Chapter 6
The Accounting Cycle: Statements and Closing Entries
136
The final steps of the accounting cycle are illustrated using the MP Consulting example from the
previous chapter. At the end of the previous chapter, we prepared a worksheet which shows the
unadjusted trial balance, the adjustments made and the adjusted trial balance. This is shown in
Figure 6.2.The adjusted trial balance shows the balance of the accounts after the adjustments have
been made. At this point, the accounts are ready to be compiled into the financial statements.
MP Consulting
Worksheet
January 31, 2016
Unadjusted Trial
Balance
Adjustments
Adjusted Trial
Balance
Account Titles
DR
CR
DR
CR
DR
CR
Cash
$3,800
$3,800
Accounts Receivable
3,000
$1,000
4,000
Prepaid Insurance
1,200
$100
1,100
Equipment
8,300
8,300
Accumulated Depreciation
$0
150
$150
Accounts Payable
1,250
1,250
Interest Payable
0
25
25
Unearned Revenue
2,000
200
1,800
Bank Loan
2,500
2,500
Parish, Capital
10,300
10,300
Parish, Drawings
2,000
2,000
Service Revenue
3,300
1,200
4,500
Depreciation Expense
0
150
150
Insurance Expense
0
100
100
Interest Expense
0
25
25
Rent Expense
800
800
Telephone Expense
250
250
Total
$19,350 $19,350 $1,475 $1,475 $20,525 $20,525
________________
Figure 6.2
The worksheet is only a working paper for accountants, it is not meant to be read by external users
of financial information. It is therefore important to create formal documents in the form of an
income statement, a statement of owner’s equity and a balance sheet.
The Income Statement
The income statement takes the values from the adjusted trial balance columns of the worksheet
and organizes them into a format that shows the net income or loss.To illustrate the importance of
preparing the adjustments, first look at the income statement in Figure 6.3.This income statement
was prepared before any adjustments were made. Net income shows $2,250.
