Illustration of the Accounting Cycle In this section, the complete accounting cycle for one period is Blustrated. Assume that for several years Kelly Pitney has operated a part-time consulting business from her hime, As of April 1, 20Y8, Kelly decided to move to rented quarters and to operate the besiness is a full-time basis. The business will be known as Kelly Consulting. During April, Kelly Consultion entered into the following transactions: Apr. 1. The following assets were received from Kelly Pitney as an investment in Kelly Cin. sulting: cash, \$13,100, accounts receivable, \$3,000; supplies, \$1,400, and office eqpip ment, $12,500. There were no liabilities received. 1. Paid three month' rent on a lease rental contract, $4,800. 2. Paid six months' premiums on property and casualty insurance policies, $1,800. 4. Received cash from clients as an advance payment for services to be provided and recorded it as uneamed fees, $5,000. 5. Purchased additional office equipment on account from Office Station Co0,32,000 6. Received cash from clients on account, $1,800. 10. Paid cash for a newspaper advertisement, $120. 12. Paid Office Station Ca. for part of the debt incurred on April 5,$1,200. 12. Recorded services provided on account for the period April 1-12,\$4,200. 14. Paid part-time receptionist for two weeks' salary, $750. 17. Recorded cash from cash clients for fees eamed during the period April 1-16, 46,250. 18. Paid cash for supplies, $800. 20. Recorded services provinfed cur account for the period April 13-20, \$2,100. 24. Recorded cash from wash suents for fees earned for the period April 17-24, $3,850. 27. Paid part-time receptlomint for two weeks' salary, $750. 29. Paid telephone bill for April, $130. 30. Paid electricity bill for April, $200. 30. Recorded cash from cash clients for fees earned for the period April 25-30, \$3,050. 30. Recorded services provided on account for the remainder of April, \$1,500, 30. Paid cash to Kelly Pitney for personal use, $6,000. Step 1. Analyzing and Recording Transactions in the Journal The first step in the accounting cycle is to analyze and record transactions in the journal using the double-entry accounting system. As illustrated in Chapter 2, transactions are analyzed and journalized as follows: - Step 1. Carefully read the description of the transaction to determine whether an asket. liability, owner's equity (capital or drawing), revenue, or expense account is affected. - Step 2. For each account affected by the transaction, determine whether the accoust increases or decreases. - Step 3. Determine whether each increase or decrease should be recorded as a debir er 1 credit, following the rules of debit and credit shown in Exhibit 3 of Chapter 2. - Step 4. Record the transaction using a journal entry. The company's chart of accounts is useful in determining which accounts are alfectrd by the transaction. The chart of accounts for Kelly Consulting is shown in Exhibit 9. 11 Cash 12 Accounts Receivable 14 Supplies 31 Kelly Pitrey Capital 32 Kelly Pitrey, Orawing 15 Prepaid Rent 41 Fees Earned 16 Prepaid insurance 51 Salary Expense 52. Rent Expense 18 Office Equipment. 19 Accumulated Depreciation 21 Accounts Payable 53 Supplies fxpense 54 Depreciation Expense 22 Salaries Payable 23 Unearned Fees 55 Insurance Expense 59. Miscellaneous Expense Exhibit 9 Chart of Acoos tor Kally Consuleng After analyzing each of Kelly Consulting's transactions for April, the journal entries are reocided as shown in Exhibit 10. Step 2. Posting Transactions to the Ledger Periodically, the transactions recorded in the journal are posted to the accounts in the ledger. The debits and credits for each journal entry are posted to the accounts in the order in which they occur in the journal. As illustrated in Chapters 2 and 3 , journal entries are posted to the accounts using the following four steps: - Step 1. The date is entered in the Date column of the account. - Step 2. The amount is entered into the Debit or Credit column of the account. - Step 3. The journal page number is entered in the Posting Reference column. - Step 4. The account number is catered in the Posting Reference (Post. Ref.) column in the journal. The journal entries for Kelly Constiting have been posted to the ledger shown in Exhibit 18. Step 3. Preparing an Unadjusted Trial Balance An unadjusted trial balance is prepared to determine whether any errors have been made in posting the debits and credits to the ledger. The unadjusted trial balance shown in Exhibit If does not provide complete proof of the accuracy of the ledger. It indicates only that the debies and the credits are equal. This proof is of value, however, because errors often affect the equality of debits and credits. If the two totals of a trial balance are not equal, an error has occurred that must be discovered and corrected. The unadjusted account balances shown in Exhibit 11 were taken from Kelly Consulting's ledger on pages 186-188, before any adjusting entries were recorded. Step 4. Assembling and Analyzing Adjustment Data before the financial statements can be prepared, the accounts must be updated. The four types of accounts that normally require adjustment include accrued revenues, accrued expenses, thesthed revenues, and prepaid expenses. In addition, depreciation expense must be recorded far fixed assets other than land. The following data have been assembled on April 30, 20Y8, if analysis of possible adjustments for Kelly Consulting: Serpples on hand on April 30 are $1,350. 5. Prepieciation of affice equipment for April is $330. 4. Acciend receptionist salary on April 30 is $120. t. Pent tapled during April is $1,600