
| Cash | $17,100 | |
| Accounts Receivable | 1,050 | |
| Supplies | 350 | |
| Prepaid Insurance | 2,200 | |
| Total current assets | $20,700 | |
| Property, plant, and equipment | ||
| Equipment | 12,000 | |
| Less: Accumulated Depreciation | (200) | 11,800 |
| Total assets | $32,500 | |
| Current liabilities | ||
| Accounts Payable | $300 | |
| Wages Payable | 400 | |
| Unearned Revenue | 900 | |
| Total liabilities | $1,600 | |
| Stockholders' equity | ||
| Common Stock | 30,000 | |
| Retained Earnings | 900 | |
| Total stockholders' equity | 30,900 | |
| Total liabilities and stockholders' equity | $32,500 |
In practice (your tools). In a free spreadsheet such as Google Sheets, put each balance sheet amount in its own cell and let formulas do the adding. Total the current assets with =SUM(B2:B5), and add a check cell that subtracts total liabilities and stockholders' equity from total assets. That check cell should show 0. If it does not, look first at Retained Earnings, the one figure carried in from another statement.
In words: at the end of Month 1, the shop has $32,500 of assets, claimed by $1,600 of liabilities and $30,900 of stockholders' equity, and $20,700 of those assets are current.
Misconception check. Students often list Unearned Revenue with the revenues, or put Accumulated Depreciation with the liabilities. Both sit in the wrong place. Unearned Revenue is a current liability: the shop owes the cycling club $900 of tune-ups. Accumulated Depreciation is a contra asset, so it is subtracted from Equipment inside property, plant, and equipment.
Pause and think (choose one). (a) Imagine you are a banker deciding on a small loan to the shop. Which group on this balance sheet would you read first, and why? (b) Imagine you are a supplier deciding whether to sell the shop parts on account. Which group would you read first, and why?
5. Sort temporary and permanent accounts
Think about a car's odometer and its trip meter. The odometer never resets; it keeps the car's whole history. The trip meter measures one trip, and you reset it to zero before the next one. Accounts come in the same two kinds.
Temporary accounts are the revenue, expense, and dividend accounts. They measure one period, and they are closed so that each starts the next period at zero. Permanent accounts are the asset, liability, and stockholders' equity accounts. Their balances carry forward from one period to the next, and they are never closed.
| Kind | Accounts | Where it reports |
|---|---|---|
| Temporary | Service Revenue; Wages Expense; Rent Expense; Supplies Expense; Insurance Expense; Depreciation Expense; Dividends | Income statement, or the statement of retained earnings for Dividends |
| Permanent | Cash; Accounts Receivable; Supplies; Prepaid Insurance; Equipment; Accumulated Depreciation; Accounts Payable; Wages Payable; Unearned Revenue; Common Stock; Retained Earnings | Balance sheet |
You will see Retained Earnings on the permanent list even though it did not appear on the adjusted trial balance. It had a $0 balance, and the closing entries are about to give it one.
Worked example — two accounts with similar names. Supplies is permanent: it is the $350 of supplies still on the shelf, an asset that carries into Month 2. Supplies Expense is temporary: it is the $550 of supplies used up in Month 1, and Month 2 must start measuring its own use from zero.
Misconception check. Students often think Dividends is a permanent account, because it is tied to equity. It is temporary. Dividends measures what the shop paid its owners in one period, so it starts each period at zero. A second trap: Accumulated Depreciation is permanent, because it belongs to the balance sheet, even though Depreciation Expense is temporary.
6. Journalize the closing entries through Income Summary
Back to the trip meter. Before the next trip, you write down the miles you drove, and then you reset the meter. The closing entries do both jobs: they record the month's result in Retained Earnings, then reset the temporary accounts to zero.
Closing entries are the entries made at the end of a period that move the balances of the revenue, expense, and dividend accounts into Retained Earnings, leaving those accounts at zero. Many businesses close through Income Summary, a temporary account used only during closing: it receives the revenues and the expenses, holds the net income for a moment, and then passes it to Retained Earnings.
Worked example — the shop's four closing entries. You close a balance by putting the same amount on its opposite side, so you always know which side to use. Service Revenue has a credit balance, so you debit it.
- Closing entry 1, close the revenue account: debit Service Revenue 5,850; credit Income Summary 5,850.
- Closing entry 2, close the expense accounts: debit Income Summary 4,450; credit Wages Expense 2,000, Rent Expense 1,500, Supplies Expense 550, Insurance Expense 200, and Depreciation Expense 200. The credits total 2,000 + 1,500 + 550 + 200 + 200 = 4,450.
- After entries 1 and 2, Income Summary has a credit of 5,850 − debit 4,450 = a $1,400 credit balance, the net income.
- Closing entry 3, close Income Summary to Retained Earnings: debit Income Summary 1,400; credit Retained Earnings 1,400. Income Summary now reads zero.
- Closing entry 4, close Dividends to Retained Earnings: debit Retained Earnings 500; credit Dividends 500.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| 1 | Service Revenue | 5,850 | |
| Income Summary | 5,850 | ||
| Close the revenue account. | |||
| 2 | Income Summary | 4,450 | |
| Wages Expense | 2,000 | ||
| Rent Expense | 1,500 | ||
| Supplies Expense | 550 | ||
| Insurance Expense | 200 | ||
| Depreciation Expense | 200 | ||
| Close the expense accounts. | |||
| 3 | Income Summary | 1,400 | |
| Retained Earnings | 1,400 | ||
| Close Income Summary, the net income, to Retained Earnings. | |||
| 4 | Retained Earnings | 500 | |
| Dividends | 500 | ||
| Close Dividends to Retained Earnings. |
After posting, Retained Earnings holds 0 + 1,400 − 500 = $900. That is the same $900 the statement of retained earnings reported. The ledger and the statement now agree.
In words: the closing entries move the month's $1,400 of net income and its $500 dividend into Retained Earnings and leave every revenue, expense, and dividend account at zero for Month 2.
Misconception check — the two closing traps. Students often think closing entries close the balance sheet accounts too. They do not; Cash, Equipment, and the rest keep their balances, because the shop still has that cash and that equipment on Day 1 of Month 2. Students also often close Dividends to Income Summary. That would put a distribution to owners into the net income figure, as if it were an expense. Dividends goes straight to Retained Earnings.
Pause and think (choose one). (a) In your own words, why does Income Summary end at zero after entry 3? (b) In your own words, what would go wrong in Month 2 if the shop skipped closing entry 2?
7. Prove the post-closing trial balance
A careful shop owner who has reset the register for the next day counts the drawer one last time before locking up. You do the same after closing. You list every balance that is left and check that the two columns still match.
The post-closing trial balance is a list of the ledger's balances after the closing entries are posted, checking that total debits equal total credits. Only permanent accounts appear on it, because every temporary account now reads zero.
The bicycle shop
Post-Closing Trial Balance
End of Month 1
| Account | Debit | Credit |
|---|---|---|
| Cash | $17,100 | |
| Accounts Receivable | $1,050 | |
| Supplies | $350 | |
| Prepaid Insurance | $2,200 | |
| Equipment | $12,000 | |
| Accumulated Depreciation | $200 | |
| Accounts Payable | $300 | |
| Wages Payable | $400 | |
| Unearned Revenue | $900 | |
| Common Stock | $30,000 | |
| Retained Earnings | $900 | |
| Totals | $32,700 | $32,700 |
Worked example — footing and explaining the total. The debits are Cash 17,100 + Accounts Receivable 1,050 + Supplies 350 + Prepaid Insurance 2,200 + Equipment 12,000 = $32,700. The credits are Accumulated Depreciation 200 + Accounts Payable 300 + Wages Payable 400 + Unearned Revenue 900 + Common Stock 30,000 + Retained Earnings 900 = $32,700.
Why $32,700 and not the $32,500 of total assets? On the balance sheet, Accumulated Depreciation is subtracted from Equipment. On a trial balance, it sits in the credit column instead. So 32,500 + 200 = 32,700.
You can also trace the total back to Week 4. On the debit side, closing removed Dividends and the five expenses: 37,650 − Dividends 500 − expenses 4,450 = 32,700. On the credit side, closing removed Service Revenue and added Retained Earnings: 37,650 − Service Revenue 5,850 + Retained Earnings 900 = 32,700.
In practice (your tools). In your spreadsheet, copy the adjusted trial balance to a new tab, set every temporary account to 0, and enter the new Retained Earnings balance. Total the columns with =SUM(B2:B12) and =SUM(C2:C12), and keep a check cell such as =B13-C13 that should show 0.
Misconception check. Students often think a balanced post-closing trial balance proves the closing was right. Week 3's warning still holds. Suppose you forgot closing entry 4. Dividends would still show $500 on the debit side, and Retained Earnings would show $1,400 instead of $900 on the credit side. Both columns would be $500 larger, $33,200 each, and they would still match. One caveat, then: the check catches a lopsided entry, not a missing one. So also confirm that no revenue, expense, or dividend account is on the list.
8. Trace the accounting cycle from transaction to closed books
Think about a recipe you have made so often that you could do it without your card. The steps come in the same order every time, and each one prepares the next. Accountants have a recipe like that too.
The accounting cycle is the steps an accountant performs each period, in order:
- Analyze transactions.
- Journalize.
- Post.
- Prepare a trial balance.
- Journalize and post adjusting entries.
- Prepare an adjusted trial balance.
- Prepare the financial statements.
- Journalize and post closing entries.
- Prepare a post-closing trial balance.
Worked example — one month of the bicycle shop. You have now done every step for Month 1. Week 2 analyzed the twelve transactions. Week 3 journalized them, posted them, and prepared the unadjusted trial balance at $36,800. Week 4 journalized and posted six adjustments and prepared the adjusted trial balance at $37,650. This week you prepared the statements, journalized and posted four closing entries, and prepared the post-closing trial balance at $32,700. Month 2 begins at step 1 with the permanent balances carried forward. And the question the founder asks at the start of this chapter now has your answer: yes, the shop made $1,400.
| Step | What happens | The shop's Month 1 |
|---|---|---|
| 1 to 3 | Analyze, journalize, post | Twelve transactions, Weeks 2 and 3 |
| 4 | Trial balance | $36,800 on each side |
| 5 and 6 | Adjust, then adjusted trial balance | Six adjustments; $37,650 on each side |
| 7 | Financial statements | Net income $1,400; total assets $32,500 |
| 8 | Closing entries | Four entries through Income Summary |
| 9 | Post-closing trial balance | $32,700 on each side |
The accounting cycle is a convention: a well-tested order of work, not a law of nature. An honesty note belongs here too. Real businesses often run some steps through software, so a person may never see a separate posting step. The order of the logic still holds.
Misconception check. Students often think the closing entries come before the statements, since closing sounds like the end of the month's work and the statements sound like a report written afterward. Reverse that and the statements break. Closing sets every revenue and expense account to zero, so an income statement prepared after closing would show no revenue at all. The statements come first; closing comes after.
Key terms
- Financial statements — The reports a business prepares for outside readers from the adjusted trial balance, prepared in order because each uses a figure from the one before it. (first used: 1. Prepare the statements in the right order)
- Net income — A period's revenues minus its expenses, a measure of what the business earned and not the cash it has. (first used: 2. Prepare the income statement and read net income)
- Classified balance sheet — A balance sheet that sorts assets and liabilities into groups, separating current items from long-term ones. (first used: 4. Classify the balance sheet: current versus long-term)
- Current assets — Cash and the items a business expects to turn into cash or use up within one year or the operating cycle. (first used: 4. Classify the balance sheet: current versus long-term)
- Property, plant, and equipment — The long-term group of assets a business uses for years, shown at cost less Accumulated Depreciation. (first used: 4. Classify the balance sheet: current versus long-term)
- Current liabilities — The obligations a business expects to pay or settle within one year or the operating cycle. (first used: 4. Classify the balance sheet: current versus long-term)
- Long-term liabilities — The obligations a business does not expect to pay or settle within one year or the operating cycle. (first used: 4. Classify the balance sheet: current versus long-term)
- Operating cycle — The time it takes a business to spend cash on what it sells, sell it, and collect the cash from its customers. (first used: 4. Classify the balance sheet: current versus long-term)
- Temporary accounts — The revenue, expense, and dividend accounts, which measure one period and are closed so that each starts the next period at zero. (first used: 5. Sort temporary and permanent accounts)
- Permanent accounts — The asset, liability, and stockholders' equity accounts, whose balances carry forward and are never closed. (first used: 5. Sort temporary and permanent accounts)
- Closing entries — The end-of-period entries that move the revenue, expense, and dividend balances into Retained Earnings and leave those accounts at zero. (first used: 6. Journalize the closing entries through Income Summary)
- Income Summary — A temporary account used only during closing that receives the revenues and expenses and passes the net income to Retained Earnings. (first used: 6. Journalize the closing entries through Income Summary)
- Post-closing trial balance — A list of the ledger's balances after closing, checking that debits equal credits, on which only permanent accounts appear. (first used: 7. Prove the post-closing trial balance)
- Accounting cycle — The steps an accountant performs each period, in order, from analyzing transactions to the post-closing trial balance. (first used: 8. Trace the accounting cycle from transaction to closed books)
Summary
- Prepare the statements in order: income statement, statement of retained earnings, balance sheet.
- Net income is revenues minus expenses; it is not cash.
- Dividends go on the statement of retained earnings, never the income statement.
- A classified balance sheet separates current from long-term items.
- Temporary accounts close each period; permanent accounts carry forward.
- Four closing entries: revenues, expenses, Income Summary, then Dividends to Retained Earnings.
- The shop's post-closing trial balance is $32,700 on each side.
- The accounting cycle runs from analyzing transactions to the post-closing trial balance.
Check your understanding
Work these before looking at the answers — they are ungraded, and the answers (with reasoning) are at the bottom of the page.
- A dog-grooming service (illustrative) ends its year with these balances. Grooming Revenue is $48,000. The other balances are Wages Expense of $21,000, Rent Expense of $9,600, Supplies Expense of $3,400, Depreciation Expense of $1,500, Dividends of $6,000, and beginning Retained Earnings of $8,000. Compute net income and ending Retained Earnings.
- A farmers' market stall (illustrative) lists five items at the end of its first season. They are cash in its lockbox, a market-booth fee paid ahead for the next season, a canopy tent it expects to use for several seasons, a bill from a seed supplier due next month, and a loan due in three years. Sort each into current assets, property, plant, and equipment, current liabilities, or long-term liabilities, and say why.
- A food truck (illustrative) ends a month with Sales Revenue of $9,200. Its other balances are Food Supplies Expense of $3,100, Wages Expense of $2,600, Fuel Expense of $700, and Dividends of $1,000. Write its four closing entries and give the change in Retained Earnings.
- Your friend drafts a tutoring business's post-closing trial balance (illustrative). The debits are Cash $4,300, Accounts Receivable $900, and Equipment $6,000. The credits are Accumulated Depreciation $1,200, Accounts Payable $400, Common Stock $7,000, Service Revenue $2,500, and Retained Earnings. Find the account that does not belong, and find the Retained Earnings balance that makes the corrected list balance.
Answers (worked reasoning — read after attempting)
- The expenses total 21,000 + 9,600 + 3,400 + 1,500 = $35,500, so net income is 48,000 − 35,500 = $12,500. Ending Retained Earnings is 8,000 + 12,500 − 6,000 = $14,500. The $6,000 dividend is not one of the expenses; it comes out on the statement of retained earnings.
- The lockbox cash and the prepaid booth fee are current assets, because the cash is already cash and the fee will be used up within the next season. The canopy is property, plant, and equipment, because the stall uses it for several seasons. The seed bill is a current liability, due next month. The three-year loan is a long-term liability, because it is not due within one year or the operating cycle.
- The expenses total 3,100 + 2,600 + 700 = $6,400. Entry 1: debit Sales Revenue 9,200; credit Income Summary 9,200. Entry 2: debit Income Summary 6,400; credit Food Supplies Expense 3,100, Wages Expense 2,600, and Fuel Expense 700. Income Summary now holds 9,200 − 6,400 = $2,800, the net income. Entry 3: debit Income Summary 2,800; credit Retained Earnings 2,800. Entry 4: debit Retained Earnings 1,000; credit Dividends 1,000. Retained Earnings rises by 2,800 − 1,000 = $1,800. Dividends went straight to Retained Earnings, not through Income Summary.
- Service Revenue does not belong, because it is a temporary account and reads zero after closing. Without it, the debits are 4,300 + 900 + 6,000 = $11,200. The credits other than Retained Earnings are 1,200 + 400 + 7,000 = $8,600. So Retained Earnings must be 11,200 − 8,600 = $2,600. Total assets are 11,200 − 1,200 = $10,000, and the trial balance total is $1,200 higher than total assets because Accumulated Depreciation sits in the credit column.
Next up in this module: the Readings & Resources page, the lecture tutorial, the practice set, the quiz, the discussion, and the assignment; next week the merchandising operating cycle adds cost of goods sold, a new expense rule for a business that resells goods.
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