The accounting cycle is the process by which companies produce their financial statements for a specific period. It is the steps that are followed through the time period. The accounting cycle starts with the beginning asset, liability, and stockholders' equity account balances left over from the preceding period. For a business like Wonder'sWonder's Quality Automotive that is in its first month of operations, those beginning balances are all $0. The table below outlines the complete accounting cycle of a business. Start with Item 1 and move clockwise.LOADING...(Click the icon to view the accounting cycle diagram.)Accounting takes place at two different times:bullet•During the period (Steps 1 through 3 from the accounting cycle diagram)long dash—Journalizing transactions and posting to the accountsbullet•End of the period (Steps 4 through 10 from the accouting cycle diagram)long dash—Adjusting the accounts, preparing the financial statements, and closing the accountsIn this problem, we will walk through Wonder'sWonder's Quality Automotive's entire accounting cycle. Remember that Step 1long dash—starting with the beginning account balances, is not necessary for a company in its first period of operations. All of the beginning balances are $0. So we'll begin with Steps 2 and 3long dash—journalizing and posting the transactions.Requirement 1. Prepare the journal entries, and post to the T-accounts.Begin by preparing the journal entries for the DecemberDecember transactions. Dec.Dec. 1:
WonderWonder contributed $ 55 comma 000$55,000 cash to the business in exchange for shares of common stock. The two accounts involved are Cash (an asset) and Common Stock (equity). Both Cash and Common Stock increase. We record an increase in an asset with a debit and an increase in equity with a credit. Go ahead and journalize the transaction. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Save Accounting Table... + Copy to Clipboard... + Date Accounts and Explanation Debit Credit Dec. 1 Cash 55,000 Common Stock 55,000 Issued common stock. Dec.Dec. 1: Purchased $ 9 comma 000$9,000 of equipment paying cash. Equipment (an asset) is increasing and Cash (an asset) is decreasing. Remember that assets increase with debits and decrease with credits. Save Accounting Table... + Copy to Clipboard... + Date Accounts and Explanation Debit Credit Dec. 1 Equipment 9,000 Cash 9,000 Purchased equipment with cash. Dec.Dec. 1: Paid
$ 2 comma 400$2,400 for a 1212-month insurance policy starting on DecemberDecember 1. Prepaid expenses are advance payments of expenses. Prepaid expenses are always paid for before they are used up. Such expenses are considered assets rather than expenses until they are used up. The two accounts involved in this transaction, then, are Prepaid Insurance (an asset) and Cash (an asset). Remember that assets increase with debits and decrease with credits. Save Accounting Table... + Copy to Clipboard... + Date Accounts and Explanation Debit Credit Dec. 1 Prepaid Insurance 2,400 Cash 2,400 Paid insurance in advance. Dec.Dec. 9: Paid $ 15 comma 000$15,000 cash to purchase land for an office site.
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