Financial Accounting · Practice problem
Build an Income Statement
Mustang Design Co. has these adjusted balances for the year ended December 31. Prepare the income statement.
| Account | Balance |
|---|
| Cash | 8,200 |
| Service Revenue | 12,000 |
| Rent Expense | 2,400 |
| Wages Expense | 3,600 |
| Dividends | 1,000 |
| Supplies Expense | 600 |
| Accounts Payable | 1,300 |
| Depreciation Expense | 900 |
Solution
Mustang Design Co.
Income Statement · For the Year Ended December 31
| Service revenue | | $12,000 |
| Expenses | | |
| Wages expense | $3,600 | |
| Rent expense | 2,400 | |
| Depreciation expense | 900 | |
| Supplies expense | 600 | |
| Total expenses | | 7,500 |
| Net income | | $4,500 |
Watch out: Cash and Accounts Payable belong on the balance sheet, and Dividends go on the statement of retained earnings. None of them affect net income.
Financial Accounting · Study guide
Adjusting Entries, Step by Step
Adjusting entries are recorded at the end of a period so revenue and expenses land in the period they belong to. Each one affects an income statement account and a balance sheet account, and never involves cash.
| Type | What happened | Example |
|---|
| Accrued revenue | Earned, not yet recorded | Services performed, not billed |
| Accrued expense | Incurred, not yet paid | Wages owed to employees |
| Deferred revenue | Cash received before it’s earned | Customer prepays a contract |
| Prepaid expense | Cash paid before it’s used | Insurance paid in advance |
Worked examples · December 31
1. Employees earned $800 of wages that will be paid in January.
| Account | Debit | Credit |
|---|
| Wages Expense | 800 | |
| Wages Payable | | 800 |
2. On October 1, a customer paid $1,200 for 12 months of service.
$1,200 ÷ 12 × 3 months = $300 earned.
| Account | Debit | Credit |
|---|
| Unearned Revenue | 300 | |
| Service Revenue | | 300 |
3. On December 1, the company paid $2,400 for a 12-month insurance policy.
$2,400 ÷ 12 × 1 month = $200 used.
| Account | Debit | Credit |
|---|
| Insurance Expense | 200 | |
| Prepaid Insurance | | 200 |
4. Equipment cost $10,000, has a $1,000 salvage value and a 5-year life (straight-line).
($10,000 − $1,000) ÷ 5 = $1,800 per year.
| Account | Debit | Credit |
|---|
| Depreciation Expense | 1,800 | |
| Accumulated Depreciation | | 1,800 |
Check: accumulated depreciation is a contra-asset. It has a credit balance and reduces equipment on the balance sheet.
Any course · Study plan
Two-Week Midterm Study Plan
A realistic plan for the 14 days before an exam, at about 60–90 minutes a day.
| Days | Focus |
|---|
| 1–2 | List every topic on the exam. Rate each one: got it, shaky, or lost. |
| 3–5 | Re-work lecture examples for your “shaky” and “lost” topics. |
| 6–8 | Do practice problems by topic. Mark every one you miss. |
| 9 | Tutoring session: work through the problems you marked. |
| 10–11 | Mixed practice without notes, so you learn to recognize each topic. |
| 12 | Take a full practice exam under a timer. |
| 13 | Review every mistake and make a one-page summary sheet. |
| 14 | Light review of your summary sheet. Get a full night’s sleep. |
What to bring to a session
- The syllabus or exam topic list
- Homework or practice problems you got wrong
- Any practice exams your professor has shared
Tip: studying accounting is mostly doing problems, not re-reading. If you can’t solve it without notes, you’re not done with that topic.
