1. Completing the Accounting Cycle
Chapter 4
Completing the Accounting Cycle
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. After studying this chapter, you should be able to:
Objectives
1. Review the seven basic steps of the accounting cycle.
2. Prepare a work sheet.
3. Prepare financial statements from a work sheet.
4. Prepare adjusting and closing entries from a work sheet.
5. Explain what is meant by the fiscal year and the natural business year.
6. Analyze and interpret the financial solvency of a business by computing working capital and the current ratio.
After studying this chapter, you should be able to:

4. Seven Basic Steps of the Accounting Cycle
1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. A trial balance is prepared, adjustment data are assembled, and an optional work sheet is completed.
4. Financial statements are prepared.
5. Adjusting entries are journalized and posted.
6. Closing entries are journalized and posted.
7. A post-closing trial balance is prepared.

5. Assets are commonly divided into classes and that two of these classes are current assets and property, plant, and equipment.

6. That’s correct. Cash and other assets that are expected to be converted into cash, sold, or used up usually in less than a year are current assets.

7. Well… besides cash, there’s notes receivable, accounts receivable, supplies, and other prepaid items.
For example?

8. There are some exceptions, but that’s basically correct
There are some exceptions, but that’s basically correct. Assets such as office equipment, machinery, buildings, and land would appear under that heading.
So, assets that have a life over a year are listed under property, plant, and equipment.

9. Liabilities due usually within one year or less and that are to be paid out of current assets are called current liabilities.
Accounts payable
Wages payable
Interest payable
Unearned fees

10. Liabilities not due for more than a year usually are long-term liabilities.
Mortgage note payable
Mortgage payable
Bond payable

11. The work sheet is a useful device for understanding the flow of accounting data from the unadjusted trial balance to the financial statements.

12. The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Prepared from the general ledger. Accounts are listed in the following order: assets, liabilities, owner’s equity, revenues, and expenses.

13. Adjustments are entered here. Two possibilities:
The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are entered here. Two possibilities:
1. Deferrals – Existing balances are changed.
2. Accruals – New information is entered.

14. The Work Sheet
Trial Balance
Adjustments
Adjusted TB
Accounts Dr Cr Dr Cr Dr Cr
Adjustments are combined with the trial balance. Account balances are now adjusted.

15. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42,600 42,600
The Unadjusted Trial Balance

16. (a) The Supplies account has a debit of $2,000
(a) The Supplies account has a debit of $2,000. A count of supplies at the end of the period reveals that $760 is on hand. Therefore, $1,240 in supplies was used during the two-month period.

17. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800
Miscellaneous Expense 455
42,600 42,600
(a) 1,240
(a) 1,240

18. (b) The Prepaid Insurance account has a debit balance of $2,400, which represents prepayment of insurance for 24 months beginning December 1. Thus, the insurance expense for this month is $100 ($2,400 ÷ 24).

19. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(b)
Insurance Expense (b) 100
Accounts are added as needed.

20. (c) The Unearned Rent account has a credit balance of $360, which represents the receipt of three-months’ rent beginning with December 1. Thus, the rent revenue for December is $120.
FOR RENT

21. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(c)
Insurance Expense (b) 100
Rent Revenue (c) 120

22. (d) Wages accrued but not paid at the end of December total $250.

23. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(d)
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)

24. (e) Fees accrued at the end of December, but not recorded, total $500.

25. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340
Wages Expense 4,275 (d)
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
(e)
(e)
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)

26. (f) Depreciation of the office equipment is $50 for December.

27. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220 (e)
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340 (e) 500
Wages Expense 4,275 (d)
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)
Depreciation Expense (f)
Accum. Depreciation (f)

28. For the Two Months Ended December 31, 2005
NetSolutions
Work Sheet
For the Two Months Ended December 31, 2005
Adjusted
Trial Balance Adjustments Trial Balance
To make more space, let’s remove the heading.
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Cash 2,065
Accounts Receivable 2,220 (e)
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340 (e) 500
Wages Expense 4,275 (d)
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)
Depreciation Expense (f)
Accum. Depreciation (f)

29. Summed and ruled 31 Cash 2,065 Accounts Receivable 2,220 (e) 500
Adjusted
Trial Balance Adjustments Trial Balance 31
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2,065
Accounts Receivable 2,220 (e)
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340 (e) 500
Wages Expense 4,275 (d)
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)
Depreciation Expense (f)
Accum. Depreciation (f)
2,260 2,260
Summed and ruled

30. Next, the unadjusted Trial Balance columns and the Adjustments columns are combined to determine the amounts displayed in the Adjusted Trial Balance.

31. 33 Cash 2,065 Accounts Receivable 2,220 (e) 500
Adjusted
Trial Balance Adjustments Trial Balance 33
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2,065
Accounts Receivable 2,220 (e)
Supplies 2,000 (a) 1,240
Prepaid Insurance 2,400 (b) Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 360 (c)
Chris Clark, Capital 25,000
Chris Clark, Drawing 4,000
Fees Earned 16,340 (e) 500
Wages Expense 4,275 (d)
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 800 (a) 1,240
Miscellaneous Expense 455
42,600 42,600
Insurance Expense (b) 100
Rent Revenue (c)
Wages Payable (d)
Depreciation Expense (f)
Accum. Depreciation (f)
2,260 2,260

32. 34 Cash 2,065 2,065 Accounts Receivable 2,220 (e) 500 2,720
Adjusted
Trial Balance Adjustments Trial Balance 34
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2, ,065
Accounts Receivable 2,220 (e) ,720
Supplies 2,000 (a) 1,
Prepaid Insurance 2,400 (b) ,300 Land 20, ,000
Office Equipment 1, ,800
Accounts Payable
Unearned Rent 360 (c)
Chris Clark, Capital 25, ,000
Chris Clark, Drawing 4, ,000
Fees Earned 16,340 (e) ,840
Wages Expense 4,275 (d) ,525
Rent Expense 1, ,600
Utilities Expense
Supplies Expense 800 (a) 1,240 2,040
Miscellaneous Expense
42,600 42,600
Insurance Expense (b)
Rent Revenue (c)
Wages Payable (d)
Depreciation Expense (f)
Accum. Depreciation (f)
2,260 2,260 43,400 43,400

33. The Work Sheet
Adjusted TB
Income State.
Balance Sheet
Accounts Dr Cr Dr Cr Dr Cr
Revenue and expense balances in the Adjusted Trial Balance column are extended to the Income Statement column.

34. The Work Sheet
Adjusted TB
Income State.
Balance Sheet
Accounts Dr Cr Dr Cr Dr Cr
Asset, liability, owner’s equity, and drawing balances in the Adjusted Trial Balance column are extended to the Balance Sheet column.

35. To make room on the slides for the Income statement and Balance Sheet columns, the Trial Balance and Adjustments columns have been removed.

36. 38 Cash 2,065 Accounts Receivable 2,720 Supplies 760
Adjusted
Trial Balance Income Statement Balance Sheet 38
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2,065
Accounts Receivable 2,720
Supplies 760
Prepaid Insurance 2,300
Land 20,000
Office Equipment 1,800
Accounts Payable 900
Unearned Rent 240
Chris Clark, Capital 25, Chris Clark, Drawing 4,000
Fees Earned 16,840
Wages Expense 4,525
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 2,040
Miscellaneous Expense 455
Insurance Expense 100
Rent Revenue 120
Wages Payable 250
Depreciation Expense 50
Accum. Depreciation ,400 43,400

37. Now, let’s extend the balances from the Adjusted Trial Balance column.

38. 40 Cash 2,065 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760
Adjusted
Trial Balance Income Statement Balance Sheet 40
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2, ,065
Accounts Receivable 2, ,720
Supplies
Prepaid Insurance 2, ,300
Land 20, ,000
Office Equipment 1, ,800
Accounts Payable
Unearned Rent
Chris Clark, Capital 25, ,000 Chris Clark, Drawing 4, ,000
Fees Earned 16, ,840
Wages Expense 4,525 4,525
Rent Expense 1,600 1,600
Utilities Expense
Supplies Expense 2,040 2,040
Miscellaneous Expense
Insurance Expense
Rent Revenue
Wages Payable
Depreciation Expense
Accum. Depreciation ,400 43,400

39. These four columns are summed.

40. 42 Cash 2,065 2,065 Accounts Receivable 2,720 2,720 Supplies 760 760
Adjusted
Trial Balance Income Statement Balance Sheet 42
Account Title Debit Credit Debit Credit Debit Credit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Cash 2, ,065
Accounts Receivable 2, ,720
Supplies
Prepaid Insurance 2, ,300
Land 20, ,000
Office Equipment 1, ,800
Accounts Payable
Unearned Rent
Chris Clark, Capital 25, ,000 Chris Clark, Drawing 4, ,000
Fees Earned 16, ,840
Wages Expense 4,525 4,525
Rent Expense 1,600 1,600
Utilities Expense
Supplies Expense 2,040 2,040
Miscellaneous Expense
Insurance Expense
Rent Revenue
Wages Payable
Depreciation Expense
Accum. Depreciation ,400 43,400 9,755 16,960 33,645 26,440

41. The difference between the Income Statement column totals is the net income (or net loss) for the period.

42. The difference between the Balance Sheet column totals is also the income (or net loss) for the period.

43. Income Statement Balance Sheet
9,755 16,960 33,645 26,440
7, ,205
16,960 16,960 33,645 33,645
Net Income
Net Income

44. NetSolutions Income Statement For Two Months Ended December 31, 2005
Fees earned $16,840
Rent revenue Total revenues $16,960
Expenses:
Wages expense $ 4,525
Supplies expense 2,040
Rent expense 1,600
Utilities expense 985
Insurance expense 100
Depreciation expense 50
Miscellaneous expense 455
Total expenses 9,755
Net income $ 7,205
Every amount on this income statement was taken from the Income Statement column of the work sheet.

45. From the Balance Sheet debit column of the work sheet.
NetSolutions Statement of Owner’s Equity For the Two Months Ended December 31, 2005
Chris Clark, Capital, November 1, $
Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, Capital, December 31, $28,205
From the Balance Sheet debit column of the work sheet.
Either from the income statement or the work sheet.

46. NetSolutions Balance Sheet December 31, 2005
Assets Liabilities
Current assets: Current liabilities:
Cash $ 2,065 Accounts payable $900
Accounts receivable 2,720 Wages payable 250
Supplies Unearned rent 240
Prepaid insurance ,300 Total liabilities $ 1,390
Total current assets $ 7,845
Property, plant, and
equipment:
Land $20,000
Office equip. $1,800
Less accum.
depreciation , Owner’s Equity
Total property, plant Chris Clark, Capital 28,205
and equipment ,750 Total liabilities and
Total assets $29,595 owner’s equity $29,595
From the Statement of Owner’s Equity

47. Adjusting and Closing Entries
Adjusting entries are recorded in the journal at the end of the accounting period.

48. Adjusting and Closing Entries
If a work sheet has been prepared, the data for these entries are in the Adjustments columns.

49. 2 1 3 4 The Closing Process Income Summary
Expenses are transferred to Income Summary 1
Revenues are transferred to Income Summary 3
Net Income or Net Loss is transferred to Owner’s Capital
OWNER’S CAPITAL 4
Drawings are transferred to Owner’s Capital

50. Adjusting and Closing Entries
Income Summary 2
Expenses are transferred to Income Summary 1
Revenues are transferred to Income Summary
The Income Summary account does not appear on the financial statements. 3
Net Income or Net Loss is transferred to Owner’s Capital
OWNER’S CAPITAL 4
Drawings are transferred to Owner’s Capital

51. Miscellaneous Expense
The Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Income Summary
Rent Revenue
Bal. 120
Note: The balances shown are adjusted balances before closing. The following sequence demonstrates the closing process.
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000

52. Miscellaneous Expense
The Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Income Summary
16,840
16,960
Rent Revenue
120
Bal. 120
Step 1
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Debit each revenue account for the amount of its balance, and credit Income Summary for the total revenue.

53. Miscellaneous Expense
The Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
455
100
2,040
985 50
1,600
4,525
Income Summary
9,775
16,960
Step 2
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Debit Income Summary for the total expenses and credit each expense account for its balance.

54. Miscellaneous Expense
The Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
455
100
2,040
985 50
1,600
4,525
Income Summary
9,775
16,960
7,205
Step 3
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Debit Income Summary for the amount of its balance (in this case, the net income) and credit the capital account.
7,205

55. Miscellaneous Expense
The Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
455
100
2,040
985 50
1,600
4,525
Income Summary
9,775
16,960
7,205
Step 4
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Debit the capital account for the balance of the drawing account, and credit drawing for the same amount.
4,000
7,205
4,000

56. Miscellaneous Expense
Review of the Closing Process
Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,480
120
445
100
2,040
985 50
1,600
4,525
4,525
1,600 50
985
2,040
100
455
Income Summary
16,840
120
16,960
9,775
9,775
16,960
7,205
7,205
Chris Clark, Capital
Bal. 25,000
Chris Clark, Drawing
Bal. 4,000
Close Revenues
4,000
4,000
Close Expenses
7,205
7,205
Close Income Summary
Close Drawing
4,000
4,000

57. After the closing entries are posted, all of the temporary accounts have zero balances.

58. Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accumulated Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital

59. Financial Analysis for NetSolutions
Working Capital =
Current Assets –
Current Liabilities
Working Capital =
$7,845 –
$1,390
Working Capital =
$6,455

60. Financial Analysis for NetSolutions
Current Ratio =
Current Assets ÷
Current Liabilities
Current Ratio =
$7,845 ÷
$1,390
Current Ratio =
5.6

61. Financial Analysis for NetSolutions
This ratio implies that NetSolutions is able to pay its current liabilities.

62. Financial Analysis for NetSolutions
Current ratio =
Current Assets ÷
Current Liabilities
Current ratio =
$7,845 ÷
$1,390
Current ratio =
5.6

63. Financial Analysis for NetSolutions
NetSolutions can use the current ratio to make comparisons across companies and with industry averages.

64. Chapter 4
The End