13–11-1 Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Financial Statementsand Closing Procedures

Financial Statementsand Closing Procedures

Section 1: Preparing the Financial Statements

Chapter

13

Section Objectives1. Prepare a classified income statement

from the worksheet.

2. Prepare a statement of owner’s equity from the worksheet.

3. Prepare a classified balance sheet from the worksheet.

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A classified income statement is sometimes called a multiple-step income statement.

The Classified Income Statement

Objective 1 Prepare a classified income statement from the worksheet

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A single-step income statement is a format in which only one computation is needed to determine the net income.

ANSWER:

QUESTION:

What is a single-step income statement?

(Total Revenue – Total Expenses = Net Income)

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Operating Revenue

Net sales for Whiteside Antiques

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Three elements are needed to compute the cost of goods sold:

The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.

Cost of Goods Sold

Beginning inventory Net delivered cost of purchases Ending inventory

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Purchases Freight In (Purchases Returns and Allowances) (Purchases Discounts)

Net Delivered Cost of Purchases

Net Delivered Cost of Purchases

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Beginning Merchandise Inventory Net Delivered Cost of Purchases

Total Merchandise Available for Sale

Total Merchandise Available for Sale

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Cost of Goods Sold

Beginning Merchandise InventoryNet Delivered Cost of Purchases

Cost of Goods Available for Sale

Less Ending Inventory

Cost of Goods Sold

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Merchandise Inventory is the one account that appears on both the income statement and the balance sheet.

Beginning and ending merchandise inventory balances appear on the income statement.

Ending merchandise inventory also appears on the balance sheet in the Assets section.

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Cost of Goods SoldMerchandise Inventory, Jan. 1, 2013 52,000.00Purchases 321,500.00Freight In 9,800.00Delivered Cost of Purchases 331,300.00Less Purchases Returns and Allowances 3,050.00

Purchases Discounts 3,130.00 6,180.00Net Delivered Cost of Purchases 325,120.00Total Merchandise Available for Sale 377,120.00Less Merchandise Inventory, Dec. 31, 2013 47,000.00Cost of Goods Sold 330,120.00

Whiteside Antiques Partial Income Statement

Year Ended December 31, 2013

Cost of Goods Sold

Merchandise available for sale

Cost of goods sold

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Gross Profit on Sales

For Whiteside Antiques net sales is the revenue earned from selling antique items.

Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and provide a profit.

Gross profit is the difference between the net sales and the cost of goods sold

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Operating RevenueSales 561,650.00Less Sales Returns and Allowances 12,500.00Net Sales 549,150.00

Cost of Goods SoldMerchandise Inventory, Jan. 1, 2013 52,000.00Purchases 321,500.00Freight In 9,800.00Delivered Cost of Purchases 331,300.00Less Purchases Returns and Allowances 3,050.00Purchases Discounts 3,130.00 6,180.00Net Delivered Cost of Purchases 325,120.00Total Merchandise Available for Sale 377,120.00

Less Merchandise Inventory, Dec. 31, 2013 47,000.00Cost of Goods Sold 330,120.00

Gross Profit on Sales 219,030.00

Whiteside AntiquesPartial Income Statement

Year Ended December 31, 2013

Gross profit on sales for Whiteside Antiques

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Gross Profit on Sales 219,030.00Operating Expenses Selling Expenses

Salaries Expense - Sales 79,690.00Advertising Expense 7,425.00Cash Short or Over 125.00Supplies Expense 4,975.00Depreciation Expense - Store Equipment 2,400.00

Total Selling Expenses 94,615.00General and Administrative Expenses

Rent Expense 27,600.00Salaries Expense - Office 26,500.00Insurance Expense 2,450.00Payroll Taxes Expense 7,371.20Telephone Expense 1,875.00Uncollectible Accounts Expense 800.00Utilities Expense 5,925.00Depreciation Expense - Office Equipment 700.00

Total General and Administrative Expenses 73,221.20Total Operating Expenses 167836.2

Whiteside AntiquesPartial Income Statement

Year Ended December 31, 2013

Salaries for salespersons and advertising are examples of selling expenses

Operating Expenses

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Gross Profit on Sales 219,030.00Operating Expenses Selling Expenses

Salaries Expense - Sales 79,690.00Advertising Expense 7,425.00Cash Short or Over 125.00Supplies Expense 4,975.00Depreciation Expense - Store Equipment 2,400.00

Total Selling Expenses 94,615.00General and Administrative Expenses

Rent Expense 27,600.00Salaries Expense - Office 26,500.00Insurance Expense 2,450.00Payroll Taxes Expense 7,371.20Telephone Expense 1,875.00Uncollectible Accounts Expense 800.00Utilities Expense 5,925.00Depreciation Expense - Office Equipment 700.00

Total General and Administrative Expenses 73,221.20Total Operating Expenses 167836.20

Whiteside AntiquesPartial Income Statement

Year Ended December 31, 2013

Operating Expenses

Rent, utilities, and salaries for office employees are examples of general and administrative expenses

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Operating RevenueSales 561,650.00Less Sales Returns and Allowances 12,500.00Net Sales 549,150.00Cost of Goods Sold 330,120.00

Gross Profit on Sales 219,030.00Operating Expenses Selling Expenses

Salaries Expense - Sales 79,690.00Advertising Expense 7,425.00Cash Short or Over 125.00Supplies Expense 4,975.00Depreciation Expense - Store Equipment 2,400.00

Total Selling Expenses 94,615.00General and Administrative Expenses

Rent Expense 27,600.00Salaries Expense - Office 26,500.00Insurance Expense 2,450.00Payroll Taxes Expense 7,371.20Telephone Expense 1,875.00Uncollectible Accounts Expense 800.00Utilities Expense 5,925.00Depreciation Expense - Office Equipment 700.00

Total General and Administrative Expenses 73,221.20Total Operating Expenses 167,836.20

Net Income from Operations 51,193.80

Whiteside Antiques

Partial Income StatementYear Ended December 31, 2013

Net income from operations

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Operating ExpensesNet Income from Operations 51,193.80Other Income

Interest Income 166.00Miscellaneous Income 366.00

Total Other Income 532.00Other Expenses

Interest Expense 770.00Net Nonoperating Expense 238.00

Whiteside AntiquesPartial Income Statement

Year Ended December 31, 2013

Other Income and Other Expenses

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Operating RevenueNet Sales 549,150.00

Cost of Goods Sold 330,120.00Gross Profit on Sales 219,030.00Operating Expenses

Total Selling Expenses 94,615.00Total Administrative Expenses 73,221.20Total Operating Expenses 167,836.20

Net Income from Operations 51,193.80Other Income

Interest Income 166.00Miscellaneous Income 366.00

Total Other Income 532.00Other Expenses

Interest Expense 770.00Net Nonoperating Expense 238.00

Whiteside AntiquesPartial Income Statement

Year Ended December 31, 2013

Net income for Whiteside Antiques

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The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period.

The ending capital balance for Bill Whiteside, $84,576.80, is used to prepare the balance sheet.

Bill Whiteside, Capital, January 1, 2013 61,221.00Net Income for Year 50,955.80Less Withdrawals for the Year 27,600.00Increase in Capital 23,355.80Bill Whiteside, Capital, December 31, 2013 84,567.80

Whiteside AntiquesStatement of Owner's Equity

Year Ended December 31, 2013

Objective 2 Prepare a Statement of Owner’s Equity from the worksheet

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Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year.

ANSWER:

QUESTION:

What are current assets?

Objective 3Prepare a classified balancesheet from the worksheet

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Current AssetsCurrent Assets

Assets Current Assets Cash 13,136.00 Petty Cash Fund 100.00 Notes Receivable 1,200.00 Accounts Receivable 32,000.00 Less Allow. for Doubtful Accounts 1,050.00 30,950.00 Interest Receivable 30.00 Merchandise Inventory 47,000.00 Prepaid Expenses Supplies 1,325.00 Prepaid Insurance 4,900.00 Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00

Whiteside AntiquesPartial Balance SheetDecember 31, 2013

Current assets for Whiteside Antiques

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Plant and EquipmentPlant and Equipment Noncurrent assets are called long-term assets.

An important category of long-term assets is plant and equipment.

For many businesses plant and equipment represents a sizable investment.

Assets Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00Plant and Equipment Store Equipment 30,000.00 Less Accumulated Depreciation 2,400.00 27,600.00 Office Equipment 5,000.00 Less Accumulated Depreciation 700.00 4,300.00 Total Plant and Equipment 31,900.00 Total Assets 130,616.00

Whiteside AntiquesBalance Sheet

December 31, 2013

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Current Liabilities Current Liabilities

Assets Prepaid Interest 75.00 6,300.00

Total Current Assets 98,716.00 Total Plant and Equipment 31,900.00 Total Assets 130,616.00

Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade 2,000.00

Notes Payable-Bank 9,000.00 Accounts Payable 24,129.00 Interest Payable 20.00 Social Security Tax Payable 1,158.40 Medicare Tax Payable 267.40 Employee Income Tax Payable 990.00 Fed. Unemployment Tax Pay. 9.60 State Unemployment Tax Pay. 64.80 Salaries Payable 1,200.00 Sales Tax Payable 7,200.00

Total Current Liabilities 46,039.20

Whiteside AntiquesPartial Balance Sheet December 31, 2013

Total current liabilities

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Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly.

Long-term liabilities include mortgages, notes payable, and loans payable.

Long-Term Liabilities Long-Term Liabilities

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Owner's Equity

The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.

61,221.0050,955.8027,600.00

23,355.8084,576.80

Increase in CapitalBill Whiteside, Capital, December 31, 2013

Statement of Owner's EquityYear Ended December 31, 2013

Bill Whiteside, Capital, January 1, 2013Net Income for YearLess Withdrawals for the Year

Assets Owner’s Equity

Bill Whiteside, Capital 84,576.80Total Liabilities and Owner's Equity 130,616.00

Whiteside AntiquesPartial Balance SheetDecember 31, 2013

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Financial Statementsand Closing Procedures

Financial Statementsand Closing Procedures

Section 2: Completing the Accounting Cycle

Chapter

13

Section Objectives4. Journalize and post the adjusting entries.

5. Journalize and post the closing entries.

6. Prepare a postclosing trial balance.

7. Journalize and post reversing entries.

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All adjustments are shown on the worksheet.

After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records.

They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

Objective 4 Journalize and post the adjusting entries

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Adjusting EntriesType of

Adjustment Worksheet Reference

Purpose

Inventory (a – b) Removes beginning inventory and adds ending inventory to the accounting records.

Expense (c – e) Matches expense to revenue for the period; the credit is to a contra asset account.

Accrued Expense (f – i) Matches expense to revenue for the period; the credit is to a liability account.

Prepaid Expense (j –l) Matches expense to revenue for the period; the credit is to an asset account.

Accrued Interest (m)

Recognizes interest earned in the period. The debit is to an asset account, (interest receivable) and the credit is to a revenue account.

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At the end of the period, the temporary accounts are closed.

The temporary accounts are:

Revenue accounts Cost of goods sold and expense accounts Expense accounts Drawing account

Journalize and Post the Closing Entries

Objective 5

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1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary.

2. Close expense accounts and cost of goods sold accounts with debit balances to Income Summary.

3. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital.

4. Close the drawing account to owner's capital.

There are four steps in the closing process:

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GENERAL JOURNAL PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT REF.

2013

Dec. 31Closing Entries

Income Summary 568,362.00

Sales 561,650.00Interest Income 166.00Miscellaneous Income 366.00Purchases Returns and Allowances 3,050.00Purchases Discounts 3,130.00

Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances.

Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

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Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances

Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.

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Income Summary

12/31 47,000.0012/31 568,362.00 615,362.00 Bal. 50,955.80

Adjusting Entries (a-b) 12/31 52,000.00Closing Entries 12/31 512,406.20

564,406.20

GENERAL JOURNAL PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT REF.

Dec. 31 Income Summary 50,955.80Bill Whiteside, Capital 50,955.80

The third closing entry transfers the Income Summary balance to the owner's capital account. This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. For Whiteside Antiques, the third closing entry is as follows:

Step 3: Closing the Income Summary Account

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GENERAL JOURNAL PAGE 28

DATE DESCRIPTION POST. DEBIT CREDIT REF.

Dec. 31 Bill Whiteside, Capital 27,600.00Bill Whiteside, Drawing 27,600.00

Step 4: Closing the Drawing account

This entry closes the drawing account and updates the capital account

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Posting the Closing EntriesPosting the Closing Entries

The closing entries are posted from the general journal to the general ledger.

This process brings the temporary account balances to zero.

The word Closing is entered in the Description column.

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Preparing a Postclosing Trial Balance

Prepare a postclosing trial balance to confirm that the general ledger is in balance.

Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance.

The postclosing trial balance matches the amounts reported on the balance sheet.

To verify this, compare the postclosing trial balance with the balance sheet.

Objective 6

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RevenueCost of

Goods Sold

Expenses Withdrawals

Temporary accounts do not appear on the postclosing trial balance

Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance

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Preparing a Postclosing Trial Balance

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Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses.

ANSWER:

QUESTION:

What are reversing entries?

Objective 7 Journalize and post reversing entries

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The Accounting Cycle

Step 1 Analyze

transactions

Step 2 Journalize the

data about transactions

Step 3 Post the

data about transactions

Step 4 Prepare

a worksheet

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

Step 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

Step 9 Interpret

the financial information Step 8

Prepare a postclosing trial balance

Step 5Prepare financial

statements

Step 4 Prepare

a worksheet

Step 3 Post the

data about transactions

Step 2 Journalize the

data about transactions

Step 1 Analyze

transactions

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

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Flow of Financial Data through an Accounting System

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Thank Youfor using

College Accounting:A Contemporary Approach, 2nd Edition

Haddock • Price • Farina