Closing the Books on a Window-Cleaning Company's Second Year: From the Adjusted Trial Balance to a Classified Balance Sheet, Four Closing Entries and What the Numbers Tell the Owners
[Student Name]
University of Phoenix
ACC/290: Principles of Accounting I
Week 5 Assignment
[Instructor Name]
[Date]
The business and all figures are a composite written for a model paper.
A composite window-cleaning and gutter company, organized as a small corporation by two former property maintenance workers, has finished its second year. Its three crews clean storefront glass on monthly contracts, wash homes in spring and fall and clear gutters before winter. The bookkeeper has recorded the year's transactions and the adjusting entries, and the owners now want the year-end statements for two reasons: they are deciding whether to buy a third truck, and their insurer has asked for a balance sheet before renewing the policy. The adjusted trial balance is not the end of the cycle; it is the raw material for the statements and the starting point for closing the books. This paper completes the remaining steps and interprets the result.
The Adjusted Trial Balance
After adjustments, the ledger shows these December 31 balances. Debit balances: Cash, $28,400; Accounts Receivable, $6,200; Supplies, $1,300; Prepaid Insurance, $2,100; Equipment, $24,000; Vehicles, $48,000; Dividends, $9,000; Wages Expense, $71,500; Vehicle Fuel and Maintenance Expense, $12,800; Rent Expense, $7,200; Supplies Expense, $5,400; Insurance Expense, $4,200; Advertising Expense, $3,600; Telephone and Utilities Expense, $2,100; Depreciation Expense, $11,600; and Interest Expense, $2,300. The debits total $239,700.
Credit balances: Accumulated Depreciation, Equipment, $9,600; Accumulated Depreciation, Vehicles, $19,200; Accounts Payable, $2,700; Wages Payable, $1,800; Unearned Service Revenue, $4,500; Interest Payable, $400; Notes Payable, $26,000; Common Stock, $30,000; Retained Earnings, $7,500; and Service Revenue, $138,000. The credits also total $239,700, so the ledger is in balance and the statements can be prepared.
One detail matters before the balance sheet is built. The note payable is a truck loan, and $8,000 of its principal is due within the next twelve months. That portion is a current liability, even though the whole loan sits in one ledger account (Weygandt et al., 2021).
Step 1: Income Statement
Service revenue for the year was $138,000. Expenses were wages, $71,500; vehicle fuel and maintenance, $12,800; depreciation, $11,600; rent for the equipment shop, $7,200; supplies, $5,400; insurance, $4,200; advertising, $3,600; interest, $2,300; and telephone and utilities, $2,100. Total expenses were $120,700, and net income was $17,300.
Only revenue and expense accounts appear here. The $9,000 of dividends paid to the two owners is not an expense of running the business, so it is left for the next statement.
Step 2: Statement of Retained Earnings
Retained earnings began the year at $7,500, the income the company kept from its first year. Adding net income of $17,300 and subtracting dividends of $9,000 gives ending retained earnings of $15,800. This ending figure, not the $7,500 in the trial balance, is the one that belongs on the balance sheet, because the trial balance still shows the balance as it stood before this year's income and dividends were added and subtracted.
Step 3: Classified Balance Sheet
Current assets
Cash, $28,400; accounts receivable, $6,200; supplies, $1,300; and prepaid insurance, $2,100. Total current assets are $38,000.
Property, plant and equipment
Equipment of $24,000 less accumulated depreciation of $9,600 is $14,400. Vehicles of $48,000 less accumulated depreciation of $19,200 is $28,800. Net property and equipment is $43,200, and total assets are $81,200.
Current liabilities
Accounts payable, $2,700; wages payable, $1,800; unearned service revenue, $4,500; interest payable, $400; and the current portion of the truck loan, $8,000. Total current liabilities are $17,400.
Long-term liabilities
The rest of the truck loan, $18,000. Total liabilities are $35,400.
Stockholders' equity
Common stock, $30,000, and retained earnings, $15,800, for total equity of $45,800. Liabilities plus equity equal $81,200, the same as total assets.
Step 4: Closing Entries
Revenue, expense and dividend accounts are temporary. They measure one year's activity, so they must be reset to zero before the new year begins, with their net effect moved into Retained Earnings (Weygandt et al., 2021). The company uses an Income Summary account to do this in four entries.
1. Close revenue: debit Service Revenue $138,000; credit Income Summary $138,000.
2. Close expenses: debit Income Summary $120,700; credit each of the nine expense accounts for its balance.
3. Close Income Summary: its credit balance is now $17,300, equal to net income, so debit Income Summary $17,300 and credit Retained Earnings $17,300.
4. Close dividends: debit Retained Earnings $9,000; credit Dividends $9,000.
After posting, every temporary account shows a zero balance and Retained Earnings shows $15,800, the same figure reported on the statement of retained earnings. That match is the check that the closing entries were complete.
Step 5: Post-Closing Trial Balance
Only permanent accounts remain. Debit balances: Cash, $28,400; Accounts Receivable, $6,200; Supplies, $1,300; Prepaid Insurance, $2,100; Equipment, $24,000; and Vehicles, $48,000, for a total of $110,000. Credit balances: the two accumulated depreciation accounts, $28,800; Accounts Payable, $2,700; Wages Payable, $1,800; Unearned Service Revenue, $4,500; Interest Payable, $400; Notes Payable, $26,000; Common Stock, $30,000; and Retained Earnings, $15,800, also totaling $110,000. The books are ready for the new year.
Step 6: What the Numbers Say
Statements are prepared so that someone can make a decision with them, and the owners have two decisions in front of them. Four measures, each computed from the statements above, frame the answer.
Liquidity
Working capital, current assets minus current liabilities, is $38,000 minus $17,400, or $20,600. The current ratio is $38,000 divided by $17,400, or about 2.2. The company holds a little more than two dollars of short-term resources for each dollar it owes within a year. One of those obligations deserves attention: the $4,500 of unearned revenue will be settled by doing work, not by paying cash, which makes the company's liquidity somewhat stronger than the ratio alone suggests.
Solvency
Debt to assets is $35,400 divided by $81,200, or about 44%. Creditors have financed a little less than half of what the company owns, most of it through the truck loan. Early work on financial ratios found that firms that later failed had weaker ratios for several years before failure than firms that survived, with the ratio of cash flow to total debt the best single predictor in that study (Beaver, 1966). A second truck loan would push the debt ratio higher, so the owners should look at what the new crew would earn before they sign.
Profitability
Net income of $17,300 on revenue of $138,000 is a profit margin of about 12.5%. Wages alone consumed about 52% of revenue, and vehicle costs and depreciation another 18%. For a service business, the margin depends on keeping crews busy; a third truck adds depreciation, fuel and wages from the day it arrives, but revenue only as contracts are signed.
What the owners should conclude
The company is profitable, liquid and moderately leveraged. It paid about half of its net income to the owners as dividends and kept the rest, which built equity from $37,500 to $45,800. Lenders price that evidence. Studying private U.S. firms, Minnis (2011) found that companies with audited financial statements paid lower interest rates on their debt and that lenders gave more weight to verified financial information when setting loan terms. A clean, classified set of statements is therefore the best evidence the owners can bring to the insurer, and to a lender if they finance the truck. Before buying it, they should use these statements as a baseline and project the third crew's contracts, since the current margin leaves room for a slow first season but not for a truck that sits idle.
Conclusion
The last steps of the accounting cycle turned an adjusted trial balance into an income statement showing net income of $17,300, a statement of retained earnings ending at $15,800 and a classified balance sheet with total assets of $81,200. Four closing entries reset the temporary accounts and moved the year's results into retained earnings, and the post-closing trial balance proved the ledger ready for the new year. Read together, the statements show a business that can meet its short-term obligations and has room to grow, provided the owners test the new truck against realistic revenue before committing to it.
References
Beaver, W. H. (1966). Financial ratios as predictors of failure. Journal of Accounting Research, 4, 71-111. https://doi.org/10.2307/2490171
Minnis, M. (2011). The value of financial statement verification in debt financing: Evidence from private U.S. firms. Journal of Accounting Research, 49(2), 457-506. https://doi.org/10.1111/j.1475-679X.2011.00411.x
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 290 Week 5 example is structured
The ACC/290 shelf page describes Week 5 as closing with statements built from a completed cycle and a short interpretation. The paper begins where the adjusting work of earlier weeks ends, with an adjusted trial balance, and carries it through the last steps of the cycle in the order an accountant performs them. It then turns the finished statements into four measures and says in plain words what they mean for the owners' plans. Students search this week as ACC 290 Week 5, ACC290 Wk 5 or ACC/290 Wk 5; all three are the same assignment.
ACC/290 Week 5 questions, answered
What does ACC/290 Week 5 usually ask for?
The ACC/290 shelf describes Week 5 as closing with financial statements built from a completed accounting cycle and a short interpretation. Many sections assign a comprehensive problem that runs from an adjusted trial balance to statements, closing entries and a post-closing trial balance.
Which accounts are closed at year-end?
Temporary accounts: revenues, expenses and dividends (or owner's drawings in a proprietorship). They measure one period's activity, so they start each new year at zero. Assets, liabilities and equity accounts are permanent and carry their balances forward.
What makes a balance sheet classified?
It groups assets and liabilities into current and long-term sections. Current items are expected to be converted to cash or settled within one year, which lets a reader compute working capital and the current ratio directly from the statement.
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