chapter six financial statements and the closing process

CHAPTER SIX

FINANCIAL STATEMENTS AND THE

CLOSING PROCESS

WORK SHEET

Used for three major end-of-period activities:– journalizing adjusting entries– preparing financial statements– journalizing closing entries

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.-Del. Eq.Accts. Pay.Wages Pay.J J, Cap.

Del. FeesWages Exp.

J J, Drawing

Rent Exp.Sup. ExpTel. Exp.Ins. Exp.Depr. Exp.

CR. DR.BALANCE SHEET

37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

From this work sheet, we can prepare the financial statements.

PREPARING FINANCIAL STATEMENTS

1st: Prepare the Income Statement. 2nd: Prepare the Statement of Owner’s

Equity. 3rd: Prepare the Balance Sheet.

Jessica Jane’s Campus DeliveryIncome Statement

For Month Ended June 30, 20--

Heading should contain 3 lines:

1. Company Name2. Statement Title3. Time period covered or date



Revenues are shown first.

Revenues:

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp.

J J, Drawing

Rent ExpSup. Exp.Tel. Exp.Ins. Exp.Depr. Exp.


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Revenue



Revenues:Delivery Fees $2,150

Top amount in each column will include

“$”.




When there is only one revenue account, “Total Revenues” is not computed

or shown.




Expenses are shown next.

Expenses:

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.-Del. Eq.Accts PayWages Pay.J J, Cap.

Del. FeesWages Exp.

J J, Drawing

Rent Exp.Sup. Exp.Tel. Exp.Ins. Exp.Depr. Exp.


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Expenses



Revenues:Delivery Fees

Expenses:Wages Expense

$2,150

$ 700

First amount in the columnis shown with a “$”.




Expenses:Wages ExpenseRent Expense

Telephone Expense

$2,150

$ 700200

50Supplies Expense 60

Insurance ExpenseDepreciation Expense - Delivery Eq.

25100

Expenses are listed in either: account number order OR descending order by dollar amount.





Telephone Expense

$2,150

$ 700200



25100

Single underline indicates addition or subtraction.





Telephone Expense

Total Expenses

$2,150

$ 700200



25100

1,135

Next, expenses are totaled.





Telephone Expense

Total Expenses

$2,150

$ 700200



25100

1,135Net Income $1,015

Jessica Jane’s Campus DeliveryStatement of Owner’s Equity


Jessica Jane, capital, June 1, 20--

Statement starts with the Capital balance as of the beginning of the accounting period.



Jessica Jane, capital, June 1, 20-- $2,000

Instead of showing Revenue increasing & Expenses decreasing the Owner’s Equity,

this statement uses the net effect (Net Income/Loss) from the

Income Statement.

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.-Del Eq.Accts. Pay.Wages Pay.J J, Cap.

Del. FeesWages Exp

J J, Drawing

Rent ExpSup. ExpTel. ExpIns. ExpDepr. Exp


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Be careful!! Capital from the work sheetmay not be the beginning capital balance.

It is the beginning balance PLUS anyadditional investments.




Since Jessica made no additionalinvestments this period, we can

use the capital balance from the work sheet.

$2,000




Next we add in the Net Income/Lossfrom the Income Statement or

from the work sheet.

$2,000

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. Eq.A. D.-Del Eq.Accts. PayWages PayJ J, Cap

Del. FeesWages Exp

J J, Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Net Income is found in the Income Statement debit column

and the Balance Sheet credit column.

Net Income



Jessica Jane, capital, June 1, 20-- $2,000Net Income for June $1,015

Now we will go to thework sheet for the Drawing

account.

Less: Withdrawals for June

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp.

J J, Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Drawing account tells us the amount of assets Jessica has withdrawn from

business for personal use. Net Income




Lastly, we calculate the endingCapital balance and double

rule the statement.

Less: Withdrawals for June 150Increase in Capital 865Jessica Jane, capital, June 30, 20-- $2,865

FORMS OF BALANCE SHEETS

Liabilities and Owner’s Equity are shown BELOW the Asset section.

This is the form you will see from now on in this text.

Asset section is on the LEFT, Liabilities and Owner’s Equity sections are on the RIGHT.

This is the form you saw in chapters 2-5.

REPORT FORM ACCOUNT FORM

CLASSIFIED BALANCE SHEET

Similar items are grouped togetherAssets are classified as:

• Current Assets• Property, Plant, and Equipment

Liabilities are classified as:• Current Liabilities• Long Term Liabilities

CURRENT ASSETS

Assets (including cash) that will be converted into cash or consumed within one year or the normal operating cycle, whichever is longer

Examples:– Cash, Accounts Receivable, Supplies, Prepaid

Insurance

OPERATING CYCLE

The time period required to purchase supplies and services and convert them back into cash

Start with cash

Purchase Supplies

and Services

Provide Services for Cash and “On Account”

Collect Receivables Back

to Cash

PROPERTY, PLANT, AND EQUIPMENT

Assets that are expected to serve the business for many years

Also called Plant Assets or Long-Term Assets

Examples:– Land, Buildings, and Equipment

CURRENT LIABILITIES

Liabilities that are due within one year or the normal operating cycle of the business, whichever is longer

They will be paid out of current assets.Examples:

– Accounts Payable– Wages Payable

LONG-TERM LIABILITIES

Obligations that are not expected to be paid within a year and do not require the use of current assets

Also called Long-Term DebtExample:

– Mortgage on an office building

Jessica Jane does not have any long-term liabilities.

Jessica Jane’s Campus DeliveryBalance SheetJune 30, 20--

AssetsCurrent Assets

Current Assets are listed first.

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp.

J J, Drawing

Rent Exp.Sup. ExpTel. Exp.Ins. Exp.Depr. Exp.


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Current Assets

Net Income



Cash $370Accounts Receivable 650Supplies 20Prepaid Insurance 175

Total Current Assets $1,215

The long-term assets are listed next.

Property, Plant, and Equipment

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT

Accts. Rec.SuppliesPpd. Ins.Del. EqA. D.-Del Eq.Accts. Pay.Wages PayJ J, Cap

Del. FeesWages Exp

J J, Drawing

Rent ExpSup. ExpTel. Exp.Ins. Exp.Depr. Exp.


37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Property, Plant, and Equipment includesthe long-term assets AND their related

Accumulated Depreciation accounts.

Net Income




Total Current Assets $1,215Property, Plant, and Equipment

Delivery EquipmentAccumulated Depr. - Delivery Eq.

$3,600100 3,500

Book Value




Total Current Assets $1,215Property, Plant, and Equipment


$3,600100 3,500

Total Assets $4,715

Now for the Liabilities!!!

Liabilities




Total Current Assets $1,215Property, Plant and Equipment


$3,600100 3,500

Total Assets $4,715

Just as with assets, the current (or short-term)

are shown first.

LiabilitiesCurrent Liabilities

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp

J J, Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Jessica has only two liabilities and they are both current….

Accounts Payable and Wages Payable

Net Income




Total Current Assets $1,215Property, Plant and Equipment


$3,600100 3,500

Total Assets $4,715

Let’s shift to the lowerpart of our Balance Sheet.


Accounts Payable $1,800



Accounts Payable $1,800Wages Payable 50

Total Current Liabilities $1,850

Since Jessica does not have long-term liabilities, we will move on to

the Owner’s Equity section.

Owner’s Equity

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp.

J J, Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Caution!!! This capital amount does not include Net Income or Drawing.

We must use the June 30th capital amount from the Statement

of Owner’s Equity. Net Income




This is the amount we will put on the Balance Sheet.

Less: Withdrawals for June 150Increase in Capital 865Jessica Jane, capital, June 30, 20-- $2,865



Accounts Payable $1,800Wages Payable 50

Total Current Liabilities $1,850Owner’s Equity

Jessica Jane, Capital 2,865Total Liabilities and Owner’s Equity

$4,715

It Balances!!!Total Assets of $4,715 equals

Total Liabilities and Owner’s Equity of $4,715.

CLOSING PROCESS

Gives temporary accounts zero balances so they are prepared to accumulate new information for the next accounting period

Involves four closing journal entriesIncome Summary account is used to aid

in the closing process.

PERMANENT ACCOUNTS

All accounts reported on the Balance Sheet – Assets (including contra-assets)– Liabilities– Capital account

Contain the results of all transactions since the business started

NOT CLOSED

TEMPORARY ACCOUNTS

Accumulate information for a specific accounting period

All accounts not on the Balance Sheet– Revenues– Expenses– Drawing

These accounts are closed.

CLOSING ENTRY

Close Revenue Accounts to Income Summary

ENTRY #1

ADJ. T. B.DR.CR.

ACCOUNT TITLE

CashDR. CR.

INCOME STMT


Del. FeesWages Exp.

J J, Drawing



37065020

1753600

1001800

502000

1502150

7002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Revenue

CLOSING ENTRY


ENTRY #1

DELIVERY FEES

2,150

To reduce this account’s balance to zero, we must debit it $2,150.

2,150(1)Bal.

CLOSING ENTRY


ENTRY #1

DELIVERY FEES INCOME SUMMARY

2,150

We are, in effect, transferring the balance to the

Income Summary account.

2,150 2,150(1) (1)

CLOSING ENTRY


ENTRY #1

DELIVERY FEES INCOME SUMMARY

2,1502,150 2,150

Bal.

0Let’s Journalize

this entry!

(1) (1)

GENERAL JOURNAL

DATE DESCRIPTION PR DEBIT CREDIT

Closing Entries1

2

3

4

5

6

7

8

9

10

11

Instead of an explanation aftereach closing entry,

“Closing Entries” is written before the first entry.

GENERAL JOURNAL


Closing Entries1

2

3

4

5

6

7

8

9

10

11

20--June 30 Delivery Fees

Income Summary

2150 00

2150 00

CLOSING ENTRY

Close Expense Accounts to Income Summary

ENTRY #2

Each expense account is closedin this one closing entry.

Wages Expense700 700 (2)Bal.

Expenses have debit balances….Therefore, to close them, they

must be credited.

Wages Expense700 700 (2)Bal.

Wages Expense is now closed; the $700 balance will be

transferred to Income Summaryalong with the balances of all the other expense accounts.

0

Income SummaryWages Expense700

Rent Expense200

Supplies Expense60

Telephone Expense

Insurance Expense Depr. Expense - Del. Eq.

50

25 100

2,150700 (2)

60 (2)

25 (2)

200 (2)

50 (2)

100 (2)

1,135(2)

All the expense account balances

are combinedand Income Summary is debited for

the total.

0

0

0

0

0

0

1,015

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Income SummaryWages Expense700

Rent Expense200

Supplies Expense60

Telephone Expense

Insurance Expense Depr. Expense - Del. Eq.

50

25 100

2,150700 (2)

60 (2)

25 (2)

200 (2)

50 (2)

100 (2)

1,135(2)

Let’s journalize this entry!

0

0

0

0

0

0

1,015

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

GENERAL JOURNAL


Closing Entries1

2

3

4

5

6

7

8

9

10

11

20--June 30 Delivery Fees

Income Summary

2150 00

2150 00

30 Income Summary 1135 00

Wages Expense 700 00

Rent Expense 200 00

Supplies Expense 60 00

Telephone Expense 50 00

Insurance Expense 25 00

Depr. Exp.-Delivery Equip. 100 00

This is a compound journal entry…..One debit which equals the six credits

CLOSING ENTRY

Close Income Summary to Capital

ENTRY #3

INCOME SUMMARY

2,150 REVENUES

CLOSING ENTRY


ENTRY #3

INCOME SUMMARY

1,135 2,150

EXPENSES

CLOSING ENTRY


ENTRY #3

INCOME SUMMARY

1,135 2,150

1,015 Bal.

The balance in Income Summaryis the Net Income.

CLOSING ENTRY


ENTRY #3

INCOME SUMMARY

1,135 2,150

1,015 Bal.

By debiting Income Summary,we close the account.

1,015(3)

CLOSING ENTRY


ENTRY #3

INCOME SUMMARY J. JANE, CAPITAL

1,135 2,150

1,015 Bal.

2,000 Bal.

We transfer the Net Income into the Capital account.

1,015(3) 1,015

GENERAL JOURNAL continued


Closing Entries continued12

13

14

15

16

17

18

19

20

21

22

20--June 30 Income Summary

Capital

1015 00

1015 00

CLOSING ENTRY

Close Drawing to CapitalENTRY #4

J. JANE, DRAWING J. JANE, CAPITAL

Bal. 2,000

Bal.

1501,015150 (4)

1503,015

(4)

CLOSING ENTRY

Close Drawing to CapitalENTRY #4

J. JANE, DRAWING J. JANE, CAPITAL

Bal. 2,000

Bal.

1501,015150 (4)

1503,015

(4)

2,865 Bal.The Capital account now

reflects the ending balanceshown on the Statement of

Owner’s Equity.

GENERAL JOURNAL continued


Closing Entries continued12

13

14

15

16

17

18

19

20

21

22

20--June 30 Income Summary

Capital

1015 00

1015 00

30

J. Jane, Drawing

150 00J. Jane, Capital

150 00

The Closing Entries are then posted to the General Ledger accounts.

FOUR-COLUMN ACCOUNT

Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

DELIVERY FEES 401

20--June 6 500 500

15 600 1100

30 1050 2150

30 Closing

J1

J1

J2

“Closing” is written in the

Item area.

FOUR-COLUMN ACCOUNT

Account: Account No.

DATE ITEM PR DR. CR.BALANCE

DR. CR.

DELIVERY FEES 401

20--June 6 500 500

15 600 1100

30 1050 2150

30 Closing 2150

J1

J1

J2

J4

A line is drawn through to signify a zero balance.

POST-CLOSING TRIAL BALANCE

Prepared after closing entries To prove the equality of the debit and

credit balances in the general ledger accounts

Only accounts which remain open (permanent accounts) are listed.

Jessica Jane’s Campus DeliveryPost-Closing Trial Balance

June 30, 20--

Account Title Acct No.

Debit Balance

Credit Balance

CashAccounts ReceivableSuppliesPrepaid InsuranceDelivery Equipment

Accounts Payable

Jessica Jane, Capital

Accumulated Depr.-Delivery Eq.

101122141145185185.1202219Wages Payable311

370650

20175

3600100

180050

28654815 4815

There are only Permanent accountson the Post-Closing

Trial Balance.

ACCOUNTING CYCLE

Analyze source documents.Journalize the transaction.Post to the ledger accounts.Prepare a trial balance.Determine and prepare the needed

adjustments on the work sheet.

ACCOUNTING CYCLE cont.

Complete an end-of-period work sheet.Prepare an income statement, statement

of owner’s equity, and balance sheet.Journalize and post the adjusting entries.Journalize and post the closing entries.Prepare a post-closing trial balance.

chapter six financial statements and the closing process

Documents

delivery fees expenses

fees wages

revenue slide

income stmt

statement title

date slide

supplies expense

closing process slide