id stringlengths 36 36 | embedding list | document stringlengths 70 999 | metadata stringlengths 691 694 |
|---|---|---|---|
d7280431-591c-4075-9597-fe76a411ffb6 | [
0.013700015842914581,
0.03198159113526344,
-0.05037650838494301,
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0.019502855837345123,
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0.037822384387254715,
0.03131987154483795,
0.0424405038356781,
-0.012232418172061443,
0.02943870984017849,
-0.010621828958392143,
-0.02457304671406746,
-0.0050... | Elaine Pofeldt. “5 Ways to Tackle the Problem That Kills One of Every Four Small Businesses.” Money. May 19, 2015. http://time.com/money/
1
3888448/cash-flow-small-business-startups/
310
Chapter 5 Completing the Accounting Cycle
becoming insolvent because bills cannot be paid on time and assets need to be written down. When
Lehman Brothers could not timely pay their bills in 2008, it went bankrupt, sending a shock throughout
the entire banking system. Accountants need to understand the differences between net worth, equity,
liquidity, and solvency, and be able to inform stakeholders of their organization’s actual financial
position, not just the recorded numbers on the balance sheet.
Two calculations a company might use to test for liquidity are working capital and the current ratio. Working
capital, which was first described in Introduction to Financial Statements, is found by taking the difference
between current assets and current liabilities. | {"creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader"} |
7c1ea92b-bd2e-459a-a8ea-dade8957e073 | [
0.03831648826599121,
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-0.05672500655055046,
-0.0339968204498291,
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0.001353721716441214,
0.04196741804480553,
0.04127579182386398,
0.010667376220226288,
-0.04011594... | capital, which was first described in Introduction to Financial Statements, is found by taking the difference
between current assets and current liabilities.
A positive outcome means the company has enough current assets available to pay its current liabilities or
current debts. A negative outcome means the company does not have enough current assets to cover its
current liabilities and may have to arrange short-term financing. Though a positive working capital is
preferred, a company needs to make sure that there is not too much of a difference between current assets
and current liabilities. A company that has a high working capital might have too much money in current
assets that could be used for other company investments. Things such as industry and size of a company will
dictate what type of margin is best.
Let’s consider Printing Plus and its working capital (Figure 5.13). | {"creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7, "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true, "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529"} |
9b1617c2-37ad-4e93-a09a-dc69a09ab775 | [
-0.008716506883502007,
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0.009508662857115269,
0.05080236867070198,
-0.0022813663817942142,
0.02357279695570469,
0.040400613099336624,
0.010486816056072712,
0.006718662101775408,
-0.... | dictate what type of margin is best.
Let’s consider Printing Plus and its working capital (Figure 5.13).
2 Matt Johnson. “Revisiting the Lehman Brothers Collapse, the Business of Banking and Its Inherent Crises.” Coinmonks. February 1, 2018.
https://medium.com/coinmonks/revisiting-the-lehman-brothers-collapse-fb18769d6cf8
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
311
Figure 5.13
Balance Sheet for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-
NC-SA 4.0 license)
Printing Plus’s current assets include cash, accounts receivable, interest receivable, and supplies. Their current
liabilities include accounts payable, salaries payable, and unearned revenue. The following is the computation
of working capital:
Working capital = $26,540 – $5,400 = $21,140
This means that you have more than enough working capital to pay the current liabilities your company has | {"total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)", "file_type": ".pdf", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
7ef8ccc8-9174-4d36-ac3c-870c0c7e9d9d | [
0.0375540629029274,
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0.03277330473065376,
-0.004892878234386444,
0.024092290550470352,
0.04785940423607826,
-0.013099751435220242,
-0.0048058778047561646,
-0... | of working capital:
Working capital = $26,540 – $5,400 = $21,140
This means that you have more than enough working capital to pay the current liabilities your company has
recorded. This figure may seem high, but remember that this is the company’s first month of operations and
this much cash may need to be available for larger, long-term asset purchases. However, there is also the
possibility that the company might choose to identify long-term financing options for the acquisition of
expensive, long-term assets, assuming that it can qualify for the increased debt.
Notice that part of the current liability calculation is unearned revenue. If a company has a surplus of
unearned revenue, it can sometimes get away with less working capital, as it will need less cash to pay its bills.
However, the company must be careful, since the cash was recorded before providing the services or products | {"moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "uploaded_via": "batch_uploader", "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf"} |
69b8e604-a526-493c-ae53-cbd948052c3f | [
-0.06719639897346497,
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0.0476895272731781,
-0.010833834297955036,
-0.009602125734090805,
-0.09743592888116837,
-0.003287021303549409,
-0.02219618670642376,
-0.00019012059783563018,
-0.019209949299693108,
0.04706832394003868,
0.031975165009498596,
-0.0769280195236206,
0... | However, the company must be careful, since the cash was recorded before providing the services or products
associated with the unearned revenue. This relationship is why the unearned revenue was initially created, and
there often will be necessary cash outflows associated with meeting the terms of the unearned revenue
creation.
Companies with inventory will usually need a higher working capital than a service company, as inventory can
tie up a large amount of a company’s cash with less cash available to pay its bills. Also, small companies will
normally need a higher working capital than larger companies, because it is harder for smaller companies to
get loans, and they usually pay a higher interest rate.
312
Chapter 5 Completing the Accounting Cycle
L I N K T O L E A R N I N G
PricewaterhouseCoopers (PwC) released its 2015 Annual Global Working Capital Survey
(https://openstax.org/l/50PwC2015WorCap) which is a detailed study on working capital. Though the | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7, "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00"} |
ba289bf0-dc9b-4855-86d8-3db36f9c9860 | [
0.05190381407737732,
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-0.01737920194864273,
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0.0464298352599144,
-0.03641299158334732,
-0.027663862332701683,
-0.0020574103109538555,
-0.054557885974645615,
-0.023694481700658798,
0.013831781223416328,
0.013219292275607586,
-0.023872317746281624,
... | PricewaterhouseCoopers (PwC) released its 2015 Annual Global Working Capital Survey
(https://openstax.org/l/50PwC2015WorCap) which is a detailed study on working capital. Though the
report does not show the working capital calculation you just learned, there is very interesting
information about working capital in different industries, business sizes, and locations. Take a few
minutes and peruse this document.
The current ratio (also known as the working capital ratio), which was first described in Introduction to
Financial Statements, tells a company how many times over company current assets can cover current
liabilities. It is found by dividing current assets by current liabilities and is calculated as follows:
For example, if a company has current assets of $20,000 and current liabilities of $10,000, its current ratio is
$20,000/$10,000 = two times. This means the company has enough current assets to cover its current liabilities | {"total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true} |
2ad3afc8-b6e0-4c4f-8f97-d0a9672a72a2 | [
-0.03424476832151413,
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-0.07759653031826019,
-0.020947670564055443,
-0.0006765049765817821,
-0.00420345226302743,
-0.012575079686939716,
0.09809671342372894,
-0.053462717682123184,
0.014884251169860363,
0.03738629072904587,
0.061872463673353195,
0.01569794863462448,
0... | $20,000/$10,000 = two times. This means the company has enough current assets to cover its current liabilities
twice. Ideally, many companies would like to maintain a 1.5:2 times current assets over current liabilities ratio.
However, depending on the company’s function or purpose, an optimal ratio could be lower or higher than
the previous recommendation. For example, many utilities do not have large fluctuations in anticipated
seasonal current ratios, so they might decide to maintain a current ratio of 1.25:1.5 times current assets over
current liabilities ratio, while a high-tech startup might want to maintain a ratio of 2.5:3 times current assets
over current liabilities ratio.
The current ratio for Printing Plus is $26,540/$5,400 = 4.91 times. That is a very high current ratio, but since the
business was just started, having more cash might allow the company to make larger purchases while still | {"uploaded_via": "batch_uploader", "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "batch_upload": true, "total_pages": 1055, "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529"} |
7d3cabf0-b7d7-4e57-9172-a6353fc74b39 | [
-0.009466927498579025,
-0.02683532051742077,
-0.06292043626308441,
-0.07368585467338562,
0.004967262968420982,
0.011647847481071949,
-0.08817155659198761,
-0.0014050825266167521,
0.05112080276012421,
-0.02656116522848606,
0.014086834155023098,
0.07342948019504547,
-0.04152526706457138,
0.0... | business was just started, having more cash might allow the company to make larger purchases while still
paying its liabilities. However, this ratio might be a result of short-term conditions, so the company is advised
to still plan on maintaining a ratio that is considered both rational and not too risky.
Using ratios for a single year does not provide a broad picture. A company will get much better information if
it compares the working capital and current ratio numbers for several years so it can see increases, decreases,
and where numbers remain fairly consistent. Companies can also benefit from comparing this financial data to
that of other companies in the industry.
E T H I C A L C O N S I D E R A T I O N S
Computers Still Use Debits and Credits: Check behind the Dashboard for Fraud
Newly hired accountants are often sat at a computer to work off of a dashboard, which is a computer | {"batch_upload": true, "file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "file_name": "FinancialAccounting-OP.pdf", "file_type": ".pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "moddate": "2020-08-05T15:26:11-05:00", "total_pages": 1055, "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
b87e8e59-a0ad-4900-8c25-0eee7f75413a | [
-0.03540579974651337,
0.004946570843458176,
-0.06484672427177429,
-0.0597376748919487,
-0.017926964908838272,
-0.0362471267580986,
0.06276892870664597,
-0.030996885150671005,
0.10012812167406082,
0.04803180694580078,
0.02139991708099842,
0.026371214538812637,
0.022119272500276566,
-0.09485... | Computers Still Use Debits and Credits: Check behind the Dashboard for Fraud
Newly hired accountants are often sat at a computer to work off of a dashboard, which is a computer
screen where entries are made into the accounting system. New accountants working with modern
accounting software may not be aware that their software uses the debit and credit system you learned
about, and that the system may automatically close the books without the accountant’s review of closing
entries. Manually closing the books gives accountants a chance to review the balances of different
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
313
accounts; if accountants do not review the entries, they will not know what is occurring in the accounting
system or in their organization’s financial statements.
Many accounting systems automatically close the books if the command is made in the system. While | {"file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true} |
1a078011-c1c4-4952-9239-115978666ec4 | [
-0.07864497601985931,
0.09080485254526138,
-0.08911862969398499,
-0.060432069003582,
-0.06095272675156593,
0.00968954712152481,
0.11437254399061203,
-0.01068942528218031,
0.056903839111328125,
0.058840494602918625,
0.01266341470181942,
-0.03879246860742569,
0.02910039760172367,
-0.07539321... | system or in their organization’s financial statements.
Many accounting systems automatically close the books if the command is made in the system. While
debits and credits are being entered and may not have been reviewed, the system can be instructed to
close out the revenue and expense accounts and create an Income Statement.
A knowledgeable accountant can review entries within the software’s audit function. The accountant will
be able to look at every entry, its description, both sides of the entry (debit and credit), and any changes
made in the entry. This review is important in determining if any incorrect entry was either a mistake or
fraud. The accountant can see who made the entry and how the entry occurred in the accounting system.
To ensure the integrity of the system, each person working in the system must have a unique user
identification, and no users may know others’ passwords. If there is an entry or updated entry, the | {"batch_upload": true, "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055} |
5c0f7df0-e58e-4902-8d64-466b55088f6c | [
-0.06834683567285538,
0.07550828158855438,
-0.0788787230849266,
-0.08681196719408035,
-0.04107695072889328,
0.023530006408691406,
0.0473194494843483,
-0.030149009078741074,
0.03324124589562416,
-0.027880989015102386,
0.06023554131388664,
0.02592800185084343,
0.06752044707536697,
-0.0654229... | To ensure the integrity of the system, each person working in the system must have a unique user
identification, and no users may know others’ passwords. If there is an entry or updated entry, the
accountant will be able to see the entry in the audit function of the software. If an employee has changed
expense items to pay his or her personal bills, the accountant can see the change. Similarly, changes in
transaction dates can be reviewed to determine whether they are fraudulent. Professional accountants
know what goes on in their organization’s accounting system.
5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
We have gone through the entire accounting cycle for Printing Plus with the steps spread over three chapters.
Let’s go through the complete accounting cycle for another company here. The full accounting cycle diagram
is presented in Figure 5.14.
314
Chapter 5 Completing the Accounting Cycle
Figure 5.14 | {"creator": "DocBook XSL Stylesheets V1.79.1", "batch_upload": true, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "total_pages": 1055, "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "file_type": ".pdf", "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creationdate": "2019-04-24T10:32:54-05:00"} |
3affa27c-a8b5-4d39-bd45-42c2521792fe | [
-0.03702642768621445,
0.010168087668716908,
-0.01662231609225273,
-0.048586469143629074,
-0.10076429694890976,
-0.011405895464122295,
0.009757734835147858,
0.019757403060793877,
-0.010663763619959354,
-0.005751190707087517,
0.10894391685724258,
-0.013074076734483242,
0.011070859618484974,
... | Let’s go through the complete accounting cycle for another company here. The full accounting cycle diagram
is presented in Figure 5.14.
314
Chapter 5 Completing the Accounting Cycle
Figure 5.14
The Accounting Cycle. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0
license)
We next take a look at a comprehensive example that works through the entire accounting cycle for Clip’em
Cliff. Clifford Girard retired from the US Marine Corps after 20 years of active duty. Cliff decides it would be fun
to become a barber and open his own shop called “Clip’em Cliff.” He will run the barber shop out of his home
for the first couple of months while he identifies a new location for his shop.
Since his Marines career included several years of logistics, he is also going to operate a consulting practice
where he will help budding barbers create a barbering practice. He will charge a flat fee or a per hour charge. | {"batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7} |
bdb48cba-eedd-4f65-bdb4-7eb0225d80f1 | [
-0.03032860904932022,
-0.006751972250640392,
-0.008221282623708248,
-0.09517347067594528,
-0.1257815659046173,
0.0030795997008681297,
0.022577933967113495,
0.08323033899068832,
-0.04927024617791176,
0.03701642528176308,
0.0907379612326622,
-0.007509224582463503,
0.005787692964076996,
-0.03... | where he will help budding barbers create a barbering practice. He will charge a flat fee or a per hour charge.
His consulting practice will be recognized as service revenue and will provide additional revenue while he
develops his barbering practice.
He obtains a barber’s license after the required training and is ready to open his shop on August 1. Table 5.2
shows his transactions from the first month of business.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
315
Transactions for August
Date
Transaction
Aug. 1
Cliff issues $70,000 shares of common stock for cash.
Aug. 3
Cliff purchases barbering equipment for $45,000; $37,500 was paid immediately with cash, and
the remaining $7,500 was billed to Cliff with payment due in 30 days. He decided to buy used
equipment, because he was not sure if he truly wanted to run a barber shop. He assumed that | {"uploaded_via": "batch_uploader", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "file_size_mb": 156.7} |
ccf979a3-db4a-4169-8830-60371469b1d3 | [
-0.07405080646276474,
0.01005493476986885,
-0.0075300466269254684,
-0.08352289348840714,
-0.09443972259759903,
-0.03185189142823219,
0.04152737557888031,
0.06914018839597702,
-0.04783051088452339,
0.045502275228500366,
0.06686083972454071,
-0.04850348085165024,
0.00216494919732213,
-0.0520... | the remaining $7,500 was billed to Cliff with payment due in 30 days. He decided to buy used
equipment, because he was not sure if he truly wanted to run a barber shop. He assumed that
he will replace the used equipment with new equipment within a couple of years.
Aug. 6
Cliff purchases supplies for $300 cash.
Aug. 10
Cliff provides $4,000 in services to a customer who asks to be billed for the services.
Aug. 13
Cliff pays a $75 utility bill with cash.
Aug. 14
Cliff receives $3,200 cash in advance from a customer for services not yet rendered.
Aug. 16
Cliff distributed $150 cash in dividends to stockholders.
Aug. 17
Cliff receives $5,200 cash from a customer for services rendered.
Aug. 19
Cliff paid $2,000 toward the outstanding liability from the August 3 transaction.
Aug. 22
Cliff paid $4,600 cash in salaries expense to employees.
Aug. 28
The customer from the August 10 transaction pays $1,500 cash toward Cliff’s account.
Table 5.2 | {"uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "batch_upload": true, "file_size_mb": 156.7, "file_name": "FinancialAccounting-OP.pdf"} |
bab030aa-5568-4cde-879d-ff385e6798ff | [
-0.060006339102983475,
0.01341752614825964,
0.012780928052961826,
-0.10645640641450882,
-0.09420108795166016,
-0.018330063670873642,
0.05622798204421997,
0.0918380469083786,
-0.03350739926099777,
0.04279500991106033,
0.11065394431352615,
-0.01835060864686966,
-0.03963874280452728,
-0.05246... | Aug. 22
Cliff paid $4,600 cash in salaries expense to employees.
Aug. 28
The customer from the August 10 transaction pays $1,500 cash toward Cliff’s account.
Table 5.2
Transaction 1: On August 1, 2019, Cliff issues $70,000 shares of common stock for cash.
Analysis:
• Clip’em Cliff now has more cash. Cash is an asset, which is increasing on the debit side.
• When the company issues stock, this yields a higher common stock figure than before issuance. The
common stock account is increasing on the credit side.
Transaction 2: On August 3, 2019, Cliff purchases barbering equipment for $45,000; $37,500 was paid
immediately with cash, and the remaining $7,500 was billed to Cliff with payment due in 30 days.
316
Analysis:
Chapter 5 Completing the Accounting Cycle
• Clip’em Cliff now has more equipment than before. Equipment is an asset, which is increasing on the
debit side for $45,000.
• Cash is used to pay for $37,500. Cash is an asset, decreasing on the credit side. | {"file_type": ".pdf", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "creationdate": "2019-04-24T10:32:54-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "batch_upload": true, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)"} |
187e4fb9-ebe4-444f-aaa9-d6f07abb2266 | [
-0.061957813799381256,
0.00715166749432683,
-0.014821421355009079,
-0.10621444135904312,
-0.05687457695603371,
-0.03164071589708328,
0.09925419837236404,
0.07213594764471054,
0.020884528756141663,
0.035359665751457214,
0.09069555252790451,
-0.01995559222996235,
-0.007500968873500824,
-0.01... | debit side for $45,000.
• Cash is used to pay for $37,500. Cash is an asset, decreasing on the credit side.
• Cliff asked to be billed, which means he did not pay cash immediately for $7,500 of the equipment.
Accounts Payable is used to signal this short-term liability. Accounts payable is increasing on the credit
side.
Transaction 3: On August 6, 2019, Cliff purchases supplies for $300 cash.
Analysis:
• Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• Supplies, an asset account, is increasing on the debit side.
Transaction 4: On August 10, 2019, provides $4,000 in services to a customer who asks to be billed for the
services.
Analysis:
• Clip’em Cliff provided service, thus earning revenue. Revenue impacts equity, and increases on the credit
side.
• The customer did not pay immediately for the service and owes Cliff payment. This is an Accounts | {"file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "total_pages": 1055, "batch_upload": true, "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
10a616df-ccd0-448a-9ef7-e32f9ed9c0d5 | [
-0.06522374600172043,
0.013753768056631088,
0.023505570366978645,
-0.08016536384820938,
-0.048566654324531555,
-0.047321517020463943,
0.06826064735651016,
0.03761705756187439,
0.028766345232725143,
0.03989250957965851,
0.09245854616165161,
-0.03928346931934357,
0.007335769943892956,
-0.047... | side.
• The customer did not pay immediately for the service and owes Cliff payment. This is an Accounts
Receivable for Cliff. Accounts Receivable is an asset that is increasing on the debit side.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
317
Transaction 5: On August 13, 2019, Cliff pays a $75 utility bill with cash.
Analysis:
• Clip’em Cliff now has less cash than before. Cash is an asset that is decreasing on the credit side.
• Utility payments are billed expenses. Utility Expense negatively impacts equity, and increases on the debit
side.
Transaction 6: On August 14, 2019, Cliff receives $3,200 cash in advance from a customer for services to be
rendered.
Analysis:
• Clip’em Cliff now has more cash. Cash is an asset, which is increasing on the debit side.
• The customer has not yet received services but already paid the company. This means the company owes | {"moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_type": ".pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "file_name": "FinancialAccounting-OP.pdf"} |
1f4d4d70-ea97-4216-bfd1-7eb557b09de3 | [
-0.0736682265996933,
-0.01933686062693596,
-0.001869425643235445,
-0.09106503427028656,
-0.024085253477096558,
-0.040550295263528824,
0.08004859834909439,
0.06811035424470901,
0.07741529494524002,
0.03043012134730816,
0.12769043445587158,
0.025194237008690834,
-0.03380538523197174,
-0.0356... | • Clip’em Cliff now has more cash. Cash is an asset, which is increasing on the debit side.
• The customer has not yet received services but already paid the company. This means the company owes
the customer the service. This creates a liability to the customer, and revenue cannot yet be recognized.
Unearned Revenue is the liability account, which is increasing on the credit side.
318
Chapter 5 Completing the Accounting Cycle
Transaction 7: On August 16, 2019, Cliff distributed $150 cash in dividends to stockholders.
Analysis:
• Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• When the company pays out dividends, this decreases equity and increases the dividends account.
Dividends increases on the debit side.
Transaction 8: On August 17, 2019, Cliff receives $5,200 cash from a customer for services rendered.
Analysis:
• Clip’em Cliff now has more cash than before. Cash is an asset, which is increasing on the debit side. | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true} |
e748f90a-a0da-4601-891f-d8e3feec3632 | [
-0.04670776054263115,
0.027872763574123383,
-0.016721421852707863,
-0.09833190590143204,
-0.019488099962472916,
-0.02501225471496582,
0.06224147975444794,
0.05547717213630676,
0.05347590148448944,
0.02579309418797493,
0.0709008201956749,
0.005219800863415003,
-0.012609769590198994,
-0.0400... | Analysis:
• Clip’em Cliff now has more cash than before. Cash is an asset, which is increasing on the debit side.
• Service was provided, which means revenue can be recognized. Service Revenue increases equity. Service
Revenue is increasing on the credit side.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
319
Transaction 9: On August 19, 2019, Cliff paid $2,000 toward the outstanding liability from the August 3
transaction.
Analysis:
• Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• Accounts Payable is a liability account, decreasing on the debit side.
Transaction 10: On August 22, 2019, Cliff paid $4,600 cash in salaries expense to employees.
Analysis:
• Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• When the company pays salaries, this is an expense to the business. Salaries Expense reduces equity by | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "batch_upload": true, "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "uploaded_via": "batch_uploader", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
f09cc891-4c67-4fd6-a29f-7b383525bf54 | [
-0.047762610018253326,
0.04674309119582176,
-0.011006570421159267,
-0.07568753510713577,
-0.026385877281427383,
-0.022801583632826805,
0.051269952207803726,
0.058664530515670776,
0.013526433147490025,
0.03314846754074097,
0.07784488797187805,
0.00017943816783372313,
-0.012216262519359589,
... | • Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• When the company pays salaries, this is an expense to the business. Salaries Expense reduces equity by
increasing on the debit side.
320
Chapter 5 Completing the Accounting Cycle
Transaction 11: On August 28, 2019, the customer from the August 10 transaction pays $1,500 cash toward
Cliff’s account.
Analysis:
• The customer made a partial payment on their outstanding account. This reduces Accounts Receivable.
Accounts Receivable is an asset account decreasing on the credit side.
• Cash is an asset, increasing on the debit side.
The complete journal for August is presented in Figure 5.15.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
321
Figure 5.15
Journal Entries for August. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA
4.0 license) | {"creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "total_pages": 1055, "file_type": ".pdf", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529"} |
1ad25191-5cb8-44f4-a684-da09a86ec3ef | [
-0.07181894779205322,
0.0544993095099926,
-0.03980044275522232,
-0.09311921894550323,
-0.019907398149371147,
-0.032493509352207184,
0.06614205241203308,
0.07036684453487396,
0.09547138214111328,
0.0293179489672184,
0.0654476210474968,
-0.0259106308221817,
0.03942561522126198,
-0.0628701001... | 321
Figure 5.15
Journal Entries for August. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA
4.0 license)
Once all journal entries have been created, the next step in the accounting cycle is to post journal information
to the ledger. The ledger is visually represented by T-accounts. Cliff will go through each transaction and
transfer the account information into the debit or credit side of that ledger account. Any account that has
more than one transaction needs to have a final balance calculated. This happens by taking the difference
between the debits and credits in an account.
Clip’em Cliff’s ledger represented by T-accounts is presented in Figure 5.16.
322
Chapter 5 Completing the Accounting Cycle
Figure 5.16
T-Accounts for August. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0
license)
You will notice that the sum of the asset account balances in Cliff’s ledger equals the sum of the liability and | {"file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00"} |
d0d56ecf-eea4-4917-95e8-21f89ca9b2ce | [
-0.050084516406059265,
0.030900167301297188,
-0.05543917417526245,
-0.1132502481341362,
0.0017400564393028617,
-0.03370358422398567,
0.03472016379237175,
0.059756629168987274,
0.06750237196683884,
0.052418310195207596,
0.06735126674175262,
-0.05105733498930931,
0.01926124468445778,
-0.0750... | license)
You will notice that the sum of the asset account balances in Cliff’s ledger equals the sum of the liability and
equity account balances at $83,075. The final debit or credit balance in each account is transferred to the
unadjusted trial balance in the corresponding debit or credit column as illustrated in Figure 5.17.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
323
Figure 5.17 Unadjusted Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
Once all of the account balances are transferred to the correct columns, each column is totaled. The total in
the debit column must match the total in the credit column to remain balanced. The unadjusted trial balance
for Clip’em Cliff appears in Figure 5.18.
Figure 5.18 Unadjusted Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, | {"file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "batch_upload": true, "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
ce53ce8b-86d3-4e36-8e25-bc651099b10a | [
-0.0802115648984909,
0.010328728705644608,
-0.010921251960098743,
-0.06988181173801422,
-0.018813244998455048,
-0.03305353224277496,
0.020127693191170692,
0.08769288659095764,
0.03028622269630432,
0.047324441373348236,
0.10525713860988617,
0.006933031603693962,
-0.010452527552843094,
-0.08... | for Clip’em Cliff appears in Figure 5.18.
Figure 5.18 Unadjusted Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
The unadjusted trial balance shows a debit and credit balance of $87,900. Remember, the unadjusted trial
balance is prepared before any period-end adjustments are made.
On August 31, Cliff has the transactions shown in Table 5.3 requiring adjustment.
324
Chapter 5 Completing the Accounting Cycle
Date
Transaction
August 31 Transactions
Aug. 31
Cliff took an inventory of supplies and discovered that $250 of supplies remain unused at the
end of the month.
Aug. 31
The equipment purchased on August 3 depreciated $2,500 during the month of August.
Aug. 31
Clip’em Cliff performed $1,100 of services during August for the customer from the August 14
transaction.
Aug. 31
Reviewing the company bank statement, Clip’em Cliff discovers $350 of interest earned during | {"uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true} |
7d068ce4-89a3-4f3b-9c29-7faa9e4d8eea | [
-0.03107263147830963,
0.033301014453172684,
-0.011137186549603939,
-0.012760353274643421,
-0.01178072951734066,
-0.030164621770381927,
0.07102561742067337,
0.055328428745269775,
-0.0278489850461483,
0.03618329018354416,
0.10635004937648773,
-0.016734685748815536,
-0.032288867980241776,
-0.... | transaction.
Aug. 31
Reviewing the company bank statement, Clip’em Cliff discovers $350 of interest earned during
the month of August that was previously uncollected and unrecorded. As a new customer for
the bank, the interest was paid by a bank that offered an above-market-average interest rate.
Aug. 31
Unpaid and previously unrecorded income taxes for the month are $3,400. The tax payment was
to cover his federal quarterly estimated income taxes. He lives in a state that does not have an
individual income tax
Table 5.3
Adjusting Transaction 1: Cliff took an inventory of supplies and discovered that $250 of supplies remain
unused at the end of the month.
Analysis:
• $250 of supplies remain at the end of August. The company began the month with $300 worth of supplies.
Therefore, $50 of supplies were used during the month and must be recorded (300 – 250). Supplies is an
asset that is decreasing (credit). | {"total_pages": 1055, "batch_upload": true, "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "uploaded_via": "batch_uploader"} |
a7791711-25f4-49c6-8ad3-3215c90ec32d | [
0.01620076410472393,
0.050538573414087296,
0.046518441289663315,
-0.024635637179017067,
0.007309014443308115,
-0.027085229754447937,
-0.00408674031496048,
0.02471812069416046,
-0.013200382702052593,
0.06218339502811432,
0.053748320788145065,
-0.021283017471432686,
0.09173330664634705,
-0.0... | Therefore, $50 of supplies were used during the month and must be recorded (300 – 250). Supplies is an
asset that is decreasing (credit).
• Supplies is a type of prepaid expense, that when used, becomes an expense. Supplies Expense would
increase (debit) for the $50 of supplies used during August.
Adjusting Transaction 2: The equipment purchased on August 3 depreciated $2,500 during the month of
August.
Analysis:
• Equipment cost of $2,500 was allocated during August. This depreciation will affect the Accumulated
Depreciation–Equipment account and the Depreciation Expense–Equipment account. While we are not
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
325
doing depreciation calculations here, you will come across more complex calculations, such as
depreciation in Long-Term Assets.
• Accumulated Depreciation–Equipment is a contra asset account (contrary to Equipment) and increases | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true} |
c1b89cf1-b17c-42a8-9524-607019a6ef3f | [
-0.061397913843393326,
0.026472294703125954,
0.030211511999368668,
-0.0995488315820694,
-0.0458696112036705,
-0.030474238097667694,
0.06166601553559303,
0.06352728605270386,
0.042460765689611435,
0.033039648085832596,
0.12094134837388992,
0.026120956987142563,
0.022715173661708832,
-0.0525... | depreciation in Long-Term Assets.
• Accumulated Depreciation–Equipment is a contra asset account (contrary to Equipment) and increases
(credit) for $2,500.
• Depreciation Expense–Equipment is an expense account that is increasing (debit) for $2,500.
Adjusting Transaction 3: Clip’em Cliff performed $1,100 of services during August for the customer from the
August 14 transaction.
Analysis:
• The customer from the August 14 transaction gave the company $3,200 in advanced payment for services.
By the end of August the company had earned $1,100 of the advanced payment. This means that the
company still has yet to provide $2,100 in services to that customer.
• Since some of the unearned revenue is now earned, Unearned Revenue would decrease. Unearned
Revenue is a liability account and decreases on the debit side.
• The company can now recognize the $1,100 as earned revenue. Service Revenue increases (credit) for
$1,100. | {"producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "total_pages": 1055, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true, "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
90a9b777-e37c-431a-ab9b-81b5038d12aa | [
-0.052642397582530975,
0.005212009884417057,
-0.03619752079248428,
-0.1429765373468399,
-0.0804968997836113,
-0.03642845153808594,
0.0721251368522644,
0.07125107198953629,
0.0161968432366848,
0.0482165701687336,
0.02323664352297783,
-0.032555777579545975,
-0.019439570605754852,
-0.06506329... | Revenue is a liability account and decreases on the debit side.
• The company can now recognize the $1,100 as earned revenue. Service Revenue increases (credit) for
$1,100.
Adjusting Transaction 4: Reviewing the company bank statement, Clip’em Cliff identifies $350 of interest
earned during the month of August that was previously unrecorded.
Analysis:
•
Interest is revenue for the company on money kept in a money market account at the bank. The company
only sees the bank statement at the end of the month and needs to record as received interest revenue
reflected on the bank statement.
326
Chapter 5 Completing the Accounting Cycle
•
Interest Revenue is a revenue account that increases (credit) for $350.
• Since Clip’em Cliff has yet to collect this interest revenue, it is considered a receivable. Interest Receivable
increases (debit) for $350.
Adjusting Transaction 5: Unpaid and previously unrecorded income taxes for the month are $3,400.
Analysis:
• | {"file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "moddate": "2020-08-05T15:26:11-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting"} |
725b879c-4bc1-48df-81fc-787c0f008f73 | [
-0.043058816343545914,
0.011798392981290817,
-0.007313453126698732,
-0.09410538524389267,
-0.020217860117554665,
0.0076658097095787525,
0.026219895109534264,
0.0560126006603241,
-0.0016834918642416596,
0.026585863903164864,
0.060224007815122604,
0.00513210566714406,
-0.05578583851456642,
-... | increases (debit) for $350.
Adjusting Transaction 5: Unpaid and previously unrecorded income taxes for the month are $3,400.
Analysis:
•
Income taxes are an expense to the business that accumulate during the period but are only paid at
predetermined times throughout the year. This period did not require payment but did accumulate
income tax.
•
Income Tax Expense is an expense account that negatively affects equity. Income Tax Expense increases
on the debit side.
• The company owes the tax money but has not yet paid, signaling a liability. Income Tax Payable is a
liability that is increasing on the credit side.
The summary of adjusting journal entries for Clip’em Cliff is presented in Figure 5.19.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
327
Figure 5.19
Adjusting Journal Entries for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license) | {"producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "creator": "DocBook XSL Stylesheets V1.79.1", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
2654503b-2b3d-4857-b2fd-c5a6116c9bc7 | [
-0.07139801234006882,
0.03162955492734909,
-0.027593467384576797,
-0.07736469805240631,
-0.01784241572022438,
-0.03899572417140007,
0.018214166164398193,
0.04640376567840576,
0.07402937114238739,
0.04333899915218353,
0.07924414426088333,
-0.04433451592922211,
0.0136366356164217,
-0.0410640... | 327
Figure 5.19
Adjusting Journal Entries for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
Now that all of the adjusting entries are journalized, they must be posted to the ledger. Posting adjusting
entries is the same process as posting the general journal entries. Each journalized account figure will transfer
to the corresponding ledger account on either the debit or credit side as illustrated in Figure 5.20.
Figure 5.20
Posting Ledger Entries for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, under
CC BY-NC-SA 4.0 license)
We would normally use a general ledger, but for illustrative purposes, we are using T-accounts to represent
the ledgers. The T-accounts after the adjusting entries are posted are presented in Figure 5.21.
328
Chapter 5 Completing the Accounting Cycle
Figure 5.21
Ledger Entries (in T-Accounts) for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, | {"file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
ecf77606-8b16-4f9b-8905-84568dbc1629 | [
-0.025601083412766457,
0.03458162024617195,
-0.009653781540691853,
-0.0908818244934082,
-0.013748745433986187,
-0.03449687734246254,
0.03988983854651451,
0.07207520306110382,
0.07254163920879364,
0.034378718584775925,
0.07751599699258804,
-0.02295234426856041,
0.020357536152005196,
-0.0978... | Chapter 5 Completing the Accounting Cycle
Figure 5.21
Ledger Entries (in T-Accounts) for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
You will notice that the sum of the asset account balances equals the sum of the liability and equity account
balances at $80,875. The final debit or credit balance in each account is transferred to the adjusted trial
balance, the same way the general ledger transferred to the unadjusted trial balance.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
329
The next step in the cycle is to prepare the adjusted trial balance. Clip’em Cliff’s adjusted trial balance is shown
in Figure 5.22.
Figure 5.22
Adjusted Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, under
CC BY-NC-SA 4.0 license) | {"upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
bbc9ff85-e20c-4892-af5d-afaad5b9be7d | [
-0.025281760841608047,
0.0567958727478981,
-0.020708972588181496,
-0.0541030690073967,
-0.013658011332154274,
0.021513687446713448,
0.03130802512168884,
0.09092589467763901,
0.06500989943742752,
0.03144730255007744,
0.05345519632101059,
-0.04092546924948692,
-0.022377843037247658,
-0.11492... | in Figure 5.22.
Figure 5.22
Adjusted Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, under
CC BY-NC-SA 4.0 license)
The adjusted trial balance shows a debit and credit balance of $94,150. Once the adjusted trial balance is
prepared, Cliff can prepare his financial statements (step 7 in the cycle). We only prepare the income
statement, statement of retained earnings, and the balance sheet. The statement of cash flows is discussed in
detail in Statement of Cash Flows.
To prepare your financial statements, you want to work with your adjusted trial balance.
Remember, revenues and expenses go on an income statement. Dividends, net income (loss), and retained
earnings balances go on the statement of retained earnings. On a balance sheet you find assets, contra assets,
liabilities, and stockholders’ equity accounts.
The income statement for Clip’em Cliff is shown in Figure 5.23.
330
Chapter 5 Completing the Accounting Cycle
Figure 5.23 | {"batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "producer": "Prince 11 (www.princexml.com)", "file_type": ".pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "file_name": "FinancialAccounting-OP.pdf"} |
1d6e7c13-77ff-448e-be30-0d53cec79c21 | [
-0.020485620945692062,
0.043098896741867065,
0.0022158983629196882,
-0.03303392231464386,
0.004860988352447748,
0.01891808956861496,
0.07114632427692413,
0.08075575530529022,
0.07941235601902008,
-0.010291745886206627,
0.09384801238775253,
-0.023899758234620094,
-0.007666935678571463,
-0.0... | liabilities, and stockholders’ equity accounts.
The income statement for Clip’em Cliff is shown in Figure 5.23.
330
Chapter 5 Completing the Accounting Cycle
Figure 5.23
Income Statement for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, under CC
BY-NC-SA 4.0 license)
Note that expenses were only $25 less than revenues. For the first month of operations, Cliff welcomes any
income. Cliff will want to increase income in the next period to show growth for investors and lenders.
Next, Cliff prepares the following statement of retained earnings (Figure 5.24).
Figure 5.24
Statement of Retained Earnings for Clip’em Cliff. (attribution: Copyright Rice University,
OpenStax, under CC BY-NC-SA 4.0 license)
The beginning retained earnings balance is zero because Cliff just began operations and does not have a
balance to carry over to a future period. The ending retained earnings balance is –$125. You probably never | {"moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1"} |
256d6eb1-2521-4a89-90a5-792edec31dab | [
-0.023252949118614197,
0.08259213715791702,
-0.023685786873102188,
-0.0698390007019043,
-0.04720963165163994,
-0.03582009673118591,
0.08312823623418808,
0.05037086084485054,
0.07231799513101578,
0.020463427528738976,
0.07299100607633591,
-0.02030983753502369,
-0.00009895213588606566,
-0.02... | balance to carry over to a future period. The ending retained earnings balance is –$125. You probably never
want to have a negative value on your retained earnings statement, but this situation is not totally unusual for
an organization in its initial operations. Cliff will want to improve this outcome going forward. It might make
sense for Cliff to not pay dividends until he increases his net income.
Cliff then prepares the balance sheet for Clip’em Cliff as shown in Figure 5.25.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
331
Figure 5.25
Balance Sheet for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax, under CC BY-
NC-SA 4.0 license)
The balance sheet shows total assets of $80,875, which equals total liabilities and equity. Now that the financial
statements are complete, Cliff will go to the next step in the accounting cycle, preparing and posting closing | {"creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "file_size_mb": 156.7, "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true, "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)"} |
8c88fac4-0af5-4586-9ee5-76aacb31e1b9 | [
-0.023103492334485054,
0.0620548389852047,
-0.027539340779185295,
-0.08219482749700546,
-0.015910208225250244,
0.024638256058096886,
0.019380250945687294,
0.07882670313119888,
0.006256736349314451,
0.03010616824030876,
0.019063180312514305,
-0.04458203539252281,
-0.03580142557621002,
-0.08... | statements are complete, Cliff will go to the next step in the accounting cycle, preparing and posting closing
entries. To do this, Cliff needs his adjusted trial balance information.
Cliff will only close temporary accounts, which include revenues, expenses, income summary, and dividends.
The first entry closes revenue accounts to income summary. To close revenues, Cliff will debit revenue
accounts and credit income summary.
The second entry closes expense accounts to income summary. To close expenses, Cliff will credit expense
accounts and debit income summary.
332
Chapter 5 Completing the Accounting Cycle
The third entry closes income summary to retained earnings. To find the balance, take the difference between
the income summary amount in the first and second entries (10,650 – 10,625). To close income summary, Cliff
would debit Income Summary and credit Retained Earnings. | {"batch_upload": true, "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_type": ".pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
0f441893-b416-4435-b2bd-310ca94593ae | [
-0.024685995653271675,
0.011358777061104774,
-0.02128445729613304,
-0.04515407979488373,
0.007902446202933788,
0.013792854733765125,
0.059234995394945145,
0.0326065719127655,
0.05844717100262642,
0.021256323903799057,
0.060533929616212845,
-0.023133262991905212,
-0.03131342679262161,
-0.08... | the income summary amount in the first and second entries (10,650 – 10,625). To close income summary, Cliff
would debit Income Summary and credit Retained Earnings.
The fourth closing entry closes dividends to retained earnings. To close dividends, Cliff will credit Dividends,
and debit Retained Earnings.
Once all of the closing entries are journalized, Cliff will post this information to the ledger. The closed accounts
with their final balances, as well as Retained Earnings, are presented in Figure 5.26.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
333
Figure 5.26
Closed Accounts with Final Balances for Clip’em Cliff. (attribution: Copyright Rice University,
OpenStax, under CC BY-NC-SA 4.0 license)
Now that the temporary accounts are closed, they are ready for accumulation in the next period. | {"upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "total_pages": 1055, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "batch_upload": true} |
c9606dcc-ae7c-4cc5-8430-f8441d2c3b33 | [
-0.029686812311410904,
0.010412128642201424,
0.0064739868976175785,
-0.0536067970097065,
-0.016477685421705246,
0.0075777736492455006,
0.013007307425141335,
0.007392246276140213,
0.03240485116839409,
0.052089620381593704,
0.023531628772616386,
0.009068012237548828,
-0.026088634505867958,
-... | OpenStax, under CC BY-NC-SA 4.0 license)
Now that the temporary accounts are closed, they are ready for accumulation in the next period.
The last step for the month of August is step 9, preparing the post-closing trial balance. The post-closing trial
balance should only contain permanent account information. No temporary accounts should appear on this
trial balance. Clip’em Cliff’s post-closing trial balance is presented in Figure 5.27.
334
Chapter 5 Completing the Accounting Cycle
Figure 5.27
Post-Closing Trial Balance for Clip’em Cliff. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
At this point, Cliff has completed the accounting cycle for August. He is now ready to begin the process again
for September, and future periods.
C O N C E P T S I N P R A C T I C E
Reversing Entries
One step in the accounting cycle that we did not cover is reversing entries. Reversing entries can be | {"batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7} |
7ac2ee6e-9014-4473-94ad-eff93843dcad | [
-0.10781753808259964,
0.024746855720877647,
0.06370193511247635,
-0.026929117739200592,
-0.03614893555641174,
0.04665626958012581,
-0.04762416332960129,
0.006673524156212807,
0.02541593462228775,
0.03345830738544464,
0.006622707936912775,
0.019175339490175247,
-0.040265560150146484,
-0.051... | for September, and future periods.
C O N C E P T S I N P R A C T I C E
Reversing Entries
One step in the accounting cycle that we did not cover is reversing entries. Reversing entries can be
made at the beginning of a new period to certain accruals. The company will reverse adjusting entries
made in the prior period to the revenue and expense accruals.
It can be difficult to keep track of accruals from prior periods, as support documentation may not be
readily available in current or future periods. This requires an accountant to remember when these
accruals came from. By reversing these accruals, there is a reduced risk for counting revenues and
expenses twice. The support documentation received in the current or future period for an accrual will
be easier to match to prior revenues and expenses with the reversal.
L I N K T O L E A R N I N G
As we have learned, the current ratio shows how well a company can cover short-term debt with short- | {"upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf", "file_size_mb": 156.7, "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creationdate": "2019-04-24T10:32:54-05:00", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
b69d06af-aade-4e91-8fd5-d25ab6f8edc0 | [
0.028845224529504776,
0.021945809945464134,
-0.02748711220920086,
-0.01753987930715084,
0.13298764824867249,
0.011895133182406425,
-0.0045701623894274235,
0.029673635959625244,
-0.014822847209870815,
-0.02735299803316593,
0.05065039172768593,
0.006496869958937168,
0.028571313247084618,
-0.... | L I N K T O L E A R N I N G
As we have learned, the current ratio shows how well a company can cover short-term debt with short-
term assets. Look through the balance sheet in the 2017 Annual Report for Target (https://openstax.org/
l/50Target2017Bal) and calculate the current ratio. What does the outcome mean for Target?
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
335
T H I N K I T T H R O U G H
Using Liquidity Ratios to Evaluate Financial Performance
You own a landscaping business that has just begun operations. You made several expensive equipment
purchases in your first month to get your business started. These purchases very much reduced your
cash-on-hand, and in turn your liquidity suffered in the following months with a low working capital and
current ratio.
Your business is now in its eighth month of operation, and while you are starting to see a growth in sales, | {"file_size_mb": 156.7, "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
cae7bc63-5d2a-452b-bec1-3d9dad65a25a | [
0.05007028952240944,
-0.019387584179639816,
-0.049584247171878815,
-0.014798727817833424,
0.03275218605995178,
0.009195863269269466,
-0.0012690522707998753,
0.0027240989729762077,
0.02406245842576027,
-0.026937540620565414,
0.020099259912967682,
-0.0016689320327714086,
-0.0495147667825222,
... | current ratio.
Your business is now in its eighth month of operation, and while you are starting to see a growth in sales,
you are not seeing a significant change in your working capital or current ratio from the low numbers in
your early months. What could you attribute to this stagnancy in liquidity? Is there anything you can do
as a business owner to better these liquidity measurements? What will happen if you cannot change
your liquidity or it gets worse?
336
Chapter 5 Completing the Accounting Cycle
Key Terms
classified balance sheet
presents information on your balance sheet in a more informative structure, where
asset and liability categories are divided into smaller, more detailed sections
closing
returning the account to a zero balance
closing entry
prepares a company for the next accounting period by clearing any outstanding balances in
certain accounts that should not transfer over to the next period
current ratio | {"creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "batch_upload": true, "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader"} |
f77805bc-a3fe-4271-b680-6bc496950945 | [
0.016037717461586,
0.01042912807315588,
-0.043911904096603394,
-0.013925612904131413,
0.05737176164984703,
0.02497273124754429,
0.06353801488876343,
0.019633907824754715,
0.03666314482688904,
0.019815152511000633,
0.006338860839605331,
0.005414705257862806,
-0.06279962509870529,
-0.0360796... | closing entry
prepares a company for the next accounting period by clearing any outstanding balances in
certain accounts that should not transfer over to the next period
current ratio
current assets divided by current liabilities; used to determine a company’s liquidity (ability to
meet short-term obligations)
income summary
intermediary between revenues and expenses, and the Retained Earnings account,
storing all the closing information for revenues and expenses, resulting in a “summary” of income or loss
for the period
intangible asset
asset with financial value but no physical presence; examples include copyrights, patents,
goodwill, and trademarks
liquidity
ability to convert assets into cash in order to meet primarily short-term cash needs or emergencies
long-term investment
stocks, bonds, or other types of investments held for more than one operating cycle
or one year, whichever is longer
long-term liability | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "batch_upload": true, "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)"} |
d25654bf-b307-4a63-9534-91dd28114e37 | [
0.020747873932123184,
-0.041101034730672836,
-0.057263705879449844,
-0.046897295862436295,
0.0011791565921157598,
0.029969245195388794,
0.031469542533159256,
-0.007129891775548458,
0.0693381056189537,
0.027241621166467667,
0.058036983013153076,
0.007329160813242197,
-0.04645279422402382,
-... | long-term investment
stocks, bonds, or other types of investments held for more than one operating cycle
or one year, whichever is longer
long-term liability
debt settled outside one year or one operating cycle, whichever is longer
operating cycle
amount of time it takes a company to use its cash to provide a product or service and collect
payment from the customer
permanent (real) account
account that transfers balances to the next period, and includes balance sheet
accounts, such as assets, liabilities, and stockholder’s equity
post-closing trial balance
trial balance that is prepared after all the closing entries have been recorded
property, plant, and equipment
tangible assets (those that have a physical presence) held for more than
one operating cycle or one year, whichever is longer
temporary (nominal) account
account that is closed at the end of each accounting period, and includes
income statement, dividends, and income summary accounts
working capital | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055} |
b2dd53e9-b124-42a0-97c0-eb5231be32fd | [
0.012775751762092113,
0.0024206391535699368,
-0.05387437343597412,
0.005402222741395235,
0.008565197698771954,
0.03783837705850601,
0.09251625835895538,
-0.016935084015130997,
0.09485667943954468,
0.023987852036952972,
0.04789556935429573,
-0.06626647710800171,
-0.06386159360408783,
-0.057... | temporary (nominal) account
account that is closed at the end of each accounting period, and includes
income statement, dividends, and income summary accounts
working capital
current assets less current liabilities; sometimes used as a measure of liquidity
Summary
5.1 Describe and Prepare Closing Entries for a Business
• Closing entries: Closing entries prepare a company for the next period and zero out balance in temporary
accounts.
• Purpose of closing entries: Closing entries are necessary because they help a company review income
accumulation during a period, and verify data figures found on the adjusted trial balance.
• Permanent accounts: Permanent accounts do not close and are accounts that transfer balances to the
next period. They include balance sheet accounts, such as assets, liabilities, and stockholder’s equity
• Temporary accounts: Temporary accounts are closed at the end of each accounting period and include | {"creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_type": ".pdf"} |
1c2e8235-d8c0-4e2e-b04c-155c08066c73 | [
0.03192153573036194,
0.04208088666200638,
-0.04568818211555481,
0.025193458423018456,
0.02755197510123253,
0.03775014355778694,
0.08136793226003647,
0.006156838499009609,
0.09596452116966248,
0.015255440957844257,
0.04992051422595978,
-0.028016094118356705,
-0.006817299872636795,
-0.066156... | • Temporary accounts: Temporary accounts are closed at the end of each accounting period and include
income statement, dividends, and income summary accounts.
•
Income Summary: The Income Summary account is an intermediary between revenues and expenses,
and the Retained Earnings account. It stores all the closing information for revenues and expenses,
resulting in a “summary” of income or loss for the period.
• Recording closing entries: There are four closing entries; closing revenues to income summary, closing
expenses to income summary, closing income summary to retained earnings, and close dividends to
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
337
retained earnings.
• Posting closing entries: Once all closing entries are complete, the information is transferred to the
general ledger T-accounts. Balances in temporary accounts will show a zero balance. | {"file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "producer": "Prince 11 (www.princexml.com)", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "batch_upload": true, "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "moddate": "2020-08-05T15:26:11-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "total_pages": 1055} |
44cd34bb-9189-42b2-be0f-13540e2d6ac2 | [
-0.011468173004686832,
-0.003594449022784829,
-0.06248185783624649,
-0.03895983472466469,
0.034509334713220596,
-0.025861581787467003,
0.058035511523485184,
0.04639832302927971,
0.09213156253099442,
0.03460894152522087,
0.02803237922489643,
-0.014738654717803001,
-0.014137581922113895,
-0.... | • Posting closing entries: Once all closing entries are complete, the information is transferred to the
general ledger T-accounts. Balances in temporary accounts will show a zero balance.
5.2 Prepare a Post-Closing Trial Balance
• Post-closing trial balance: The post-closing trial balance is prepared after closing entries have been
posted to the ledger. This trial balance only includes permanent accounts.
5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital
Balance, and Explain How These Measures Represent Liquidity
• Cash-basis versus accrual-basis system: The cash-basis system delays revenue and expense recognition
until cash is collected, which can mislead investors about the daily operations of a business. The accrual-
basis system recognizes revenues and expenses in the period in which they were earned or incurred,
allowing for an even distribution of income and a more accurate business of daily operations. | {"uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf", "total_pages": 1055, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "file_name": "FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9"} |
9797acf5-d46c-4287-99b8-f603a681b09f | [
-0.036295533180236816,
-0.030084626749157906,
-0.08262374997138977,
-0.03506122902035713,
0.08012940734624863,
0.0075846100226044655,
0.03418579325079918,
0.0337212011218071,
0.009863294661045074,
-0.018428519368171692,
-0.029260307550430298,
0.03185562789440155,
-0.016347505152225494,
-0.... | basis system recognizes revenues and expenses in the period in which they were earned or incurred,
allowing for an even distribution of income and a more accurate business of daily operations.
• Classified balance sheet: The classified balance sheet breaks down assets and liabilities into subcategories
focusing on current and long-term classifications. This allows investors to see company position in both
the short term and long term.
• Liquidity: Liquidity means a business has enough cash available to pay bills as they come due. Being too
liquid can mean that a company is not using its assets efficiently.
• Working capital: Working capital shows how efficiently a company operates. The formula is current assets
minus current liabilities.
• Current ratio: The current ratio shows how many times over a company can cover its liabilities. It is found
by dividing current assets by current liabilities.
5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business | {"batch_upload": true, "total_pages": 1055, "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf"} |
7e7fa7d1-12f8-406e-b470-b4d01c080896 | [
0.001594854285940528,
0.002558057429268956,
-0.08173045516014099,
-0.04932040348649025,
-0.019850626587867737,
-0.009585811756551266,
0.09202390909194946,
-0.03930887579917908,
0.06972749531269073,
0.025874851271510124,
0.04766909033060074,
-0.007208089344203472,
0.02690695971250534,
-0.06... | by dividing current assets by current liabilities.
5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
• The comprehensive accounting cycle is the process in which transactions are recorded in the accounting
records and are ultimately reflected in the ending period balances on the financial statements.
• Comprehensive accounting cycle for a business: A service business is taken through the comprehensive
accounting cycle, starting with the formation of the entity, recording all necessary journal entries for its
transactions, making all required adjusting and closing journal entries, and culminating in the preparation
of all requisite financial statements
Multiple Choice
1.
5.1 Which of the following accounts is considered a temporary or nominal account?
A.
Fees Earned Revenue
B. Prepaid Advertising
C. Unearned Service Revenue
D. Prepaid Insurance
2.
5.1 Which of the following accounts is considered a permanent or real account?
A.
Interest Revenue | {"creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "producer": "Prince 11 (www.princexml.com)", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "file_type": ".pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true} |
48e524b8-8449-41f9-8319-63899bf03870 | [
-0.06841392070055008,
0.0052779847756028175,
-0.06149328872561455,
-0.04010104015469551,
0.014768112450838089,
0.03312184289097786,
0.10139790922403336,
-0.016381438821554184,
0.09052926301956177,
0.049267400056123734,
0.07289287447929382,
-0.024440573528409004,
0.000407928426284343,
-0.05... | B. Prepaid Advertising
C. Unearned Service Revenue
D. Prepaid Insurance
2.
5.1 Which of the following accounts is considered a permanent or real account?
A.
Interest Revenue
B. Prepaid Insurance
C.
Insurance Expense
D. Supplies Expense
338
Chapter 5 Completing the Accounting Cycle
3.
5.1 If a journal entry includes a debit or credit to the Cash account, it is most likely which of the
following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
4.
5.1 If a journal entry includes a debit or credit to the Retained Earnings account, it is most likely which of
the following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
5.
5.1 Which of these accounts would be present in the closing entries?
A. Dividends
B. Accounts Receivable
C. Unearned Service Revenue
D. Sales Tax Payable
6. | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "file_type": ".pdf", "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting"} |
a2546568-a8a8-4dce-bdb2-a2c13d5b9c6f | [
0.00289959367364645,
-0.025261584669351578,
-0.002985177095979452,
-0.008321387693285942,
0.018317395821213722,
0.05053194984793663,
0.06892532855272293,
-0.05620696768164635,
0.0566551573574543,
0.040110841393470764,
0.04094730317592621,
-0.07030907273292542,
0.024541858583688736,
-0.0269... | 5.
5.1 Which of these accounts would be present in the closing entries?
A. Dividends
B. Accounts Receivable
C. Unearned Service Revenue
D. Sales Tax Payable
6.
5.1 Which of these accounts would not be present in the closing entries?
A. Utilities Expense
B.
C.
Fees Earned Revenue
Insurance Expense
D. Dividends Payable
7.
5.1 Which of these accounts is never closed?
A. Dividends
B. Retained Earnings
C.
D.
Service Fee Revenue
Income Summary
8.
5.1 Which of these accounts is never closed?
A. Prepaid Rent
B.
Income Summary
C. Rent Revenue
D. Rent Expense
9.
5.1 Which account would be credited when closing the account for fees earned for the year?
A. Accounts Receivable
B.
Fees Earned Revenue
C. Unearned Fee Revenue
D.
Income Summary
10.
5.1 Which account would be credited when closing the account for rent expense for the year?
A. Prepaid Rent
B. Rent Expense
C. Rent Revenue
D. Unearned Rent Revenue | {"creationdate": "2019-04-24T10:32:54-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true, "file_type": ".pdf", "file_size_mb": 156.7, "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf"} |
c9455000-9f98-4820-bbd1-289b1b223ee4 | [
0.0017402598168700933,
0.041515812277793884,
-0.011537071317434311,
-0.029296910390257835,
0.006665501743555069,
0.05355637148022652,
0.02423003874719143,
-0.01379360817372799,
0.05914103239774704,
0.04470659792423248,
0.03250490501523018,
-0.04836208373308182,
0.011313650757074356,
-0.051... | D.
Income Summary
10.
5.1 Which account would be credited when closing the account for rent expense for the year?
A. Prepaid Rent
B. Rent Expense
C. Rent Revenue
D. Unearned Rent Revenue
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
339
11.
5.2 Which of these accounts is included in the post-closing trial balance?
A. Sales Revenue
B. Salaries Expense
C. Retained Earnings
D. Dividends
12.
5.2 Which of these accounts is not included in the post-closing trial balance?
A.
Land
B. Notes Payable
C. Retained Earnings
D. Dividends
13.
5.2 On which of the following would the year-end Retained Earnings balance be stated correctly?
A. Unadjusted Trial Balance
B. Adjusted Trial Balance
C. Post-Closing Trial Balance
D. The Worksheet
14.
5.2 Which of these accounts is included in the post-closing trial balance?
A. Supplies Expense
B. Accounts Payable
C.
D.
Sales Revenue | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "total_pages": 1055} |
48505641-04b5-43cb-8295-96c536d05e4a | [
0.038015566766262054,
0.0190377589315176,
-0.03592826798558235,
-0.04133417457342148,
0.005126320291310549,
0.045191653072834015,
0.06435194611549377,
0.023050010204315186,
0.022879082709550858,
0.07943792641162872,
0.035580333322286606,
-0.06827224045991898,
-0.02380065619945526,
-0.05313... | C. Post-Closing Trial Balance
D. The Worksheet
14.
5.2 Which of these accounts is included in the post-closing trial balance?
A. Supplies Expense
B. Accounts Payable
C.
D.
Sales Revenue
Insurance Expense
15.
5.3 If current assets are $112,000 and current liabilities are $56,000, what is the current ratio?
A. 200 percent
B. 50 percent
C.
2.0
D. $50,000
16.
5.3 If current assets are $100,000 and current liabilities are $42,000, what is the working capital?
A. 200 percent
B. 50 percent
C.
2.0
D. $58,000
Questions
1.
2.
3.
4.
5.
5.1 Explain what is meant by the term real accounts (also known as permanent accounts).
5.1 Explain what is meant by the term nominal accounts (also known as temporary accounts).
5.1 What is the purpose of the closing entries?
5.1 What would happen if the company failed to make closing entries at the end of the year?
5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are credited in | {"total_pages": 1055, "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
f1f1e5b6-69df-4b72-9151-2593d5c44ee1 | [
0.027737200260162354,
-0.028567161411046982,
0.015299219638109207,
-0.05981972813606262,
-0.0027562964241951704,
0.053562529385089874,
0.08168233186006546,
0.05130559578537941,
0.06262204796075821,
0.030002105981111526,
-0.04708556458353996,
-0.07225256413221359,
-0.07735691219568253,
-0.0... | 5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are credited in
the closing entries? Why?
340
Chapter 5 Completing the Accounting Cycle
6.
5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are debited in
the closing entries? Why?
7.
5.1 The account called Income Summary is often used in the closing entries. Explain this account’s
purpose and how it is used.
8.
9.
5.1 What are the four entries required for closing, assuming that the Income Summary account is used?
5.1 After the first two closing entries are made, Income Summary has a credit balance of $125,500. What
does this indicate about the company’s net income or loss?
10.
5.1 After the first two closing entries are made, Income Summary has a debit balance of $22,750. What
does this indicate about the company’s net income or loss?
11.
5.2 What account types are included in a post-closing trial balance?
12. | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "file_type": ".pdf", "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529"} |
4411027e-e7dc-4322-b1b0-9019a041994e | [
0.03403056040406227,
0.03914773464202881,
-0.044936276972293854,
-0.03122774325311184,
0.00742351496592164,
0.053011421114206314,
0.09335251897573471,
0.03898482397198677,
0.041078828275203705,
0.054466623812913895,
0.021474849432706833,
-0.0923893004655838,
-0.03116745501756668,
-0.053307... | does this indicate about the company’s net income or loss?
11.
5.2 What account types are included in a post-closing trial balance?
12.
5.2 Which of the basic financial statements can be directly tied to the post-closing trial balance? Why is
this so?
13.
5.3 Describe the calculation required to compute working capital. Explain the significance.
14.
5.3 Describe the calculation required to compute the current ratio. Explain the significance.
15.
5.4 Describe the progression of the three trial balances that a company would have during the period,
and explain the difference between the three.
Exercise Set A
EA1.
5.1 Identify whether each of the following accounts is nominal/temporary or real/permanent.
A. Accounts Receivable
B.
Fees Earned Revenue
C. Utility Expense
D. Prepaid Rent
EA2.
5.1 For each of the following accounts, identify whether it is nominal/temporary or real/permanent,
and whether it is reported on the Balance Sheet or the Income Statement.
A. | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "upload_timestamp": "2026-02-07T07:23:08.167529", "moddate": "2020-08-05T15:26:11-05:00", "total_pages": 1055, "batch_upload": true, "file_name": "FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "uploaded_via": "batch_uploader", "file_type": ".pdf"} |
dc15bd94-7def-49ab-a7b0-dedc2593b35f | [
0.020951872691512108,
0.058745093643665314,
-0.06730921566486359,
0.019864151254296303,
0.023370785638689995,
0.01512205507606268,
0.06044856086373329,
-0.02229662798345089,
0.033725086599588394,
0.06557588279247284,
0.03261028230190277,
-0.047882530838251114,
0.00528646120801568,
-0.05896... | EA2.
5.1 For each of the following accounts, identify whether it is nominal/temporary or real/permanent,
and whether it is reported on the Balance Sheet or the Income Statement.
A.
Interest Expense
B. Buildings
C.
Interest Payable
D. Unearned Rent Revenue
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
341
EA3.
5.1 For each of the following accounts, identify whether it would be closed at year-end (yes or no) and
on which financial statement the account would be reported (Balance Sheet, Income Statement, or Retained
Earnings Statement).
A. Accounts Payable
B. Accounts Receivable
C. Cash
D. Dividends
E.
F.
Fees Earned Revenue
Insurance Expense
G. Prepaid Insurance
H. Supplies
EA4.
5.1 The following accounts and normal balances existed at year-end. Make the four journal entries
required to close the books:
EA5. | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true, "producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529"} |
2b98f0b9-a52f-4b96-a9ed-543a8fef7b61 | [
-0.0006130337715148926,
0.0683782547712326,
-0.03716506436467171,
-0.016523970291018486,
0.0247554462403059,
0.05277469754219055,
0.05586564540863037,
-0.01712377369403839,
0.03783181682229042,
0.06406523287296295,
0.017086490988731384,
-0.010981150902807713,
0.02018938958644867,
-0.084059... | Insurance Expense
G. Prepaid Insurance
H. Supplies
EA4.
5.1 The following accounts and normal balances existed at year-end. Make the four journal entries
required to close the books:
EA5.
5.1 The following accounts and normal balances existed at year-end. Make the four journal entries
required to close the books:
EA6.
5.1 Use the following excerpts from the year-end Adjusted Trial Balance to prepare the four journal
entries required to close the books:
342
Chapter 5 Completing the Accounting Cycle
EA7.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
EA8.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
343
EA9.
5.2 Identify whether each of the following accounts would be listed in the company’s Post-Closing
Trial Balance.
A. Accounts Payable | {"upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)"} |
f9253743-9fd1-4fb6-8005-5d66d4d5550e | [
-0.02743864618241787,
0.02314968779683113,
-0.06330178678035736,
-0.051303762942552567,
0.060067810118198395,
0.05038212239742279,
0.05751905217766762,
-0.014030027203261852,
0.02699989266693592,
0.00567188486456871,
0.041614897549152374,
-0.08975997567176819,
-0.005540534853935242,
-0.038... | 343
EA9.
5.2 Identify whether each of the following accounts would be listed in the company’s Post-Closing
Trial Balance.
A. Accounts Payable
B. Advertising Expense
C. Dividends
D. Fees Earned Revenue
E. Prepaid Advertising
F.
Supplies
G. Supplies Expense
H. Unearned Fee Revenue
EA10.
5.2 Identify which of the following accounts would not be listed on the company’s Post-Closing Trial
Balance.
EA11.
5.3 For each of the following accounts, identify in which section of the classified balance sheet it
would be presented: current assets, property, intangibles, other assets, current liabilities, long-term liabilities,
or stockholder’s equity.
A. Accounts Payable
B. Accounts Receivable
C. Cash
D. Equipment
E.
Land
F. Notes Payable (due two years later)
G. Prepaid Insurance
H. Supplies
EA12.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
344 | {"file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true, "uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_type": ".pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00"} |
2028a520-df41-47a4-8485-4056f2f15eea | [
0.013687768951058388,
0.03258084878325462,
-0.06427549570798874,
-0.051052648574113846,
0.03885207325220108,
0.020223798230290413,
0.08141251653432846,
0.00290609709918499,
0.03922320902347565,
0.029365425929427147,
0.04947229102253914,
-0.06015273928642273,
0.021197527647018433,
-0.026126... | G. Prepaid Insurance
H. Supplies
EA12.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
344
Chapter 5 Completing the Accounting Cycle
EA13.
5.3 Using the following account balances, calculate for the two years presented:
A. working capital
B.
current ratio
EA14.
5.3 Using the following Balance Sheet summary information, calculate for the two companies
presented:
A. working capital
B.
current ratio
Then:
A. evaluate which company’s liquidity position appears stronger, and why.
EA15.
5.3 Using the following account balances, calculate:
A. working capital
B.
current ratio
B Exercise Set B
EB1.
5.1 Identify whether each of the following accounts are nominal/temporary or real/permanent.
A. Rent Expense
B. Unearned Service Fee Revenue
C.
Interest Revenue
D. Accounts Payable | {"moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "producer": "Prince 11 (www.princexml.com)", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "total_pages": 1055} |
bed0d3e7-2290-48b2-ba80-25f7330048ac | [
0.012525384314358234,
0.051651302725076675,
-0.060224346816539764,
0.022974781692028046,
0.002561266301199794,
0.059848640114068985,
0.06308354437351227,
-0.03053915500640869,
0.013954893685877323,
0.036750148981809616,
0.02725468948483467,
-0.10289542376995087,
0.03465476259589195,
-0.038... | EB1.
5.1 Identify whether each of the following accounts are nominal/temporary or real/permanent.
A. Rent Expense
B. Unearned Service Fee Revenue
C.
Interest Revenue
D. Accounts Payable
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
345
EB2.
5.1 For each of the following accounts, identify whether it is nominal/temporary or real/permanent,
and whether it is reported on the Balance Sheet or the Income Statement.
A. Salaries Payable
B. Sales Revenue
C.
Salaries Expense
D. Prepaid Insurance
EB3.
5.1 For each of the following accounts, identify whether it would be closed at year-end (yes or no) and
on which financial statement the account would be reported (Balance Sheet, Income Statement, or Retained
Earnings Statement).
A. Retained Earnings
B. Prepaid Rent
C. Rent Expense
D. Rent Revenue
E.
F.
Salaries Expense
Salaries Payable
G. Supplies Expense
H. Unearned Rent Revenue
EB4. | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "upload_timestamp": "2026-02-07T07:23:08.167529", "batch_upload": true, "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00"} |
3333c3b0-e115-4451-9d60-2d69c8a12815 | [
0.011852379888296127,
0.09877417236566544,
-0.01045953668653965,
0.0214755367487669,
-0.02709110453724861,
0.049694351851940155,
-0.010280522517859936,
-0.01475340873003006,
0.036788567900657654,
0.06183832511305809,
0.0004199105896987021,
-0.03243494778871536,
0.023259082809090614,
-0.091... | Earnings Statement).
A. Retained Earnings
B. Prepaid Rent
C. Rent Expense
D. Rent Revenue
E.
F.
Salaries Expense
Salaries Payable
G. Supplies Expense
H. Unearned Rent Revenue
EB4.
5.1 The following accounts and normal balances existed at year-end. Make the four journal entries
required to close the books:
EB5.
5.1 The following accounts and normal balances existed at year-end. Make the four journal entries
required to close the books:
EB6.
5.1 Use the following excerpts from the year-end Adjusted Trial Balance to prepare the four journal
entries required to close the books:
346
Chapter 5 Completing the Accounting Cycle
EB7.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
EB8.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
347
EB9. | {"moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "file_type": ".pdf"} |
ad872aa3-c356-41eb-81cb-8dfe8cff786b | [
0.005599003750830889,
0.012682849541306496,
-0.042408253997564316,
-0.04785630479454994,
0.009174554608762264,
0.05330535024404526,
0.04416583105921745,
-0.01768583059310913,
0.002258832333609462,
0.015736451372504234,
0.0229786466807127,
-0.03119623102247715,
-0.0044016120955348015,
-0.07... | This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
347
EB9.
5.2 Identify which of the following accounts would be listed on the company’s Post-Closing Trial
Balance.
A. Accounts Receivable
B. Accumulated Depreciation
C. Cash
D. Office Expense
E. Note Payable
F. Rent Revenue
G. Retained Earnings
H. Unearned Rent Revenue
EB10.
5.2 Identify which of the following accounts would not be listed on the company’s Post-Closing Trial
Balance.
EB11.
5.3 For each of the following accounts, identify in which section of the classified balance sheet it
would be presented: current assets, property, intangibles, other assets, current liabilities, long-term liabilities,
or stockholder’s equity.
A. Building
B. Cash
C. Common Stock
D. Copyright
E. Prepaid Advertising
F. Notes Payable (due six months later)
G. Taxes Payable
H. Unearned Rent Revenue
EB12. | {"batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "total_pages": 1055, "file_type": ".pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf"} |
f6da9c78-59e3-4862-964a-2b33094b3fc3 | [
-0.0010594668565317988,
0.03781275451183319,
-0.04741756618022919,
-0.06930901855230331,
-0.0005999846034683287,
0.031971193850040436,
0.009673107415437698,
0.024696897715330124,
0.01838153414428234,
-0.0014823076780885458,
0.04386299103498459,
-0.05524101480841637,
-0.022820858284831047,
... | or stockholder’s equity.
A. Building
B. Cash
C. Common Stock
D. Copyright
E. Prepaid Advertising
F. Notes Payable (due six months later)
G. Taxes Payable
H. Unearned Rent Revenue
EB12.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
348
Chapter 5 Completing the Accounting Cycle
EB13.
5.3 Using the following account balances, calculate for the two years presented:
A. working capital
B.
current ratio
EB14.
5.3 Using the following Balance Sheet summary information, calculate for the two companies
presented:
A. working capital
B.
current ratio
Then:
A. evaluate which company’s liquidity position appears stronger, and why.
EB15.
5.3 From the following Company B adjusted trial balance, prepare simple financial statements, as
follows:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
349
Problem Set A | {"upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1"} |
ef752a94-8d0c-4d69-8b8c-d0c286191de5 | [
0.017903102561831474,
0.0817127451300621,
0.006763098761439323,
-0.016686800867319107,
-0.025727147236466408,
0.010480251163244247,
0.006926981266587973,
-0.0331595204770565,
-0.008726059459149837,
0.05455075949430466,
0.03737425059080124,
-0.032243598252534866,
0.026105230674147606,
-0.05... | follows:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
349
Problem Set A
PA1.
5.1 Identify whether each of the following accounts would be considered a permanent account (yes/
no) and which financial statement it would be reported on (Balance Sheet, Income Statement, or Retained
Earnings Statement).
A. Accumulated Depreciation
B. Buildings
C. Depreciation Expense
D. Equipment
E.
F.
Fees Earned Revenue
Insurance Expense
G. Prepaid Insurance
H. Supplies Expense
I. Dividends
PA2.
5.1 The following selected accounts and normal balances existed at year-end. Make the four journal
entries required to close the books:
PA3.
5.1 The following selected accounts and normal balances existed at year-end. Notice that expenses
exceed revenue in this period. Make the four journal entries required to close the books:
350
Chapter 5 Completing the Accounting Cycle
PA4. | {"creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creationdate": "2019-04-24T10:32:54-05:00", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf"} |
d5f62247-2212-4db4-a605-9e6446d460e4 | [
0.01653653010725975,
0.07613687962293625,
-0.004204314202070236,
-0.03709566965699196,
-0.0762740895152092,
0.027960751205682755,
-0.00940688792616129,
0.007238836493343115,
0.001706709386780858,
0.06830476969480515,
0.000989485764876008,
-0.025160610675811768,
0.01013356726616621,
-0.1019... | exceed revenue in this period. Make the four journal entries required to close the books:
350
Chapter 5 Completing the Accounting Cycle
PA4.
5.1 Use the following Adjusted Trial Balance to prepare the four journal entries required to close the
books:
PA5.
5.1 Use the following Adjusted Trial Balance to prepare the four journal entries required to close the
books:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
351
PA6.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
PA7.
5.1 Assume that the first two closing entries have been made and posted. Use the T-accounts
provided as follows to:
A.
complete the closing entries
B. determine the ending balance in the Retained Earnings account
352
Chapter 5 Completing the Accounting Cycle
PA8.
5.1 Correct any obvious errors in the following closing entries by providing the four corrected closing | {"total_pages": 1055, "uploaded_via": "batch_uploader", "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)"} |
ff99dcb1-90f0-45cc-96fc-d6ffb64fa350 | [
-0.004022054374217987,
0.060066286474466324,
0.03407086804509163,
-0.03030785545706749,
-0.019177859649062157,
0.020405394956469536,
-0.04914506897330284,
0.013968238607048988,
-0.0249128807336092,
0.05185185745358467,
0.02373747155070305,
0.02018587477505207,
-0.004004457965493202,
-0.086... | Chapter 5 Completing the Accounting Cycle
PA8.
5.1 Correct any obvious errors in the following closing entries by providing the four corrected closing
entries. Assume all accounts held normal account balances in the Adjusted Trial Balance.
A.
B.
C.
D.
PA9.
5.2 Assuming the following Adjusted Trial Balance, create the Post-Closing Trial Balance that would
result, after all closing journal entries were made and posted:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
353
PA10.
5.2 The following Post-Closing Trial Balance contains errors. Prepare a corrected Post-Closing Trial
Balance:
PA11.
5.2 Assuming the following Adjusted Trial Balance, recreate the Post-Closing Trial Balance that would
result after all closing journal entries were made and posted:
PA12.
5.3 Use the following Adjusted Trial Balance to prepare a classified Balance Sheet:
354
Chapter 5 Completing the Accounting Cycle | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7} |
39bd3873-6fdc-4888-8f01-dcb24486f784 | [
-0.00018354096391703933,
0.06790214031934738,
-0.010786774568259716,
-0.054791323840618134,
-0.012628828175365925,
0.07025721669197083,
-0.056926872581243515,
0.008009103126823902,
0.010396325960755348,
0.025374997407197952,
0.05119756609201431,
0.0023152483627200127,
-0.05052826181054115,
... | PA12.
5.3 Use the following Adjusted Trial Balance to prepare a classified Balance Sheet:
354
Chapter 5 Completing the Accounting Cycle
PA13.
5.3 Using the following Balance Sheet summary information, for the two years presented calculate:
A. working capital
B.
current ratio
PA14.
5.3 Using the following Balance Sheet summary information, calculate for the two companies
presented:
A. working capital
B.
current ratio
PA15.
5.3 Using the following account balances, calculate for the two years presented:
A. working capital
B.
current ratio
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
355
PA16.
5.4 From the following Company R adjusted trial balance, prepare the following:
A.
Income Statement
B. Retained Earnings Statement
C. Balance Sheet (simple—unclassified)
D. Closing journal entries
E. Post-Closing Trial Balance
PA17. | {"creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)"} |
dc379b70-53aa-4489-b23a-4628e7b250a9 | [
0.017579354345798492,
0.09512392431497574,
-0.036510925740003586,
-0.02012632042169571,
-0.0077782380394637585,
0.06709839403629303,
0.06074131652712822,
0.0017499859677627683,
0.021792976185679436,
0.00406617671251297,
0.0526401586830616,
-0.0544220507144928,
-0.010337043553590775,
-0.048... | A.
Income Statement
B. Retained Earnings Statement
C. Balance Sheet (simple—unclassified)
D. Closing journal entries
E. Post-Closing Trial Balance
PA17.
5.4 From the following Company T adjusted trial balance, prepare the following:
A.
Income Statement
B. Retained Earnings Statement
C. Balance Sheet (simple—unclassified)
D. Closing journal entries
E. Post-Closing Trial Balance
356
Chapter 5 Completing the Accounting Cycle
B Problem Set B
PB1.
5.1 Identify whether each of the following accounts would be considered a permanent account (yes/
no) and which financial statement it would be reported on (Balance Sheet, Income Statement, or Retained
Earnings Statement).
A. Common Stock
B. Dividends
C. Dividends Payable
D. Equipment
E.
F.
Income Tax Expense
Income Tax Payable
G. Service Revenue
H. Unearned Service Revenue
I. Net Income
PB2.
5.1 The following selected accounts and normal balances existed at year-end. Make the four journal | {"total_pages": 1055, "producer": "Prince 11 (www.princexml.com)", "creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true, "file_type": ".pdf"} |
eb7f784c-ca67-4ff2-b9ca-55cf132b46bd | [
-0.006524938158690929,
0.030217798426747322,
-0.016297969967126846,
-0.03672858700156212,
-0.05278468504548073,
0.04082893207669258,
0.016154909506440163,
-0.002610082272440195,
0.007029860280454159,
0.06889715790748596,
-0.026355504989624023,
-0.003748892107978463,
-0.013446669094264507,
... | Income Tax Payable
G. Service Revenue
H. Unearned Service Revenue
I. Net Income
PB2.
5.1 The following selected accounts and normal balances existed at year-end. Make the four journal
entries required to close the books:
PB3.
5.1 The following selected accounts and normal balances existed at year-end. Notice that expenses
exceed revenue in this period. Make the four journal entries required to close the books:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
357
PB4.
5.1 Use the following Adjusted Trial Balance to prepare the four journal entries required to close the
books:
PB5.
5.1 Use the following Adjusted Trial Balance to prepare the four journal entries required to close the
books:
358
Chapter 5 Completing the Accounting Cycle
PB6.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
PB7. | {"file_type": ".pdf", "uploaded_via": "batch_uploader", "total_pages": 1055, "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "batch_upload": true, "file_size_mb": 156.7} |
ecb3b93f-ed55-4657-829b-5ad5b04958ac | [
-0.003205343848094344,
0.06173989176750183,
-0.006225913297384977,
-0.0320485457777977,
-0.046259500086307526,
0.05221104621887207,
0.007211498916149139,
0.023589089512825012,
0.010657045990228653,
0.046323470771312714,
0.018470894545316696,
-0.011358692310750484,
0.021065855398774147,
-0.... | books:
358
Chapter 5 Completing the Accounting Cycle
PB6.
5.1 Use the following T-accounts to prepare the four journal entries required to close the books:
PB7.
5.1 Assume that the first two closing entries have been made and posted. Use the T-accounts
provided below to:
A.
complete the closing entries
B. determine the ending balance in the Retained Earnings account
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
359
PB8.
5.1 Correct any obvious errors in the following closing entries by providing the four corrected closing
entries. Assume all accounts held normal account balances in the Adjusted Trial Balance.
A.
B.
C.
D.
PB9.
5.2 Assuming the following Adjusted Trial Balance, create the Post-Closing Trial Balance that would
result after all closing journal entries were made and posted:
360
Chapter 5 Completing the Accounting Cycle
PB10. | {"file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "upload_timestamp": "2026-02-07T07:23:08.167529", "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)"} |
14cfbc01-7828-4f10-aad6-f6f3cdac1a6d | [
0.01978456974029541,
0.06316420435905457,
-0.005221763160079718,
-0.026418937370181084,
-0.015710096806287766,
0.035517383366823196,
-0.06759542226791382,
0.029648128896951675,
-0.015592820011079311,
0.004373745992779732,
0.009877759031951427,
0.0013813675614073873,
-0.019876284524798393,
... | result after all closing journal entries were made and posted:
360
Chapter 5 Completing the Accounting Cycle
PB10.
5.2 The following Post-Closing Trial Balance contains errors. Prepare a corrected Post-Closing Trial
Balance:
PB11.
5.2 Assuming the following Adjusted Trial Balance, re-create the Post-Closing Trial Balance that
would result after all closing journal entries were made and posted:
PB12.
5.3 Use the following Adjusted Trial Balance to prepare a classified Balance Sheet:
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
361
PB13.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
PB14.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
PB15. | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "batch_upload": true, "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00"} |
23e83ee3-3d53-41ae-b8f1-3c1368c669e5 | [
0.016569631174206734,
0.07985017448663712,
0.009778420440852642,
-0.03588090464472771,
-0.0031629225704818964,
0.058939896523952484,
-0.0414917953312397,
0.048425111919641495,
0.032468706369400024,
0.007228861562907696,
0.038779620081186295,
0.020650872960686684,
-0.029019346460700035,
-0.... | A. working capital
B.
current ratio
PB14.
5.3 Using the following Balance Sheet summary information, calculate for the two years presented:
A. working capital
B.
current ratio
PB15.
5.3 Using the following account balances, calculate for the two years presented:
A. working capital
B.
current ratio
PB16.
5.4 From the following Company S adjusted trial balance, prepare the following:
A.
Income Statement
B. Retained Earnings Statement
C. Balance Sheet (simple—unclassified)
D. Closing journal entries
E. Post-Closing Trial Balance
362
Chapter 5 Completing the Accounting Cycle
Thought Provokers
TP1.
5.1 Assume you are the controller of a large corporation, and the chief executive officer (CEO) has
requested that you refrain from posting closing entries at 20X1 year-end, with the intention of combining the
two years’ profits in year 20X2, in an effort to make that year’s profits appear stronger. | {"file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "batch_upload": true, "total_pages": 1055, "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00"} |
4d63d311-9c62-40cd-b4b2-bb845e4b506d | [
-0.014956978149712086,
0.07390999048948288,
0.027857087552547455,
-0.0200737863779068,
-0.022951891645789146,
0.03390228748321533,
-0.004247587639838457,
0.08816526085138321,
0.0025106361135840416,
0.008698834106326103,
0.03461039438843727,
-0.07493198662996292,
-0.04533678665757179,
-0.08... | two years’ profits in year 20X2, in an effort to make that year’s profits appear stronger.
Write a memo to the CEO, to offer your response to the request to skip the closing entries for year 20X1.
TP2.
5.1 Search the Securities and Exchange Commission website (https://www.sec.gov/edgar/
searchedgar/companysearch.html) and locate the latest Form 10-K for a company you would like to analyze.
Submit a short memo:
• State the name and ticker symbol of the company you have chosen.
• Review the company’s end-of-period Balance Sheet, Income Statement, and Statement of Retained
Earnings.
• Use the information in these financial statements to answer these questions:
A.
If the company had used the income summary account for its closing entries, how much would
the company have credited the Income Summary account in the first closing entry?
B. How much would the company have debited the Income Summary account in the second
closing entry? | {"producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "uploaded_via": "batch_uploader", "file_size_mb": 156.7, "file_type": ".pdf", "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf"} |
ef05fa00-d4fa-4b31-8e27-e9d093418065 | [
-0.034212686121463776,
0.06870652735233307,
-0.009215505793690681,
-0.02044074982404709,
-0.0027987337671220303,
0.05375541374087334,
0.07886715978384018,
0.03543056547641754,
0.024155449122190475,
0.030734963715076447,
-0.004699005279690027,
-0.05570795014500618,
-0.04367636889219284,
-0.... | the company have credited the Income Summary account in the first closing entry?
B. How much would the company have debited the Income Summary account in the second
closing entry?
Provide the web link to the company’s Form 10-K, to allow accurate verification of your answers.
TP3.
5.1 Assume you are a senior accountant and have been assigned the responsibility for making the
entries to close the books for the year. You have prepared the following four entries and presented them to
your boss, the chief financial officer of the company, along with the company CEO, in the weekly staff meeting:
As the CEO was reviewing your work, he asked the question, “What do these entries mean? Can we learn
anything about the company from reviewing them?”
Provide an explanation to give to the CEO about what the entries reveal about the company’s operations this
year.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle | {"file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting"} |
abc41be2-7629-407e-a8f6-b37adad15e46 | [
-0.026773331686854362,
0.04245724156498909,
-0.05986756086349487,
-0.039085954427719116,
-0.04291640594601631,
0.019050216302275658,
-0.015327205881476402,
0.03680429980158806,
-0.017611265182495117,
0.0031791285146027803,
0.022405540570616722,
-0.03558413311839104,
-0.05143754184246063,
-... | year.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 5 Completing the Accounting Cycle
363
TP4.
5.2 Search the US Securities and Exchange Commission website (https://www.sec.gov/edgar/
searchedgar/companysearch.html) and locate the latest Form 10-K for a company you would like to analyze.
Submit a short memo:
• State the name and ticker symbol of the company you have chosen.
• Review the company’s Balance Sheets.
• Reconstruct a Post-Closing Trial Balance for the company from the information presented in the
financial statements.
Provide the web link to the company’s Form 10-K, to allow accurate verification of your answers.
TP5.
5.3 Search the Securities and Exchange Commission website (https://www.sec.gov/edgar/
searchedgar/companysearch.html) and locate the latest Form 10-K for a company you would like to analyze.
Submit a short memo:
• State the name and ticker symbol of the company you have chosen. | {"source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf", "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
f25db331-e7f4-46db-a804-f5bc924e6d82 | [
0.013349809683859348,
0.06653520464897156,
-0.05780360847711563,
-0.058119870722293854,
0.035762567073106766,
0.004643451888114214,
-0.002700097393244505,
0.024037029594182968,
-0.05043860897421837,
-0.009147591888904572,
0.046563778072595596,
-0.021415676921606064,
-0.01491170097142458,
-... | searchedgar/companysearch.html) and locate the latest Form 10-K for a company you would like to analyze.
Submit a short memo:
• State the name and ticker symbol of the company you have chosen.
• Review the company’s end-of-period Balance Sheet for the most recent annual report.
• List the amount of Current Assets and Current Liabilities for the currently reported year, and for the
previous year. Use these amounts to calculate the company’s (A) working capital and (B) current ratio.
Provide the web link to the company’s Form 10-K, to allow accurate verification of your answers.
364
Chapter 5 Completing the Accounting Cycle
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
6
Merchandising Transactions
Figure 6.1 J&J Games. Proper recognition of merchandising transactions gives management a clear inventory
picture to make informed business decisions. (credit: modification of “Video game retail store, consumerism at | {"file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "uploaded_via": "batch_uploader"} |
28a9779c-e5d7-4d5e-8560-9ff12e4a932d | [
-0.03165419399738312,
0.061146948486566544,
-0.009738393127918243,
-0.08784418553113937,
0.021774251013994217,
0.02172793820500374,
0.035685714334249496,
0.04093627259135246,
0.0020978227257728577,
0.026305193081498146,
0.04794556275010109,
0.06524816155433655,
0.0071417186409235,
0.004702... | picture to make informed business decisions. (credit: modification of “Video game retail store, consumerism at
its finest” by Bas de Reuver/Flickr, CC BY 2.0)
Chapter Outline
6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic
Inventory System
Why It Matters
Jason and his brother James own a small business called J&J Games, specializing in the sale of video games and | {"file_name": "FinancialAccounting-OP.pdf", "file_type": ".pdf", "total_pages": 1055, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "creationdate": "2019-04-24T10:32:54-05:00", "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
aaa1f22b-0c0b-426e-a914-e0ea82e1a722 | [
-0.04395213723182678,
0.048904187977313995,
-0.0012129686074331403,
-0.09052302688360214,
0.0028351424261927605,
0.03978171572089195,
0.06567390263080597,
0.035665351897478104,
0.032238636165857315,
0.030394287779927254,
0.07631519436836243,
0.0790545716881752,
0.014644299633800983,
-0.003... | Inventory System
Why It Matters
Jason and his brother James own a small business called J&J Games, specializing in the sale of video games and
accessories. They purchase their merchandise from a Marcus Electronics manufacturer and sell directly to
consumers.
When J&J Games (J&J) purchases merchandise from Marcus, they establish a contract detailing purchase costs,
payment terms, and shipping charges. It is important to establish this contract so that J&J and Marcus
understand the inventory responsibilities of each party. J&J Games typically does not pay with cash
immediately and is given an option for delayed payment with the possibility of a discount for early payment.
The delayed payment helps continue the strong relationship between the two parties, but the option for early
366
Chapter 6 Merchandising Transactions
payment gives J&J a monetary incentive to pay early and allow Marcus to use the funds for other business | {"upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "creator": "DocBook XSL Stylesheets V1.79.1", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true, "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf"} |
361d0123-cf82-4ceb-878a-5fb8a10085c6 | [
-0.07681722939014435,
0.07287093997001648,
0.03131754323840141,
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0.008370078168809414,
0.04806899651885033,
0.06808452308177948,
0.0005439266678877175,
0.016998305916786194,
0.017947755753993988,
0.046254467219114304,
0.10024844855070114,
0.025937696918845177,
-0.01830... | Chapter 6 Merchandising Transactions
payment gives J&J a monetary incentive to pay early and allow Marcus to use the funds for other business
purposes. Until J&J pays on their account, this outstanding balance remains a liability for J&J.
J&J Games successfully sells merchandise on a regular basis to customers. As the business grows, the company
later considers selling gaming accessories in bulk orders to other businesses. While these bulk sales will
provide a new growth opportunity for J&J, the company understands that these clients may need time to pay
for their orders. This can create a dilemma; J&J Games needs to offer competitive incentives for these clients
while also maintaining the ability to pay their own obligations. They will carefully consider sales discounts,
returns, and allowance policies that do not overextend their company’s financial position while giving them an
opportunity to create lasting relationships with a new customer base. | {"total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_type": ".pdf", "uploaded_via": "batch_uploader", "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true, "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting"} |
4ab9c2a9-a5c8-438e-9045-b9094f7c3a0b | [
0.010908938944339752,
0.04253481701016426,
-0.006423522252589464,
-0.059346508234739304,
0.07921326905488968,
0.02599414810538292,
0.10182841122150421,
-0.012011558748781681,
0.028514880686998367,
-0.11589768528938293,
0.06930557638406754,
0.011956164613366127,
-0.010634343139827251,
-0.00... | returns, and allowance policies that do not overextend their company’s financial position while giving them an
opportunity to create lasting relationships with a new customer base.
6.1 Compare and Contrast Merchandising versus Service Activities and
Transactions
Every week, you run errands for your household. These errands may include buying products and services
from local retailers, such as gas, groceries, and clothing. As a consumer, you are focused solely on purchasing
your items and getting home to your family. You are probably not thinking about how your purchases impact
the businesses you frequent. Whether the business is a service or a merchandising company, it tracks sales
from customers, purchases from manufacturers or other suppliers, and costs that affect their everyday
operations. There are some key differences between these business types in the manner and detail required
for transaction recognition. | {"batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "total_pages": 1055, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00"} |
23ee489f-280f-4a90-bdb4-da57c28b4c04 | [
-0.018683230504393578,
-0.015786368399858475,
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-0.08233711123466492,
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-0.022687461227178574,
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-0.0668383464217186,
0.025400664657354355,
0.034310102462768555,
0.016949737444519997,
0... | operations. There are some key differences between these business types in the manner and detail required
for transaction recognition.
Comparison of Merchandising Transactions versus Service Transactions
Some of the biggest differences between a service company and a merchandising company are what they sell,
their typical financial transactions, their operating cycles, and how these translate to financial statements.
A service company provides intangible services to customers and does not have inventory. Some examples of
service companies include lawyers, doctors, consultants, and accountants. Service companies often have
simple financial transactions that involve taking customer deposits, billing clients after services have been
provided, providing the service, and processing payments. These activities may occur frequently within a
company’s accounting cycle and make up a portion of the service company’s operating cycle. | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "title": "Principles of Accounting, Volume 1: Financial Accounting", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "file_type": ".pdf", "file_name": "FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00"} |
1d3b6c5c-ed26-435d-afba-6ab4ef72b124 | [
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0.016674431040883064,
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-0.04543887823820114,
0.00452771782875061,
-0.04060385003685951,
0.04579121246933937,
-0.00936913676559925,
0.044640928506851196,
-0.019890861585736275,
0.0692332461476326,
0.06275703758001328,
0.02869512513279915,
-0.0299... | provided, providing the service, and processing payments. These activities may occur frequently within a
company’s accounting cycle and make up a portion of the service company’s operating cycle.
An operating cycle is the amount of time it takes a company to use its cash to provide a product or service
and collect payment from the customer. Completing this cycle faster puts the company in a more stable
financial position. A typical operating cycle for a service company begins with having cash available, providing
service to a customer, and then receiving cash from the customer for the service (Figure 6.2).
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 6 Merchandising Transactions
367
Figure 6.2
Typical Operating Cycle for a Service Firm. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
The income statement format is fairly simple as well (see Figure 6.3). Revenues (sales) are reported first, | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "batch_upload": true, "file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "moddate": "2020-08-05T15:26:11-05:00"} |
fb1d6abb-1a0c-4005-9ef7-9a2a430124a0 | [
0.010878024622797966,
0.040035925805568695,
-0.002417334821075201,
-0.009687574580311775,
0.0496087484061718,
0.02629314921796322,
0.02592184953391552,
0.01999819651246071,
0.01110176369547844,
-0.04088480398058891,
0.039357513189315796,
-0.024026965722441673,
0.0359065942466259,
-0.022194... | under CC BY-NC-SA 4.0 license)
The income statement format is fairly simple as well (see Figure 6.3). Revenues (sales) are reported first,
followed by any period operating expenses. The outcome of sales less expenses, which is net income (loss), is
calculated from these accounts.
Figure 6.3
Service Company Income Statement. Expenses are subtracted directly from Sales to produce net
income (loss). (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
A merchandising company resells finished goods (inventory) produced by a manufacturer (supplier) to
customers. Some examples of merchandising companies include Walmart, Macy’s, and Home Depot.
Merchandising companies have financial transactions that include: purchasing merchandise, paying for
merchandise, storing inventory, selling merchandise, and collecting customer payments. A typical operating
cycle for a merchandising company starts with having cash available, purchasing inventory, selling the | {"source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00"} |
fd7f765d-99f9-488a-a08e-0523d15d7c79 | [
-0.005108896642923355,
0.07464614510536194,
0.032282304018735886,
-0.043486643582582474,
0.02683771401643753,
-0.0017586274771019816,
0.004090125672519207,
0.024463189765810966,
0.008419984020292759,
-0.0301880594342947,
0.07942263036966324,
-0.0115300128236413,
0.0514865480363369,
-0.0191... | cycle for a merchandising company starts with having cash available, purchasing inventory, selling the
merchandise to customers, and finally collecting payment from customers (Figure 6.4).
368
Chapter 6 Merchandising Transactions
Figure 6.4
Typical Operating Cycle for a Merchandising Company. (attribution: Copyright Rice University,
OpenStax, under CC BY-NC-SA 4.0 license)
Their income statement format is a bit more complicated than for a service company and is discussed in
greater detail in Describe and Prepare Multi-Step and Simple Income Statements for Merchandising
Companies. Note that unlike a service company, the merchandiser, also sometimes labeled as a retailer, must
first resolve any sale reductions and merchandise costs, known as Cost of Goods Sold, before determining
other expenses and net income (loss). A simple retailer income statement is shown in Figure 6.5 for
comparison. | {"batch_upload": true, "creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)"} |
51c6e9ca-1fee-4062-b446-a9ccd082b9f2 | [
0.019710002467036247,
0.05114885792136192,
0.010727716609835625,
-0.05534163862466812,
0.05342406406998634,
0.0443863607943058,
0.07485713809728622,
0.047666944563388824,
0.037022631615400314,
-0.01502278447151184,
0.08863820880651474,
-0.0433923713862896,
0.04134734719991684,
-0.000826398... | other expenses and net income (loss). A simple retailer income statement is shown in Figure 6.5 for
comparison.
Figure 6.5 Merchandise Company Income Statement. Cost of Goods Sold is deducted from net sales to
calculate gross margin. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Characteristics of Merchandising Transactions
Merchandising transactions are separated into two categories: purchases and sales. In general, a purchase
transaction occurs between a manufacturer and the merchandiser, also called a retailer. A sales transaction
occurs between a customer and the merchandiser or retailer. We will now discuss the characteristics that
create purchase and sales transactions for a retailer. A merchandiser will need to purchase merchandise for its
business to continue operations and can use several purchase situations to accomplish this. | {"title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "batch_upload": true, "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529"} |
743d0b5f-1361-4e8c-918a-ef59a9021d2d | [
-0.06389620155096054,
-0.0081831319257617,
-0.014707877300679684,
-0.07576298713684082,
0.0206868015229702,
-0.007064963690936565,
0.11561649292707443,
-0.036595430225133896,
0.01530264038592577,
0.000901933410204947,
0.09568970650434494,
0.005545069929212332,
0.005544922314584255,
-0.0187... | business to continue operations and can use several purchase situations to accomplish this.
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 6 Merchandising Transactions
369
Purchases with Cash or on Credit
A retailer typically conducts business with a manufacturer or with a supplier who buys from a manufacturer.
The retailer will purchase their finished goods for resale. When the purchase occurs, the retailer may pay for
the merchandise with cash or on credit. If the retailer pays for the merchandise with cash, they would be
trading one current asset, Cash, for another current asset, Merchandise Inventory or just Inventory,
depending upon the company’s account titles. In this example, they would record a debit entry to
Merchandise Inventory and a credit entry to Cash. If they decide to pay on credit, a liability would be created,
and Accounts Payable would be credited rather than Cash. For example, a clothing store may pay a jeans | {"upload_timestamp": "2026-02-07T07:23:08.167529", "creator": "DocBook XSL Stylesheets V1.79.1", "file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_name": "FinancialAccounting-OP.pdf", "batch_upload": true, "producer": "Prince 11 (www.princexml.com)", "moddate": "2020-08-05T15:26:11-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "file_type": ".pdf"} |
31c0b8d3-7a95-4e7d-922d-bf4d395e455e | [
-0.01479274407029152,
-0.010081657208502293,
0.011924182996153831,
-0.04614388197660446,
0.0461588129401207,
0.06798668950796127,
0.14367319643497467,
0.0029998987447470427,
0.00883987732231617,
0.04738655313849449,
0.07767298072576523,
-0.042017612606287,
0.010976062156260014,
-0.01594315... | and Accounts Payable would be credited rather than Cash. For example, a clothing store may pay a jeans
manufacturer cash for 50 pairs of jeans, costing $25 each. The following entry would occur.
If this same company decides to purchase merchandise on credit, Accounts Payable is credited instead of
Cash.
Merchandise Inventory is a current asset account that houses all purchase costs associated with the
transaction. This includes the cost of the merchandise, shipping charges, insurance fees, taxes, and any other
costs that gets the products ready for sale. Gross purchases are defined as the original amount of the
purchase without considering reductions for purchase discounts, returns, or allowances. Once the purchase
reductions are adjusted at the end of a period, net purchases are calculated. Net purchases (see Figure 6.6)
equals gross purchases less purchase discounts, purchase returns, and purchase allowances.
Figure 6.6 | {"uploaded_via": "batch_uploader", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "file_type": ".pdf"} |
1071992a-29ea-4a53-937e-d789b2f66e96 | [
-0.05212930217385292,
0.06829329580068588,
0.047914303839206696,
-0.04188244789838791,
0.07761307805776596,
0.02675623819231987,
0.05109092593193054,
0.04288109391927719,
0.05266515910625458,
0.028465207666158676,
0.10970225930213928,
0.0029832543805241585,
0.03693809732794762,
-0.04964845... | equals gross purchases less purchase discounts, purchase returns, and purchase allowances.
Figure 6.6
Purchase Transactions’ Effects on Gross Purchases. Deducting purchase discounts, returns, and
allowances from gross purchases will result in net purchases. (attribution: Copyright Rice University, OpenStax,
under CC BY-NC-SA 4.0 license)
Purchase Discounts
If a retailer, pays on credit, they will work out payment terms with the manufacturer. These payment terms
establish the purchase cost, an invoice date, any discounts, shipping charges, and the final payment due date.
Purchase discounts provide an incentive for the retailer to pay early on their accounts by offering a reduced
370
Chapter 6 Merchandising Transactions
rate on the final purchase cost. Receiving payment in a timely manner allows the manufacturer to free up cash
for other business opportunities and decreases the risk of nonpayment. | {"moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_size_mb": 156.7, "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "batch_upload": true, "uploaded_via": "batch_uploader"} |
9e7005dc-4658-417d-b440-a64898660680 | [
-0.07078906148672104,
0.08880094438791275,
0.018961170688271523,
-0.0450066514313221,
-0.0328558087348938,
-0.036055050790309906,
-0.03503578156232834,
0.04241557791829109,
0.026500042527914047,
0.0366254560649395,
0.10676876455545425,
-0.010110142640769482,
0.03681119903922081,
-0.0310180... | rate on the final purchase cost. Receiving payment in a timely manner allows the manufacturer to free up cash
for other business opportunities and decreases the risk of nonpayment.
To describe the discount terms, the manufacturer can write descriptions such as 2/10, n/30 on the invoice. The
“2” represents a discount rate of 2%, the “10” represents the discount period in days, and the “n/30” means
“net of 30” days, representing the entire payment period without a discount application. So, “2/10, n/30” reads
as, “The company will receive a 2% discount on their purchase if they pay in 10 days. Otherwise, they have 30
days from the date of the sale to pay in full, no discount received.” In some cases, if the retailer exceeds the
full payment period (30 days in this example), the manufacturer may charge interest as a penalty for late
payment. The number of days allowed for both the discount period and the full payment period begins
counting from the invoice date. | {"file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7, "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "producer": "Prince 11 (www.princexml.com)", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf"} |
cd24d8bd-1054-44b6-9a64-52e60ee01616 | [
-0.10948139429092407,
0.0890311598777771,
0.022814569994807243,
-0.07514618337154388,
-0.0023423086386173964,
0.009287348948419094,
0.04384847730398178,
-0.001391898957081139,
0.07331957668066025,
0.06713222712278366,
0.08453232795000076,
-0.044741857796907425,
0.025440817698836327,
-0.046... | payment. The number of days allowed for both the discount period and the full payment period begins
counting from the invoice date.
If a merchandiser pays an invoice within the discount period, they receive a discount, which affects the cost of
the inventory. Let’s say a retailer pays within the discount window. They would need to show a credit to the
Merchandise Inventory account, recognizing the decreased final cost of the merchandise. This aligns with the
cost principle, which requires a company to record an asset’s value at the cost of acquisition. In addition, since
cash is used to pay the manufacturer, Cash is credited. The debit to Accounts Payable does not reflect the
discount taken: it reflects fulfillment of the liability in full, and the credits to Merchandise Inventory and Cash
reflect the discount taken, as demonstrated in the following example.
If the retailer does not pay within the discount window, they do not receive a discount but are still required to | {"batch_upload": true, "file_size_mb": 156.7, "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "file_name": "FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_type": ".pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting", "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
439b7ae6-e74c-4087-b72e-95c6a564de5a | [
-0.1362002193927765,
0.06854145228862762,
0.04145146906375885,
-0.06699256598949432,
-0.013600374571979046,
-0.01545677985996008,
0.0035440055653452873,
-0.05333288013935089,
0.06269768625497818,
0.0805409848690033,
0.10981152951717377,
-0.06623292714357376,
0.024451635777950287,
-0.041403... | reflect the discount taken, as demonstrated in the following example.
If the retailer does not pay within the discount window, they do not receive a discount but are still required to
pay the full invoice price at the end of the term. In this case, Accounts Payable is debited and Cash is credited,
but no reductions are made to Merchandise Inventory.
For example, suppose a kitchen appliances retailer purchases merchandise for their store from a
manufacturer on September 1 in the amount of $1,600. Credit terms are 2/10, n/30 from the invoice date of
September 1. The retailer makes payment on September 5 and receives the discount. The following entry
occurs.
Let’s consider the same situation except the retailer did not make the discount window and paid in full on
September 30. The entry would recognize the following instead.
There are two kinds of purchase discounts, cash discounts and trade discounts. Cash discount provides a | {"upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "moddate": "2020-08-05T15:26:11-05:00", "total_pages": 1055, "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "uploaded_via": "batch_uploader", "batch_upload": true, "file_size_mb": 156.7, "producer": "Prince 11 (www.princexml.com)"} |
eb45295f-881d-4c70-9ad7-a05571838eb0 | [
-0.0665527880191803,
0.031655386090278625,
-0.0022640619426965714,
-0.045162323862314224,
0.048386506736278534,
0.010055175051093102,
0.009413857944309711,
0.0018754100892692804,
0.03128631412982941,
0.08396100997924805,
0.10604127496480942,
0.03583835810422897,
0.013294476084411144,
-0.00... | September 30. The entry would recognize the following instead.
There are two kinds of purchase discounts, cash discounts and trade discounts. Cash discount provides a
discount on the final price after purchase if a retailer pays within a discount window. On the other hand, a
trade discount is a reduction to the advertised manufacturer’s price that occurs during negotiations of a final
purchase price before the inventory is purchased. The trade discount may become larger if the retailer
purchases more in one transaction. While the cash discount is recognized in journal entries, a trade discount is
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 6 Merchandising Transactions
371
not, since it is negotiated before purchase.
For example, assume that a retailer is considering an order for $4,000 in inventory on September 1. The
manufacturer offers the retailer a 15% discount on the price if they place the order by September 5. Assume | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1", "batch_upload": true, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "file_size_mb": 156.7, "file_name": "FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "producer": "Prince 11 (www.princexml.com)"} |
1203e534-8121-40fa-b25e-cd01ec7425e3 | [
-0.11067987233400345,
0.06918106228113174,
0.013069704174995422,
-0.04363846033811569,
-0.03452281653881073,
0.03523414954543114,
-0.035143349319696426,
0.04238570109009743,
0.011292863637208939,
0.06441126018762589,
0.08570753782987595,
0.013382414355874062,
0.03566954657435417,
-0.067998... | manufacturer offers the retailer a 15% discount on the price if they place the order by September 5. Assume
that the retailer places the $4,000 order on September 3. The purchase price would be $4,000 less the 15%
discount of $600, or $3,400. Since the trade discount is based on when the order was placed and not on any
potential payment discounts, the initial journal entry to record the purchase would reflect the discounted
amount of $3,400. Even if the retailer receives a trade discount, they may still be eligible for an additional
purchase discount if they pay within the discount window of the invoice.
Purchase Returns and Allowances
If a retailer is unhappy with their purchase—for example, if the order is incorrect or if the products are
damaged—they may receive a partial or full refund from the manufacturer in a purchase returns and
allowances transaction. A purchase return occurs when merchandise is returned and a full refund is issued. A | {"batch_upload": true, "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "creator": "DocBook XSL Stylesheets V1.79.1", "total_pages": 1055, "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "file_size_mb": 156.7} |
f8f8927a-a087-460c-94ab-655ea42af43b | [
-0.054453104734420776,
0.06556437909603119,
0.05494631454348564,
-0.0006125710206106305,
-0.005721305496990681,
0.06125841662287712,
0.06455400586128235,
-0.035471897572278976,
-0.018498040735721588,
0.01802670955657959,
0.09030171483755112,
0.021525312215089798,
-0.002366796135902405,
-0.... | allowances transaction. A purchase return occurs when merchandise is returned and a full refund is issued. A
purchase allowance occurs when merchandise is kept and a partial refund is issued. In either case, a
manufacturer will issue a debit memo to acknowledge the change in contract terms and the reduction in the
amount owed.
To recognize a return or allowance, the retailer will reduce Accounts Payable (or increase Cash) and reduce
Merchandise Inventory. Accounts Payable decreases if the retailer has yet to pay on their account, and Cash
increases if they had already paid and received a subsequent refund. Merchandise Inventory decreases to
show the reduction of inventory cost from the retailer’s inventory stock. Note that if a retailer receives a
refund before they make a payment, any discount taken must be from the new cost of the merchandise less
the refund.
To illustrate, assume that Carter Candle Company received a shipment from a manufacturer that had 150 | {"producer": "Prince 11 (www.princexml.com)", "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "file_name": "FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creator": "DocBook XSL Stylesheets V1.79.1"} |
9071315d-e95c-4c42-9fe8-f1a6671b73cc | [
-0.05865820497274399,
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0.020552825182676315,
0.05518585070967674,
0.041267067193984985,
0.007910634391009808,
-0.05825... | the refund.
To illustrate, assume that Carter Candle Company received a shipment from a manufacturer that had 150
candles that cost $150. Assume that they have not yet paid for these candles and 100 of the candles are badly
damaged and must be returned. The other 50 candles are marketable, but are not the right style. The candle
company returned the 100 defective candles for a full refund and requested and received an allowance of $20
for the 50 improper candles they kept. The first entry shows the return and the second entry shows the
allowance.
It is possible to show these entries as one, since they affect the same accounts and were requested at the
same time. From a manager’s standpoint, though, it may be better to record these as separate transactions to
372
Chapter 6 Merchandising Transactions
better understand the specific reasons for the reduction to inventory (either return or allowance) and
restocking needs.
E T H I C A L C O N S I D E R A T I O N S | {"file_type": ".pdf", "producer": "Prince 11 (www.princexml.com)", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "moddate": "2020-08-05T15:26:11-05:00", "uploaded_via": "batch_uploader", "total_pages": 1055, "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529"} |
553593a6-4caf-4773-a233-4d77af1da7af | [
-0.03723075985908508,
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0.035320281982421875,
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0.03340673819184303,
0.08329614251852036,
0.009085637517273426,
-0.026096265763044357,
-0.05... | better understand the specific reasons for the reduction to inventory (either return or allowance) and
restocking needs.
E T H I C A L C O N S I D E R A T I O N S
Internal Controls over Merchandise Returns[1]
Returning merchandise requires more than an accountant making journal entries or a clerk restocking
items in a warehouse or store. An ethical accountant understands that there must be internal controls
governing the return of items. As used in accounting, the term “internal control” describes the
methodology of implementing accounting and operational checkpoints in a system to ensure compliance
with sound business and operational practices while permitting the proper recording of accounting
information. All transactions require both operational and accounting actions to ensure that the amounts
have been recorded in the accounting records and that operational requirements have been met. | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "title": "Principles of Accounting, Volume 1: Financial Accounting", "batch_upload": true, "moddate": "2020-08-05T15:26:11-05:00", "creator": "DocBook XSL Stylesheets V1.79.1", "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "file_type": ".pdf"} |
dc2f6beb-f1d7-42fd-aded-b4e44e3df308 | [
-0.12170477211475372,
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0.009865906089544296,
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0.0740746259689331,
-0.020439818501472473,
0.0018794710049405694,
0.03642585873603821,
0.10847201943397522,
-0.013458924368023872,
-0.02278895489871502,
-0.04... | have been recorded in the accounting records and that operational requirements have been met.
Merchandise return controls require that there be a separation of duties between the employee
approving the return and the person recording the return of merchandise in the accounting records.
Basically, the person performing the return should not be the person recording the event in the
accounting records. This is called separation of duties and is just one example of an internal control that
should be used when merchandise is returned.
Every company faces different challenges with returns, but one of the most common challenges includes
fake or fictitious returns. The use of internal controls is a protective action the company undertakes, with
the assistance of professional accountants, to ensure that fictitious returns do not occur. The internal
controls may include prescribed actions of employees, special tags on merchandise, specific store layouts | {"creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "file_name": "FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "total_pages": 1055, "batch_upload": true, "file_type": ".pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf"} |
80ffb382-cc83-4ad2-9964-8d4ed2b4de08 | [
-0.07181019335985184,
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-0.03687802702188492,
-0.06236449256539345,
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-0.007201459724456072,
0.12134802341461182,
0.02664855308830738,
0.01977805607020855,
-0.012032... | controls may include prescribed actions of employees, special tags on merchandise, specific store layouts
that ensure customers pass checkout points before leaving the store, cameras to record activity in the
facility, and other activities and internal controls that go beyond accounting and journal entries to ensure
that assets of a company are protected.
Characteristics of Sales Transactions
Business owners may encounter several sales situations that can help meet customer needs and control
inventory operations. For example, some customers will expect the opportunity to buy using short-term credit
and often will assume that they will receive a discount for paying within a brief period. The mechanics of sales
discounts are demonstrated later in this section.
Sales with Cash or on Credit
As previously mentioned, a sale is usually considered a transaction between a merchandiser or retailer and a | {"title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "producer": "Prince 11 (www.princexml.com)", "file_type": ".pdf", "creator": "DocBook XSL Stylesheets V1.79.1", "uploaded_via": "batch_uploader", "moddate": "2020-08-05T15:26:11-05:00", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "total_pages": 1055, "batch_upload": true} |
50801323-71a0-4bd9-96ac-bd2f434204b8 | [
-0.10290636867284775,
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0.019824659451842308,
0.08860550820827484,
-0.051484283059835434,
0.039972469210624695,
-0.02607... | discounts are demonstrated later in this section.
Sales with Cash or on Credit
As previously mentioned, a sale is usually considered a transaction between a merchandiser or retailer and a
customer. When a sale occurs, a customer has the option to pay with cash or credit. For our purposes, let’s
consider “credit” as credit extended from the business directly to the customer.
Whether or not a customer pays with cash or credit, a business must record two accounting entries. One entry
recognizes the sale and the other recognizes the cost of the sale. The sales entry consists of a debit to either
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal Control—Integrated Framework. May 2013. https://na.theiia.org/standards-
1
guidance/topics/Documents/Executive_Summary.pdf
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 6 Merchandising Transactions
373 | {"creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "uploaded_via": "batch_uploader", "batch_upload": true, "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_size_mb": 156.7, "creationdate": "2019-04-24T10:32:54-05:00", "total_pages": 1055, "file_type": ".pdf", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "upload_timestamp": "2026-02-07T07:23:08.167529"} |
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0.01775129698216915,
0.026519333943724632,
0.031348515301942825,
-0.0281... | 1
guidance/topics/Documents/Executive_Summary.pdf
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter 6 Merchandising Transactions
373
Cash or Accounts Receivable (if paying on credit), and a credit to the revenue account, Sales.
The amount recorded in the Sales account is the gross amount. Gross sales is the original amount of the sale
without factoring in any possible reductions for discounts, returns, or allowances. Once those reductions are
recorded at the end of a period, net sales are calculated. Net sales (see Figure 6.7) equals gross sales less
sales discounts, sales returns, and sales allowances. Recording the sale as it occurs allows the company to
align with the revenue recognition principle. The revenue recognition principle requires companies to record
revenue when it is earned, and revenue is earned when a product or service has been provided.
Figure 6.7 | {"file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "file_name": "FinancialAccounting-OP.pdf", "total_pages": 1055, "moddate": "2020-08-05T15:26:11-05:00", "file_type": ".pdf", "creationdate": "2019-04-24T10:32:54-05:00", "uploaded_via": "batch_uploader", "batch_upload": true, "file_size_mb": 156.7, "upload_timestamp": "2026-02-07T07:23:08.167529", "producer": "Prince 11 (www.princexml.com)", "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting"} |
8f54ab48-fe7f-4515-ab68-d313d9b7c13b | [
-0.017103156074881554,
0.029225345700979233,
0.01081121526658535,
-0.0480581633746624,
-0.01330582331866026,
0.05214553326368332,
0.0630527064204216,
0.08254756033420563,
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0.011632588692009449,
0.03537440299987793,
-0.0019914302974939346,
0.022626968100667,
-0.04751195... | revenue when it is earned, and revenue is earned when a product or service has been provided.
Figure 6.7
Sales Transactions’ Effect on Gross Sales. Deducting sales discounts, returns, and allowances
from gross sales, will result in net sales. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA
4.0 license)
The second accounting entry that is made during a sale describes the cost of sales. The cost of sales entry
includes decreasing Merchandise Inventory and increasing Cost of Goods Sold (COGS). The decrease to
Merchandise Inventory reflects the reduction in the inventory account value due to the sold merchandise. The
increase to COGS represents the expense associated with the sale. The cost of goods sold (COGS) is an
expense account that houses all costs associated with getting the product ready for sale. This could include
purchase costs, shipping, taxes, insurance, stocking fees, and overhead related to preparing the product for | {"creator": "DocBook XSL Stylesheets V1.79.1", "upload_timestamp": "2026-02-07T07:23:08.167529", "file_size_mb": 156.7, "uploaded_via": "batch_uploader", "producer": "Prince 11 (www.princexml.com)", "file_type": ".pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "creationdate": "2019-04-24T10:32:54-05:00", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "title": "Principles of Accounting, Volume 1: Financial Accounting", "moddate": "2020-08-05T15:26:11-05:00", "batch_upload": true} |
460fb66f-77f8-47c4-a51d-4db47198a239 | [
-0.07148714363574982,
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0.021989459171891212,
-0.08350765705108643,
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0.009137331508100033,
0.012564604170620441,
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0.027094025164842606,
0.03083641640841961,
-0.0036212701816111803,
-0.021546289324760437,
-0.01... | purchase costs, shipping, taxes, insurance, stocking fees, and overhead related to preparing the product for
sale. By recording the cost of sale when the sale occurs, the company aligns with the matching principle. The
matching principle requires companies to match revenues generated with related expenses in the period in
which they are incurred.
For example, when a shoe store sells 150 pairs of athletic cleats to a local baseball league for $1,500 (cost of
$900), the league may pay with cash or credit. If the baseball league elects to pay with cash, the shoe store
would debit Cash as part of the sales entry. If the baseball league decides to use a line of credit extended by
the shoe store, the shoe store would debit Accounts Receivable as part of the sales entry instead of Cash. With
the sales entry, the shoe store must also recognize the $900 cost of the shoes sold and the $900 reduction in
Merchandise Inventory. | {"file_type": ".pdf", "batch_upload": true, "file_size_mb": 156.7, "creator": "DocBook XSL Stylesheets V1.79.1", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "upload_timestamp": "2026-02-07T07:23:08.167529", "moddate": "2020-08-05T15:26:11-05:00", "file_name": "FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "creationdate": "2019-04-24T10:32:54-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "total_pages": 1055, "uploaded_via": "batch_uploader"} |
ec315f8a-98bb-42cc-8131-5c2277b1b507 | [
-0.07388701289892197,
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0.07503935694694519,
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0.04354587569832802,
0.09765418618917465,
0.09826622158288956,
-0.00595582602545619,
-0.03048304... | the sales entry, the shoe store must also recognize the $900 cost of the shoes sold and the $900 reduction in
Merchandise Inventory.
You may have noticed that sales tax has not been discussed as part of the sales entry. Sales taxes are liabilities
374
Chapter 6 Merchandising Transactions
that require a portion of every sales dollar be remitted to a government entity. This would reduce the amount
of cash the company keeps after the sale. Sales tax is relevant to consumer sales and is discussed in detail in
Current Liabilities.
There are a few transactional situations that may occur after a sale is made that have an effect on reported
sales at the end of a period.
Sales Discounts
Sales discounts are incentives given to customers to entice them to pay off their accounts early. Why would a
retailer offer this? Wouldn’t they rather receive the entire amount owed? The discount serves several purposes | {"creator": "DocBook XSL Stylesheets V1.79.1", "source": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "moddate": "2020-08-05T15:26:11-05:00", "title": "Principles of Accounting, Volume 1: Financial Accounting", "file_type": ".pdf", "source_file": "downloads\\business\\accounting\\FinancialAccounting-OP.pdf", "file_hash": "89738e550d63820fbb3a833d14ab04029664bcb14dc631bb8a45f0af74d2d6b9", "total_pages": 1055, "file_name": "FinancialAccounting-OP.pdf", "producer": "Prince 11 (www.princexml.com)", "uploaded_via": "batch_uploader", "batch_upload": true, "upload_timestamp": "2026-02-07T07:23:08.167529", "creationdate": "2019-04-24T10:32:54-05:00", "file_size_mb": 156.7} |
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