Chapter
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6 Financial Statements and the Closing Process
Learning Objective
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1
Prepare financial statements with the aid of a work sheet.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Used for three major end-of-period activities:
Journalizing adjusting entries Preparing financial statements Journalizing closing entries
The Work Sheet
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp. Sup. Exp Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
From this work sheet, we can prepare the financial statements.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
1st: Prepare the income statement. 2nd: Prepare the statement of owner’s equity. 3rd: Prepare the balance sheet.
Preparing Financial Statements
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Heading should contain 3 lines:
1. Company name 2. Statement title 3. Period ended or last
date in the period
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues are shown first.
Revenues
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650
20 175
3600 100
1800 50
2000 150
2150 700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Revenue
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees $2,150
Dollar signs used at top of columns.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees $2,150
When there is only one revenue account, “Total Revenues” is not computed
or shown.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees $2,150
Expenses are shown next.
Expenses
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts Pay Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp. Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650
20 175
3600 100
1800 50
2000 150
2150 700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Expenses
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees
Expenses Wages expense
$2,150
$ 700
Dollar signs used at top of columns.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees
Expenses Wages expense Rent expense
Telephone expense
$2,150
$ 700 200
50 Supplies expense 60
Insurance expense Depreciation expense—delivery eq.
25 100
Expenses are listed in either: account number order OR descending order by dollar amount. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees
Expenses Wages expense Rent expense
Telephone expense
$2,150
$ 700 200
50 Supplies expense 60
Insurance expense Depreciation expense—delivery eq.
25 100
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Single rulings indicate addition or subtraction.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees
Expenses Wages expense Rent expense
Telephone expense
Total expenses
$2,150
$ 700 200
50 Supplies expense 60
Insurance expense Depreciation expense—delivery eq.
25 100
1,135
Next, expenses are totaled.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Income Statement
For Month Ended June 30, 20--
Revenues Delivery fees
Expenses Wages expense Rent expense
Telephone expense
Total expenses
$2,150
$ 700 200
50 Supplies expense 60
Insurance expense Depreciation expense—delivery eq.
25 100
1,135 Net income $1,015 Net income is computed last. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20--
The statement starts with the capital account balance as of
the beginning of the accounting period.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20--
$2,000
Instead of showing revenue increasing and expenses decreasing the owner’s equity,
this statement uses the net effect (net income/loss) from the
income statement.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp
D.W, Drawing
Rent Exp Sup. Exp Tel. Exp Ins. Exp D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Be careful!! Capital from the work sheet may not be the beginning capital account balance. It is the beginning balance PLUS
any additional investments.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20--
Since Damon made no additional investments this period, we can use the capital account balance
from the work sheet.
$2,000
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20--
Next, we add in the net income/loss from the income statement or
from the work sheet.
$2,000
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del Eq. Accts. Pay Wages Pay D.W, Cap.
Del. Fees Wages Exp
D.W, Drawing
Rent Exp. Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
Net income is found in the Income Statement Debit column
and the Balance Sheet Credit column.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20-- $2,000 Net income for June $1,015
Now we will go to the work sheet for the drawing
account.
Less withdrawals for June
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp Sup. Exp Tel. Exp Ins. Exp D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
The drawing account tells us the amount of assets Damon has withdrawn from
the business for personal use.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20-- $2,000 Net income for June $1,015
Lastly, we calculate the ending capital account balance and double
rule the statement.
Less withdrawals for June 150 Increase in capital 865 Damon Williams, capital, June 30, 20--
$2,865
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
REPORT FORM Liabilities and owner’s equity sections are shown BELOW the assets section. This is the form you will see from now on in this text.
ACCOUNT FORM Assets section is on the LEFT, and liabilities and owner’s equity sections are on the RIGHT. This is the form you saw in chapters 2–5.
Forms of Balance Sheets
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Similar items are grouped together Assets are classified as:
Current Assets Property, Plant, and Equipment
Liabilities are classified as: Current Liabilities Long-Term Liabilities
Classified Balance Sheet
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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, and prepaid insurance
Current Assets
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Collect Receivables
The time period required to purchase supplies and services and convert them back into cash
Operating Cycle
Start with Cash
Purchase Supplies
and Services
Provide Services for Cash and “On Account”
Back to
Cash
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Assets that are expected to serve the business for many years Also called plant assets or long-term assets Examples:
Land, buildings, and equipment
Property, Plant, and Equipment
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
Current Liabilities
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Obligations that are not expected to be paid within a year and do not require the use of current assets Also called long-term debt Example:
A mortgage on an office building Damon does not have any long-term liabilities.
Long-Term Liabilities
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets:
Current assets are listed first.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp. Sup. Exp Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
Current assets
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets: Cash $370 Accounts receivable 650 Supplies 20 Prepaid insurance 175
Total current assets $1,215
The long-term assets are listed next.
Property, plant, and equipment
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq A. D.–Del Eq. Accts. Pay. Wages Pay D.W, Cap
Del. Fees Wages Exp
D.W, Drawing
Rent Exp Sup. Exp Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
Property, plant, and equipment includes the long-term assets AND their related
accumulated depreciation accounts.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets: Cash $370 Accounts receivable 650 Supplies 20 Prepaid insurance 175
Total current assets $1,215 Property, plant, and equipment
Delivery equipment Less accum. depr.—delivery eq.
$3,600 100 3,500
$3,500 = Book Value © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets: Cash $370 Accounts receivable 650 Supplies 20 Prepaid insurance 175
Total current assets $1,215 Property, plant, and equipment
Delivery equipment Less accum. depr.—delivery eq.
$3,600 100 3,500
Total assets $4,715
Now for the liabilities!!!
Liabilities
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets: Cash $370 Accounts receivable 650 Supplies 20 Prepaid insurance 175
Total current assets $1,215 Property, plant, and equipment
Delivery equipment Less accum. depr.—delivery eq.
$3,600 100 3,500
Total assets $4,715
Just as with assets, the current (or short-term) liabilities are shown first.
Liabilities Current liabilities:
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp
D.W, Drawing
Rent Exp Sup. Exp Tel. Exp Ins. Exp D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
Damon has only two liabilities and they are both current…
accounts payable and wages payable.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounts payable Current liabilities:
Liabilities
Damon's Campus Delivery Balance Sheet
June 30, 20-- Assets
Current assets: Cash $370 Accounts receivable 650 Supplies 20 Prepaid insurance 175
Total current assets $1,215 Property, plant, and equipment
Delivery equipment Less accum. depr.—delivery eq.
$3,600 100 3,500
Total assets $4,715
Let’s shift to the lower part of our balance sheet.
$1,800 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Liabilities
Current liabilities: Accounts payable $1,800 Wages payable 50
Total current liabilities $1,850
Since Damon does not have long-term liabilities, we will move on
to the owner’s equity section.
Owner’s Equity
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp. Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650
20 175
3600 100
1800 50
2000 150
2150 700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Net Income
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.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Statement of Owner’s Equity
For Month Ended June 30, 20--
Damon Williams, capital, June 1, 20-- $2,000 Net income for June $1,015
This is the amount we will put on the balance sheet.
Less withdrawals for June 150 Increase in capital 865 Damon Williams, capital, June 30, 20-- $2,865
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Damon's Campus Delivery Balance Sheet
June 30, 20-- Liabilities
Current liabilities: Accounts payable $1,800 Wages payable 50
Total current liabilities $1,850 Owner’s Equity
Damon Williams, capital 2,865 Total liabilities and owner’s equity $4,715
It balances!!! Total assets of $4,715 equals
Total liabilities and owner’s equity of $4,715. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Additional investments by the owner during the accounting period:
Appear in the general ledger capital account Are part of the amount reported in the unadjusted trial balance on the work sheet Must be shown separately in the statement of owner’s equity
Additional Investments by Owner
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ramon Balboa’s capital account had a beginning balance of $5,000. During the month, he invested an additional $3,000 into his business. The $8,000 balance in the capital account appears in the unadjusted trial balance on the work sheet.
Additional Investments by Owner
How does the additional investment affect the Statement of Owner’s Equity?
Ramon’s Shopping Service Statement of Owner’s Equity For Month Ended July 31, 20--
Ramon Balboa, capital, July 1, 20-- $5,000
Net income for July $2,100 Less withdrawals for July 250 Increase in capital 1,850 Ramon Balboa, capital, July 31, 20-- $9,850
Add additional investments Total investment
3,000 $8,000
To the balance sheet
From the general ledger
From the work sheet
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective
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2
Journalize and post closing entries.
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Gives temporary accounts zero balances so they are prepared to accumulate new information for the next accounting period Involves four closing journal entries The income summary account is used to aid in the closing process
The Closing Process
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All accounts reported on the balance sheet Assets (including contra-assets) Liabilities Capital account
Contain the results of all transactions since the business started These accounts are NOT CLOSED
Permanent Accounts
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Accumulate information for a specific accounting period All accounts not on the balance sheet
Revenues Expenses Drawing
These accounts are CLOSED
Temporary Accounts
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STEP #1 Close Revenue Accounts to Income Summary.
Steps in the Closing Process
ADJ. T. B. DR. CR.
ACCOUNT TITLE
Cash DR. CR.
INCOME STMT.
Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts. Pay. Wages Pay. D.W, Cap.
Del. Fees Wages Exp.
D.W, Drawing
Rent Exp. Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.
CR. DR. BALANCE SHEET
370 650
20 175
3600 100
1800 50
2000 150
2150 700 200 60 50
25 100
6100 6100
370 650 20
175 3600
100 1800
50 2000
150 2150
700 200 60 50
25 100
1135 2150 4965 3950 1015 1015 2150 2150 4965 4965
Revenue
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© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STEP #1 Close Revenue Accounts to Income Summary.
Steps in the Closing Process
DELIVERY FEES 2,150
To reduce this account’s balance to zero, we must debit it for $2,150.
2,150 (1) Bal.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STEP #1 Close Revenue Accounts to Income Summary.
Steps in the Closing Process
DELIVERY FEES INCOME SUMMARY 2,150
We are, in effect, transferring the balance to the
income summary account.
2,150 2,150 (1) (1)
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STEP #1 Close Revenue Accounts to Income Summary.
Steps in the Closing Process
DELIVERY FEES INCOME SUMMARY 2,150 2,150 2,150 Bal.
—
Let’s journalize this entry!
(1) (1)
—
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CLOSING ENTRIES IN JOURNAL FORM
DATE DESCRIPTION PR DEBIT CREDIT Closing Entries 1
2 3 4
5 6 7 8 9
10
Instead of an explanation after each closing entry, “Closing Entries” is
written before the first entry.
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CLOSING ENTRIES IN JOURNAL FORM
DATE DESCRIPTION PR DEBIT CREDIT Closing Entries 1
2 3 4
5 6 7 8 9
10
20-- June 30 Delivery Fees
Income Summary 2,150 00
2,150 00
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STEP #2 Close Expense Accounts to Income Summary.
Steps in the Closing Process
Each expense account is closed in this one closing entry.
Wages Expense
700 700 (2) Bal.
Expenses have debit balances… therefore, to close them, they
must be credited.
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Wages Expense
700 700 (2) Bal.
Wages Expense is now closed; the $700 balance will be
transferred to Income Summary along with the balances of all the other expense accounts.
—
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Income Summary Wages Expense 700
Rent Expense 200
Supplies Expense 60
Telephone Expense
Insurance Expense Depr. Expense—Del. Eq.
50
25 100
2,150 700 (2)
60 (2)
25 (2)
200 (2)
50 (2)
100 (2)
1,135 (2)
All expense account balances
are combined and Income Summary is debited for the total.
—
—
—
—
—
—
1,015 Bal.
Bal.
Bal.
Bal.
Bal.
Bal.
Bal.
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Income Summary Wages Expense 700
Rent Expense 200
Supplies Expense 60
Telephone Expense
Insurance Expense Depr. Expense—Del. Eq.
50
25 100
2,150 700 (2)
60 (2)
25 (2)
200 (2)
50 (2)
100 (2)
1,135 (2) —
—
—
—
—
—
1,015 Bal.
Bal.
Bal.
Bal.
Bal.
Bal.
Bal.
Let’s journalize this entry!
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CLOSING ENTRIES IN JOURNAL FORM
DATE DESCRIPTION PR DEBIT CREDIT Closing Entries
20-- June 30 Delivery Fees
Income Summary 2,150 00
30 Income Summary Wages Expense 700 00 Rent Expense 200 00 Supplies Expense 60 00 Telephone Expense 50 00 Insurance Expense 25 00
This is a compound journal entry… One debit that equals the six credits.
1,135 00
2,150 00
Depr. Exp.—Del. Equip. 100 00
1 2 3 4
5 6 7 8 9 10 11
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STEP #3 Close Income Summary to the Owner’s Capital Account.
Steps in the Closing Process
INCOME SUMMARY 2,150 REVENUES
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STEP #3 Close Income Summary to the Owner’s Capital Account.
Steps in the Closing Process
INCOME SUMMARY
2,150
EXPENSES
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STEP #3 Close Income Summary to the Owner’s Capital Account.
Steps in the Closing Process
INCOME SUMMARY 1,135 2,150
1,015 Bal.
The balance in Income Summary is the net income.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STEP #3 Close Income Summary to the Owner’s Capital Account.
Steps in the Closing Process
INCOME SUMMARY 1,135 2,150
1,015 Bal.
By debiting Income Summary, we close the account.
1,015 (3)
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STEP #3 Close Income Summary to the Owner’s Capital Account.
Steps in the Closing Process
INCOME SUMMARY
1,135 2,150 1,015 Bal. 1,015 (3)
D. Williams, CAPITAL
2,000 Bal. 1,015
We transfer the net income into the Owner’s Capital account.
CLOSING ENTRIES IN JOURNAL FORM
DATE DESCRIPTION PR DEBIT CREDIT Closing Entries 12
13 14
15 16 17 18 19 20 21
20-- June 30 Income Summary
Damon Williams, Capital 1,015 00
1,015 00
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© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
STEP #4 Close Drawing to the Owner’s Capital Account.
Steps in the Closing Process
D. Williams, DRAWING
D. Williams, CAPITAL
Bal. 2,000
Bal.
150 1,015
150 (4) 150
2,865
(4)
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STEP #4 Close Drawing to the Owner’s Capital Account.
Steps in the Closing Process
D. Williams, DRAWING
D. Williams, CAPITAL
Bal. 2,000 150 1,015
150 (4)
150 (4)
2,865 Bal.
The owner’s capital account now reflects the ending balance shown on the
statement of owner’s equity.
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CLOSING ENTRIES IN JOURNAL FORM
DATE DESCRIPTION PR DEBIT CREDIT Closing Entries 12
13 14
15 16 17 18 19 20 21
20-- June 30 Income Summary
Capital
1,015 00
30 Damon Williams, Drawing
150 00 Damon Williams, Capital
150 00
The closing entries are then posted to the general ledger accounts.
1,015 00
CLOSING ENTRIES POSTED TO THE GENERAL LEDGER
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.
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CLOSING ENTRIES POSTED TO THE GENERAL LEDGER
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 J4 2150 ——
A line is drawn through to signify a zero balance.
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Your Perspective-Bookkeeper
Learning Objective
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3
Prepare a post-closing trial balance.
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Prepared after closing entries To prove the equality of the debit and credit balances in the general ledger accounts Only accounts that remain open (permanent accounts) are listed
Post-Closing Trial Balance
Damon's Campus Delivery Post-Closing Trial Balance
June 30, 20--
Account Title Acct No.
Debit Balance
Credit Balance
Cash Accounts Receivable Supplies Prepaid Insurance Delivery Equipment
Accounts Payable
Damon Williams, Capital
Accumulated Depr.—Del. Eq.
101 122 141 145 185 185.1 202 219 Wages Payable 311
370 650
20 175
3,600 100
1,800 50
2,865 4,815 4,815
There are only permanent accounts on the post-closing
trial balance.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objective
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4
List and describe the steps in the accounting cycle.
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Analyze source documents. Journalize the transaction. Post to the general ledger accounts. Prepare a trial balance. Determine and prepare the needed adjustments on the work sheet.
Steps in the Accounting Cycle
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Complete an end-of-period work sheet. Journalize and post the adjusting entries. Prepare an income statement, a statement of owner’s equity, and a balance sheet. Journalize and post the closing entries. Prepare a post-closing trial balance.
Steps in the Accounting Cycle (cont.)