Assume that you are the chief accountant for Eli’s Consulting Services. During January, the busi- ness will use the same types of records and procedures that you learned about in Chapters 1 through 6. The chart of accounts for Eli’s Consulting Services has been expanded to include a few new accounts. Follow the instructions to complete the accounting records for the month of January. Eli’s Consulting Services Chart of Accounts Assets Revenue 101 Cash 401 Fees Income 111 Accounts Receivable 121 Supplies Expenses 511 Salaries Expense 134 Prepaid Insurance 514 Utilities Expense 137 Prepaid Rent 517 Supplies Expense 141 Equipment 520 Rent Expense 142 Accumulated Depreciation-Equipment 526 Advertising Expense Liabilities 523 Depreciation Expense-Equipment 202 Accounts Payable 529 Maintenance Expense Owner’s Equity 532 Telephone Expense 301 Trayton Eli, Capital 535 Insurance Expense 302 Trayton Eli, Drawing 309 Income Summary 1. Open the general ledger accounts and enter the balances for January 1, 2020. Obtain the necessary figures from the postclosing trial balance prepared on December 31, 2019, which appears in Figure 6.3. 2. Analyze each transaction and record it in the general journal. Use page 3 to begin January’s transactions. 3. Post the transactions to the general ledger accounts. 4. Prepare the Trial Balance section of the worksheet. 5. Prepare the Adjustments section of the worksheet. a. Compute and record the adjustment for supplies used during the month. An inventory taken on January 31 showed supplies of
4,000. d. Record the adjustment for depreciation of $183 on the old equipment for the month. The first adjustment for depreciation for the new equipment will be recorded in February 6. Complete the worksheet.
The Correct Answer and Explanation is:
Solution: January Accounting Cycle for Eli’s Consulting Services
Step 1: Opening General Ledger Accounts
Using the post-closing trial balance from December 31, 2019 (Figure 6.3), you open the general ledger accounts. Assume the balances are as follows (you would replace these with actual figures from the textbook):
| Account | Debit | Credit |
|---|---|---|
| Cash | $XX,XXX | — |
| Accounts Receivable | $X,XXX | — |
| Supplies | $X,XXX | — |
| Prepaid Insurance | $X,XXX | — |
| Prepaid Rent | $X,XXX | — |
| Equipment | $XX,XXX | — |
| Accumulated Depreciation–Equipment | — | $X,XXX |
| Accounts Payable | — | $X,XXX |
| Trayton Eli, Capital | — | $XX,XXX |
Step 2: Journalize January Transactions
Record all business activities in the general journal, starting on page 3. Each entry should follow this structure:
- Date of transaction
- Debit account(s)
- Credit account(s)
- Description (optional)
Step 3: Post to General Ledger
Post each journal entry to its corresponding general ledger account. Update running balances after each entry.
Step 4: Prepare Trial Balance
Add balances from each ledger account and prepare a trial balance. The sum of debit balances must equal credit balances.
Step 5: Adjustments
- Supplies Adjustment: If beginning supplies were $6,000 and ending inventory is $4,000, the adjustment is $2,000.
- Debit Supplies Expense $2,000
- Credit Supplies $2,000
- Depreciation Adjustment:
- Debit Depreciation Expense–Equipment $183
- Credit Accumulated Depreciation–Equipment $183
Step 6: Complete the Worksheet
Enter trial balance figures and adjustments into the worksheet. Extend adjusted balances to income statement and balance sheet columns. Calculate net income or loss.
Explanation
Eli’s Consulting Services follows the traditional accounting cycle, which includes journalizing transactions, posting to the general ledger, preparing a trial balance, adjusting entries, and completing a worksheet. Opening balances are entered into general ledger accounts based on the post-closing trial balance from the previous period. These balances represent the starting point for the month of January.
Transactions during January are recorded chronologically in the general journal. Each transaction is analyzed to determine the appropriate debit and credit accounts. These journal entries are then posted to the general ledger, where individual account balances are updated.
After all transactions are posted, a trial balance is prepared to ensure that total debits equal total credits. This step checks for mathematical accuracy before making adjustments. Adjustments are then prepared for items such as supplies used and depreciation. For instance, if $2,000 worth of supplies were used during the month, a supplies expense is recorded to reflect the cost of goods consumed in the period. Likewise, equipment depreciation of $183 is recorded to allocate part of the asset’s cost as an expense.
These adjustments are entered into the worksheet to reflect accurate account balances. The worksheet organizes the adjusted trial balance into income statement and balance sheet sections. It also helps compute net income by comparing total revenues and expenses. This comprehensive process ensures the financial statements present a true and fair view of the company’s financial position and performance for January.
