The unadjusted trial balance at December 31, Year 1 for Deana & Company, an interior decorating company in its first year of operations is provided below.Deana & Company Adjusted Trial Balance At December 31, Year 1THE CLOSING PROCESSUse the adjusted trial balance completed in Handout 4-3 to perform the steps in the closing process for Deana & Company at December 31, Year 1: (1) prepare the required closing entries, (2) post the entries to the T-accounts, and (3) prepare a post-closing trial balance.Deana & CompanyChapter 4 HandoutA. Why Adjustments Are Needed1. Adjustments––Entries necessary at the end of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts; also called adjusting journal entries.2. Adjustments always include both income statement and balance sheet accounts. They are needed to ensurea. Revenues are recorded in the period earned b. Expenses are recorded in the period incurred; they occur at the end of a time period (e.g., month, quarter, year)c. Assets are reported at amounts representing the economic benefits that remain at the end of the period. d. Liabilities are reported at amounts owed at the end of the period.3. Adjustments NEVER involve cash4. Adjustments are grouped into two categories: deferral and accrual.B. Prepare adjustments needed at the end of the period1. Accruals – transactions in which the company has generated revenue or incurred an expense but the money earned or owed has not been exchanged. a. Involves one asset and one revenue account or one liability and expense account.b. Creates receivables or payables.c. We provided $3,250 of consulting services to our clients in September, with payment to be received in October.Date Account Debit Credit9/30 Accounts Receivable (A+) 3,250Service Revenue (R+, SE+) 3,250d. On November 1, we loaned $18,000 to XYZ Co. and issued a 1-year, 10% note. Interest earned by Dec. 31 amounts to $300.Date Account Debit Credit12/31 Interest Receivable 300Interest Revenue 300e. The company owes $1,950 of wages to employees for work done in the last six days of December at acost of $325 per day; this amount will not be paid until January.Date Account Debit Credit12/31 Salaries and Wages Expense (E+, SE-) 1,950Salaries and Wages Payable (L+) 1,950f. On November 1, we borrowed $18,000 from the bank and issued a 1-year, 10% note. Interest owed by Dec. 31 amounts to $300.Date Account Debit Credit12/31 Interest Expense (E+, SE-) 300Interest Payable (L+) 300g. The Company pays income tax at an average rate equal to 20% of the company’s income before taxeswhich is $1,000 this period. 1000 x 20%Date Account Debit Credit12/31 Income Tax Expense (E+, SE-) 200Income Tax Payable (L+) 2002. Deferrals – transactions in which the money has been exchanged but the reporting of an expense or revenue has been postponed.a. Updates Prepaid or Unearned (Deferred)b. Involves one asset and one expense account, or one liability and revenue account.c. The company counts its supplies on hand at December 31. Of the supplies previously purchased for $600, only $250 are now on hand.Date Account Debit Credit12/31 Supplies Expense (E+, SE-) 350Supplies (A-) 350d. Three months of rent were prepaid on December 1 for $7,200 but one month has now expired, leaving only two months prepaid at December 31. Date Account Debit Credit12/31 Rent Expense (E+, SE-) 2,400Prepaid Rent (A-) 2,400e. On May 1, we purchased a 2-year insurance policy for $4,800. No adjustments were made prior to December 31. 4,800/ 24 mths = 200 mths x 8 (May 1 – Dec 31) = 1,600Date Account Debit Credit12/31 Insurance Expense (E+, SE-) 1,600Prepaid Insurance (A-) 1,600f. On September 1, we collected one year’s rent in advance of $3,600. No adjustments were made prior to December 31. 3,600/12 = 300 x 4 mths (Sept 1 – Dec 31) = 1,200Date Account Debit Credit12/31 Deferred Revenue (L-) 1,200Rent Revenue (R+, SE+) 1,200g. Depreciation expense is recorded for use of equipment, which is the company’s estimate of the proportion of a fixed asset’s cost that should be allocated each year over the asset’s expected useful life.i. Accumulated Depreciation is the contra-account balance sheet accounta. Running total of depreciation for an asset. It will increase each period until the asset is fullydepreciated. b. Normal balance in a contra-account is always the opposite of the account it offsets.c. Accumulated Depreciation is recorded with a credit because the account that it offsets, Equipment, is previously recorded with a debit.ii. Depreciation Expense is an income statement account. a. Includes only the depreciation of the current accounting year.b. The amount of depreciation depends on the method used for determining it. Depreciation methods (and their formulas) will be discussed in Chapter 9.h. On January 1, we purchased a piece of equipment for $500. It had an estimated useful life of 5 years. 500/5 years = 100 each yearDate Account Debit Credit12/31 Depreciation Expense (E+, SE-) 100 Accumulated Depreciation (xA+, A-) 100Company Name, Inc.Balance SheetAt December 31, XXXXAssetsEquipment 500 Original Cost of EquipmentAccumulated Depreciation (100) Running total of depreciationEquipment, Net of Acc. Dep 400 Carrying Value (Book Value)i. Amortization is recorded for use of an intangible asset.i. Similar to depreciation, amortization is the concept that applies to using up long-term assets that lack physical substance and have a limited period of usefulnessii. The long-term asset declines in usefulness over time, causing a reduction in the value of the asset, which creates an expense.j. The software developed for the company, estimated to have three years of usefulness, has now been used for one month at an estimated expense of $250 (9,000/36 = 250).Date Account Debit Credit12/31 Amortization Expense (E+, SE-) 250 Accumulated Amortization (xA+, A-) 250C. Prepare an adjusted trial balance1. A list of all accounts and their adjusted balances to check on the equality of recorded debits and credits; lists accounts in the order: A, L, SE, R, E2. The only difference between an adjusted trial balance and an unadjusted trial balance is that the adjustedtrial balance is prepared after all adjustments have been posted.D. Prepare Financial Statements1. In Order (1) Income Statement (2) Statement of Owners’ Equity (3) Balance Sheet (4) Statement of Cash FlowsE. Closing Process1. Close temporary