The Accounting Cycle: Definition, Steps & Example

The Golden Goals, a professional soccer team adjusting entries on May 31. 

Date	Details	Debit $	Credit$
April	Prepaid rent	$1,200,000
	Cash		$1,200,000
	Prepaid rent to accrue May 1 through September 30
May 31	Rent Expense	240,000
	Prepaid rent		240,000
	(To record the adjusting entry for prepaid Rent)

Rent expenses: 1,200,000/ 5 = 240,000 

New balance of Prepaid Rent ($960,000) 

Date	Details	Debit $	Credit$
May 31	Unearned Ticked Revenue	148,000
	Ticket Revenue		148,000
	(To record the adjusting entry for Unearned Revenue)

Exercise 4.5, page 168 

The geological consulting firm of Gilbert, March, and Kester adjusting entries on a monthly basis. 

Date	Details	Debit $	Credit$
Dec 31	Interest Expense	375
	Interest Payable		375
	(To record the adjusting entry for Interest Expense)

Annual Interest Expense: 50,000 * 9% *1/12 

Date	Details	Debit $	Credit$
Dec 31	Accounts Receivable ($1,000 * 10 days)	10,000
	Consulting fees earned		10,000
	(To record the consulting revenue earned)

b. Interest expense for 2008 = $50,000 * 9% * 6/12 = 2,250 

Interest expense for 2008 is $2,250. 

c. Revenue portion for January 2008 = $25,000 - $10,000 

Revenue portion for January 2008 is $15,000. 

Exercise 4.7, pages 168–169 

Sweeney & Associates, a large marketing firm, adjusts its accounts at the end of each month. 

Date	Details	Debit $	Credit$
Dec 31	Interest Expense	1,200
	Interest Payable		1,200
	(To record accrued interest expense for the month)
Dec 31	Depreciation Expense – Office Building	1,100
	Accumulated Depreciation – Office Building		1,100
	(To record depreciation expense for the month.)
Dec 31	Accounts Receivable	64,000
	Service Revenue		64,000
	(To record accrued service revenue)
Dec 31	Insurance Expense	150
	Prepaid Insurance		150
	(To record insurance expense for the month)
Dec 31	Unearned Service Revenue	3,500
	Service Revenue		3,500
	(To record earned portion of unearned service revenue)
Dec 31	Salaries Expense	2,400
	Service Revenue		2,400
	(To record accrued salaries expense)

Depreciation expenses for December = Cost of building / estimated life = $330,000 / 25 = $13200 

Depreciation for each month = $13,200 /12 = $1,100 

Insurance expense for one month = $1,800 /12 = $150 

b. The effect of adjustments on net income can be determined as: 

	Amount
Service Revenue ($64,000 + $3,500)		67,500
Less expenses
Interest expense	1,200
Depreciation expense	1,100
Insurance expense	150
Salaries expense	2,400
Total expenses		4,850
Increase in net income		62,650

As a result of the adjustments that have been made in part a, the net income will increase by $62,650 

Problem 4.3A, page 173 

Gunflint Adventures Questions . 

1. Age of airplane in months: 36 months 

Annual depreciation = Cost/ useful life = 240,000 / 20 = 12,000 

Monthly depreciation rate = Annual depreciation / 12 = 12,000 /12 = 1,000 

Age of airplane = Accumulated depreciation/ monthly depreciation = 36,000 / 1,000 = 36 months 

2. Monthly airport rent expense. = $1,800 

= Prepaid rent total / months remaining = $7,200 / 4 = $1,800 

3. Amount paid for the 12-month policy on February 1 = $60,000 

Monthly rate = Remaining unexpired insurance/ months = 3,500 /7 = 500 

Amount = Monthly rate * 12 months = 500 * 12 = $60,000 

1. Depreciation expense: airplane 

Date	Details	Debit $	Credit$
June 30	Depreciation expense: airplane	1,000
	Accumulated depreciation: airplane		1,000
	(To record the depreciation expense)

2. Airport rent expense 

Date	Details	Debit $	Credit$
June 30	Airport rent expense	1,800
	Prepaid airport rent		1,800
	(To record the Rent Expense for June)

3. Insurance expense 

Date	Details	Debit $	Credit$
June 30	Insurance expense	500
	Unexpired insurance		500
	(To record the Insurance Expense for June)

4. Passenger revenue earned 

Date	Details	Debit $	Credit$
June 30	Unearned revenue	75,000
	Revenue		75,000
	(To record the adjusting entry for Revenue Earned)