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David Hatfield ACCT 3551-001 1/23/2014 Dr.

Cal Christian Accounting Cycle David Hatfield CPA, a well known, seasoned accountant wants to open his own accounting firm. He invests $40,000 into DRH LLC on December 1st, 2013 in order to start the company, David Hatfield and DRH LLC recieve a receipt for the investment. DRH LLC identifies that cash will now increase and owners equity will increase by $40,000. The firm recognizes this transaction in the journal by creating a journal entry that debits cash for $40,000 and credits common stock for $40,000. DRH LLC rents out an office building on December 1st, 2013. The firm pays $24,000 for two years of rent and receives a sales invoice from the property manager. DRH reviews the transaction of the assets, cash decreases by $24,000 and prepaid rent increases $24,000. The firm creates a journal entry that debits prepaid rent for $24,000 and credits cash for $24,000. The company buys office furniture on account on December 2rd, 2013 for $5,000 and receives a bill from the furniture company for the total amount. This transaction will increase the asset account furniture, and will increase accounts payable. A journal entry is created to record this transaction, the furniture account is debited for $5,000 and accounts payable is credited for $5,000. DRH LLC paid $2,000 for supplies on December 3rd, 2013 and received a cash register reciept from the supplies store. The accounting firm analyzes the transaction and recognizes that the supplies account will increase and cash will decrease. DRH records this purchase of supplies by debiting supplies for $2,000 and crediting cash for $2,000. DRH LLC provides $20,000 of services on account to a local restaurant chain on December 18th, 2013. The firm sent a bill to the restaurant chain and keeps a receipt of the bill for records, this transaction will increase their assets and

2 increase their retained earnings. DRH created a journal entry that debited accounts receivable for $20,000 and credited service revenue by $20,000. On December 22nd, 2013 the company paid $3,000 for the furniture bought on account earlier in the month on December 2nd, 2013. DRH receives a receipt from the furniture company for the payment, and analyzes that the firms cash account will decrease and accounts payable will also decrease. The company records this payment by crediting cash for $3,000 and debiting accounts payable for $3,000. At the end of the month on December 31, 2013 DRH paid a utility bill they received in the mail for $500. The payment of the utility will decrease cash and decrease retained earnings. The firm records this payment by crediting cash for $500 and debiting utilities expense for $500. Also on December 31st, 2013 supplies were counted and $400 of supplies had been used. Supplies expense is debited for $400 and supplies is credited for $400 On the same day DRH LLC received $20,000 payment for services paid on account on December 18th, 2013. DRH provided a receipt to the local restaurant chain and kept a copy for records. A journal entry was made to record the collection, cash was debited for $20,000 and accounts receivable was credited for $20,000. DRH then took all the journal entries from the past month and posted them into the general ledger. Transferring the journal entries into the ledger allows the firm to look at all the transactions that took place over the month as a whole. The firm transferred all the credit and debit cash transactions into one account to find the ending cash balance to be $30,500. Prepaid rent is recording with and ending debit balance of $24,000. The asset account furniture has an ending debit balance of $5,000. Service revenue has an ending credit balance of $20,000. Common stock has an ending credit balance of $40,000. The supplies account has an ending debit balance of $1,600. Accounts payable has an ending

3 credit balance of $2,000 after the payment on December 22nd, 2013. Utilities expense has an ending debit balance of $500. After DRH transferred all the information into the general ledger, the account balances are put into an unadjusted trial balance. The total debit amount on the unadjusted trial balance is $62,000 and the total credit amount on the unadjusted trial balance is $62,000. Because the debits and credits equal, the accounting equation is balanced and the accounts are balanced correctly. After the unadjusted trial balance is completed DRH moves to make adjusting entries because it is the end of the accounting period. For the month of December the rent will cost $1,000. Prepaid rent is credited for $1,000 and rent expense is debited for $1,000. Now an adjusted trial balance can be created, nothing has changed from the unadjusted trial balance, except prepaid rent has decreased and rent expense has increased both by $1,000. DHR creates an income statement using their service revenue and expenses, and find a net income of $18,100. DHR creates a statement of cash flows, the cash inflows being from customers and cash outflows being from rent, supplies, furniture, and expenses. The net increase in cash, after adding the issuance of common stock, equals $30,500. Because the end of the accounting period also falls on the end of the year DRH closed out their temporary accounts into the retained earnings account. After subtracting the expenses from the revenue the retained earnings are $18,100. After completing the post-closing trial balance the total debits equal $61,000 and the total credits equal $61,000, because the debits and credits match the closing entries were prepared and posted correctly for DRH LLC.