FINANCIAL ACCOUNTING Lecture 1-2
LEARNING OBJECTIVES 他 他
Accounting g and business environment Accounting cycle
To start a business you need: • An idea that will become a product or service • A market k t off customers t who h wantt the th product d t or service i you offer
TYPES OF BUSINESS ORGANIZATIONS ` ` `
Service companies Merchandise companies Manufacturing companies
FORMS OF BUSINESS ORGANIZATION | | |
Proprietorship P i hi Partnership Corporation
BUSINESS ACTIVITIES Financing g activities | Investing activities | Operating activities |
Accounting g - a process of identifying, recording summarizing, recording, summarizing and reporting economic information to decision makers in the form of financial statements. t t t 6
Types off accounting
Financial accounting
Cost and g management accounting
Tax accounting
Users of Accounting Information • investors investors | Financial Accounting
EXTERNAL USERS
• creditors creditors di |
• regulators | regulators • customers | • customers competitors
| competitor
s
8
Users of Accounting Information
Financial Accounting EXTERNAL USERS
Financial Accounting INTERNAL USERS
9
• • • • •
investors creditors di regulators Customers Suppliers
• Owners | owners • Managers | managers • Employees | employees
ACCOUNTING CONCEPTS AND PRINCIPLES |
What is the p primary y objective j of financial Accounting and Reporting?
Accountants follow professional guidelines. The rules that govern accounting are called GAAP (generally accepted accounting principles) principles). Financial Accounting Standards Board (FASB)
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND CONCEPTS Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companies | Monetary o eta y Unit U t- o only y economic eco o c eve events ts that t at have ave monetary transactions will be reported in the financial statements | Cost Principle - assets are presented at their original (historical) cost | Going Concern - companies are established with th goall that the th t they th will ill operate t for f an indefinitely i d fi it l long period of time |
11 1152
| Periodicity y
- economic activities of any firm can be divided into discrete time periods for reporting purposes | Matching M hi P Principle i i l -all ll revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting ti period i d iin which hi h th they are incurred to produce such revenues
Basic Accounting Equation Assets
=
Liabilities
+
Owner’s Equity
The basic tool of accounting is the accounting equation. It measures the economic resources of a business and claims to those resources resources. The accounting equation shows how assets, liabilities, and owner’s equity are related. The accounting equation shows the financial position of the business.
ASSETS , LIABILITIES, AND OWNER’S EQUITY Assets are the economic resources of a business that are expected to provide benefits to the b i business iin the th future. f t Assets are what the business owns. For example: Cash Cash, merchandise inventory, inventory furniture, and land.
ASSETS , LIABILITIES, AND OWNER’S EQUITY
Claims to those assets come from two sources: | Liabilities are outsider claims to the assets of a business. | Owner’s equity q y or capital p represents p the insider claims to the assets of a business.
Assets
Economic resources
=
Liabilities
+
Owner’s Equity q y
Claims to economic resources
Effects of Transactions on Owner’s Equity OWNER’S EQUITY decreased by
increased by
Owner’s withdrawals
Owner’s investments
Expenses
Revenues
16
EFFECTS OF A BUSINESS TRANSACTION ON ACCOUNTING EQUATION
1. Investment by owner. Kay Torres invests $20,000 of her own money to start business . The Kay Torres Travel Agency began an activity on June 1, 2011. A Assets t =
Li biliti + Liabilities
O Owner’s ’ Equity E it
Cash
Owner’s Equity
((1)) +$20,000 $ , =
+$ $20,000 ,
Bal. $20,000
=
$20,000
2. Purchase an equipment for cash. The travel agency purchases equipment, equipment paying cash of $9 $9,000. 000
A Assets t = Cash
+
Li biliti + Liabilities
Equipment =
((1)) +$20,000 $ ,
Owner’s Equity +$ $20,000 ,
(2) -$9,000 Bal. $11,000
O Owner’s ’ Equity E it
+$9,000 +
$9,000=
$20,000
3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Assets = Cash
+
Equipment =
Liabilities +
Owner’s Equity
Notes payable
Owner’s Equity
(1) +$20,000
+ $20,000
(2) -$9,000
+$9,000
(3) +$15,000 $15,000 Bal. $26,000
+$15,000 $15,000 +
$9,000=
$15,000 +
$20,000
4. Purchase supplies on credit. The travel agency purchases office supplies pp for the agency, g y, agreeing g g to p pay y $1,200 , within 30 days. Assets = Cash
+
Supplies
Equipment =
Accounts Payable
Liabilities +
Owner’s E it Equity
Notes payable
Owner’s Equity
(1) +$20,000
+ $20,000
(2) -$9,000 $9,000
+$9,000 $9,000
(3) +$15,000
+$15,000
(4)
+$1 200 +$1,200
Bal. $26,000 +
$1,200+
+$1 200 +$1,200 $9,000=
$1,200+
$15,000 +
$20,000
5. Provide services for cash. The travel agency makes $2,300 , of travel arrangements g and collects this amount in cash. Assets = Cash
+
Supplies
Equipment =
Accounts Payable
Liabilities +
Owner’s E it Equity
Notes payable
Owner’s Equity
(1) +$20,000
+ $20,000
(2) -$9,000 $9,000
+$9,000 $9,000
(3) +$15,000 (4)
+$15,000 +$1 200 +$1,200
+$1 200 +$1,200
(5) +$2,300 Bal. $28,300 +
+$2,300 $1,200+
$9,000=
$1,200+
$15,000 +
$22,300
6. Provide services on credit. The travel agency performs $5,200 of services and ,in return, receives clients promises to pay this $5,200 within one month. Assets = Cash
+
Accounts Receivable
Supplies
Equipment =
Accounts Payable
Liabilities +
Owner’s Equity
Notes payable
Owner’s Equity
(1) +$20,000
+ $20,000
(2) $9,000
+$9,000
(3) +$15,000
+$15,000
(4)
+$1 200 +$1,200
+$1 200 +$1,200
(5) +$2,300
+$2,300
(6)
+$5,200 $
Bal. $28,300
$5,200
+$5,200 $ $1,200+
$9,000=
$1,200+
$15,000
$27,500
7. Partial payments of accounts payable. The travel agency pays $600 to the store where it purchased $1,200 worth of supplies in transaction (4). Assets = Cash
+
Accounts Receivable
(4)
Supplies
Equipment =
+$1 200 +$1,200
Accounts Payable
Liabilities +
Owner’s Equity
Notes payable
Owner’s Equity
+$1 200 +$1,200
(5) +$2,300 (6)
+$2,300 +$5,200
+$5,200
(7)-$600 Bal. $27,700 +
-$600 $5,200+
$1,200+
$9,000=
$600+
$15,000 +
$27,500
8. (8),(9),(10). Payments of expenses. During the month, the travel agency pays $900 in cash for building rent, $1,100 for salaries, and $300 for utilities. Assets = Cash
+
Accounts Receivable
(4)
Supplies
Equipment =
+$1 200 +$1,200
Accounts Payable
Liabilities +
Owner’s Equity
Notes payable
Owner’s Equity
+$1 200 +$1,200
(5) +$2,300 (6)
+$2,300 +$5,200
+$5,200
(7)-$600
-$600
(8) -$900 $900
-$900 $900
(9)$1,100
-$1,100
(10) $300 (10)-$300
-$300 $300
Bal. $25,400
$5,200+
$1,200+
$9,000=
$600+
$15,000
$25,200
THE ACCOUNTING CYCLE
Transactions 9. Reversing entries
1. Journalization
8. P 8 Post-closing l traill balance
2. Posting
7. Closing entries
3. Triall balance b l Work Sheet
6. Financial Statements 5.
4 Adj 4. Adjustments stm ts
Adjusted trial balance LO 3 Identify steps in the accounting cycle.
TRANSACTIONS AND EVENTS What to Record? FASB states, “transactions and other events and circumstances that affect a business enterprise.” Types of Events: External – between a business and its environment. environment Internal – event occurring entirely within a business.
DEBITS AND CREDITS Account
An Account can be illustrated in a T-Account form.
An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” Account Name Debit / Dr.
Credit / Cr.
Assets
+ Bal .
-
=
Owner Liabilit + p + Revenu - Expens ’ss y e e equity
-
+
Bal .
-
+
Bal .
-
+
Bal .
+
Bal .
-
DEBITS AND CREDITS An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double--entry accounting system (two Double (two-sided sided effect) effect). Recording done by debiting at least one account and crediting another another. DEBITS must equal CREDITS.
LO 2 Explain doubledouble-entry rules.
1. JOURNALIZING
General Journal – a chronological record of transactions. transactions Journal Entries are recorded in the journal.
ANALYSIS OF TRANSACTION
ANALYSIS
1. Investment by owner. Kay Torres invests $20,000 of her own money to start business . Th Kay The K Torres T Travel T l Agency A began b an activity ti it on June 1, 2011.
DEBITCREDIT RULES
Increases in assets are recorded by debits; debit cash $20,000 Increases in owner’s owner s equity are recorded by credits; credit owner’s equity
JOURNAL ENTRY
06 01 Cash 06.01. C h 20 20,000 000 Owner’s equity 20,000
ENTRIES IN LEDGER ACCOUNTS
C h Cash 06/01. 20,000
O Owner’s ’ equity it 20,000 06/01
GENERAL JOURNAL â„– Date
Description
1 June 1 Cash
Page 1
PR Debit Credit C 20,000
Owner's equity
20,000
to record owner's owner s investment
2 June 3 Equipment
9,000
Cash
9,000
to record purchasing equipment by cash 3 June 6 Cash Notes payable to record bank loan
15,000 15 000 15,000
GENERAL JOURNAL â„–
Date
Description
Page 1 P R
pp 4 June 11 Supplies
Debit Credit 1,200 ,
Accounts payable
1,200
to record purchasing supplies on credit
5 June 13 Cash
2,300
Service revenue
2,300
to record providing services for cash 6 June 19 Accounts receivable
5,200
Service revenue to record providing services on credit
5,200
GENERAL JOURNAL â„–
Date
Description
Page 1 PR Debit Credit C
7 June 21 Accounts payable
600
Cash
600
to record partial payment of accounts payable
8 June 26 Building rent expense
900
Cash
900
to record building rent expense 9 June 28 Salary expense Cash to record salary expense
1,100 1,100
GENERAL JOURNAL â„–
Date
Description
10 June 30 Utilities expense Cash to record utilities expense
Page 1 PR Debit Credit 300 300
2. POSTING TO THE GENERAL LEDGER
The Ledger contains the entire group of accounts maintained by a company.
LEDGER AND CHART OF ACCOUNTS The chart of accounts is a list of all accounts and includes an identifying number for each account. Account Number 1001 1201 1601 1801 2001 3101 3201 4101
Account Name Cash Accounts receivable Supplies Prepaid insurance Equipment Accounts payable Unearned revenue Owner's equity
Account Number 4301 5101 7101 7102 7103 7104 7105 7105
Account Name Owner's withdrawal Revenues Rental revenue Salaries expense Insurance expense Rent expense Supplies expense Utilities expense
GENERAL JOURNAL №
Date
Description
1 June 1 Cash
Page PR
Debit Cred
1001 20,000
O Owner's ' equity it
20 00 20,00
to record owner's investment
2 June 3 Equipment General Ledger Cash
Cash
№ Date
9,000 9,00 Acct. No. 1001
to record purchasing cash Balance Explanation Ref.equipment Debit by Credit 3 1June 15,000 20,000 1-Jun J 6 Cash GJ J1 20,000 , , Notes payable 15,00 to record bank loan
GENERAL JOURNAL D t Date
D Description i ti
Page 1 PR Debit D bit Credit C dit
June 1 Cash
20,000
Owner's equity
20,000
to record owner's investment
June 3 Equipment
9,000
Cash
9,000
to record purchasing equipment by cash June 6 Cash Date 1 Jun 1-Jun
Owner's O ' capital i l Notes payable
Explanation
Ref.
to record bank loan GJ1
Debit
15,000 A Acct. N No. 15,000
Credit
20 000 20,000
Balance
20 000 20,000
Cash (1) 20,000
Owner’s equity 20,000 (1)
3. TRIAL BALANCE
Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.
Acct No. Acct. No
Account
TRIAL BALANCE Debit Credit
Cash $ 25,400 Accounts receivable 5,200 5 200 Supplies 1,200 Equipment 9 000 9,000 Accounts payable Note payable Owner's equity Service revenue Building rent expense 900 Salary expense 1 100 1,100 Utilities expense 300 $ 43 100
$ 600 15 000 15,000 20,000 7 500 7,500
$ 43 100
4. ADJUSTING ENTRIES
Revenues - recorded in the p period in which they are earned. earned Expenses - recognized in the period in which they are incurred. incurred Adjusting entries - needed to ensure that the revenue recognition and matching principles i i l are followed. f ll d
PROBLEMS IN ACCOUNTING MEASUREMENTS |The
identification of the accounting period. period
|The
proper point in time to recognize revenue.
|The
appropriate moment to record an expense. expense 44
Identification of the Accounting Period
TIME PERIOD PRINCIPLE |For
reporting purposes purposes, an organization’s life can be divided i t separate into t accounting ti periods i d y months, y quarters, y years, years
etc etc. 46
THE ACCOUNTING PERIOD
Annual 1
2
Semiannual 1
2
3
4
Quarter 1
2
3
4
5
6
7
Month
8
9
10
11
12
The proper point in time to recognize revenues.
REVENUE RECOGNITION . . . |Revenue
y At
or
is generally recognized
the time services are performed; p ;
y When Wh
goods d are sold ld and d delivered d li d to a customer.
49
The proper point in time to recognize expenses.
THE MATCHING PRINCIPLE |The
matching principle requires that all expenses i incurred d to t generate t th the revenues recognized in an accounting period be matched with those revenues. 51
Accrual Basis Accounting g
Revenue Recognition
Matching M t hi Principle
Accrual Basis Accounting
ACCRUAL BASIS ACCOUNTING |Revenues
are recognized (recorded) when earned earned, without regard to when cash is received;
|Expenses
are recorded as incurred without regard to when they are paid. 54
An adjusting entry is recorded t b to bring i an assett or liability li bilit account balance to its proper amount.
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Accrued Revenues
Transactions where cash is p paid or received before a related expense or revenue is recognized. Transactions where cash is paid or received after a related expense or revenue is recognized.
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Accrued Revenues
Transaction where cash is paid before a related expense is recognized.
ADJUSTING PREPAID EXPENSES
Resources p paid for prior to receiving g the actual benefits. Asset Unadjusted Balance
Credit Adjustment
Here is the check f my fi for firstt 6 months’ rent.
Expense Debit Adjustment
ADJUSTING PREPAID EXPENSES y On
December 1, 2011, Scott Company paid $12 $12,000 000 to cover rent for December 2011 through May 2012.
y Let’s
look at the adjusting journal entry needed on December 31, 2011. GENERAL JOURNAL
D t Date
D Description i ti
Dec. 31 Rent Expense Prepaid Rent to record monthl y rent
Page 34 PR Debit D bit Credit C dit 2,000 2,000
ADJUSTING PREPAID EXPENSES y After
p posting, g, the accounts involved look like this: Prepaid Rent
12/1
$12,000 $12 000 12/31
$2,000 $2 000
Rent Expense 12/31
$2,000 $2 000
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Transaction where cash is received before a related revenue is recognized.
Accrued Revenues
ADJUSTING UNEARNED REVENUE Cash received in advance d off providing products or p services.
Liability Debit Adjustment
Unadjusted Balance
Buy your season tickets for all home basketball games NOW!
“GO SEAWOLVES”
Revenue Credit Adjustment
ADJUSTING UNEARNED REVENUE
On October 1,, 2011,, UAA sold 1,000 , season tickets to its 20 home basketball games for $100 each. UAA makes the following entry:
GENERAL JOURNAL Date
Description
Oct. 1 Cash Unearned Basketball Revenue Recei pts for 1,000 sea son ti ck ets
Page 34 PR
Debit
Credit
100,000 100,000
ADJUSTING UNEARNED REVENUE
On December 31 31, UAA has played 10 of its regular home games, winning 8 and losing 2. GENERAL JOURNAL Date Dec. 31
Description
Page 34 PR
Prepare the appropriate Adjusting Entry on December 31
Debit
Credit
ADJUSTING UNEARNED REVENUE
On December 31 31, UAA has played 10 of its regular home games, winning 8 and losing 2. GENERAL JOURNAL Date
Description
Dec. 31 Unearned Basketball Revenue Basketball Revenue to recogni ze ba sk etba l l revenue
Page 34 PR
Debit
Credit
50,000 50 000 50,000
ADJUSTING UNEARNED REVENUE y After
p posting, g, the accounts involved look like this Unearned Basketball Revenue 12/31 $50,000 10/1 $100,000
Basketball Revenue 12/31
$50,000
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Accrued Revenues
Transaction where cash is paid before a related expense is recognized.
ADJUSTING FOR DEPRECIATION y Depreciation
is the process of computing expense from allocating the cost of plant and equipment over its expected useful lives.
Straight-Line Depreciation
=
Asset Cost – Salvage Value Useful f lL Life f
ADJUSTING FOR DEPRECIATION 2. Purchase an equipment for cash. The travel
agency purchases equipment equipment, paying cash of $9,000.
• Let’s compute depreciation expense for the year ended June 30, 2011. 2011 Depreciation = Expense
$9,000 - $0 5
= $1,800/12=150. $1 800/12 150 f for m month nth 69
ADJUSTING FOR DEPRECIATION y Prepare p
the jjournal entry. y
GENERAL JOURNAL Date
Description
June 31 Depreciation Exp.
Page 2 PR
Debit
Credit
12,000
Accum Depreciation Accum. To record a nnua l depreci a ti on
Accumulated depreciation p is a contra asset account.
12 000 12,000
ADJUSTING FOR DEPRECIATION
y After
posting posting, the accounts involved look like this: Equipment 6/3
$9,000
Depreciation Expense 6/30
$150
Accumulated Depreciation 6/30 $150
ADJUSTING FOR DEPRECIATION Kay Torres Co.Ltd Balance Sheet At June 30, 2011 Assets Cash . . . Equipment Less: accumulated deprec deprec. . . . Total Assets
$
9,000 (150)
8 850 8,850
The Th equipment account is shown on the balance sheet like this.
ADJUSTING FOR SUPPLIES At the end of current p period balance of Supplies pp was $900 . So we must adjust supplies expense.
– Prepare the journal entry. GENERAL JOURNAL Date
Description
pp expense p June 30 Supplies Supplies To record suppl i es expence
Page 2 PR
Debit
Credit
300 300
ADJUSTING FOR SUPPLIES
y After
posting posting, the accounts involved look like this: Supplies 6/11
$1,200
$300 6/30
Supplies Expense 6/30
$300
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Accrued Revenues
Transaction where cash is paid after a related expense is recognized.
ADJUSTING FOR ACCRUED EXPENSES
Costs incurred in a period that are both unpaid and unrecorded. Expense Debit Adjustment
Its accrued bank loan interest!
Liability Credit Adjustment
ADJUSTING FOR ACCRUED EXPENSES 3. Borrow cash from the bank. The travel agency g y borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year year.
06/30/11 Month end
06/05/11
Record adjusting journal entry.
First payment Date of interest 31/12/11
ADJUSTING FOR ACCRUED EXPENSES 3. Borrow cash from the bank. The travel agency g y borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.
GENERAL JOURNAL Date
Description
June 30 Interest expense Interest payable t record to d i nterest t t a ccrua l
Page 34 PR
Debit
Credit
150 150
ADJUSTING FOR ACCRUED EXPENSES
y After
p posting, g, the accounts involved will look like this . . . Interest Expense 06/30 $150
Interest Payable 06/30 $150
Exh. 3.4
FRAMEWORK FOR ADJUSTMENTS Framework for Adjustments Adjustments
Prepaid Expenses
Depreciation
Unearned Revenues
Accrued Expenses
Accrued Revenues
Transaction where cash is received after a related revenue is recognized.
ADJUSTING FOR ACCRUED REVENUES Revenues earned i a period in i d that h are both unrecorded and not yet received.
Asset Debit Adjustment
Yes, you can pay me for your tax return when I finish the work.
Revenue Credit Adjustment
ADJUSTING FOR ACCRUED REVENUES Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry necessary on December 31, 2002, the end of the company’s p y fiscal y year. GENERAL JOURNAL Date
Description
Dec. 31 Accounts Receivable S Service i Revenues R Revenues ea rned but not recei ved
Page 34 PR
Debit
Credit
31,200 31 200 31,200
Exhibit 3.18 Summary of Adjustments and Financial Statement Links Category
Before Adjusting B/S
I/S
Adjusting Adj ti Entry
Expense
Dr. Expense Cr. Asset
Unearned Revenue Liability
Revenue
Dr. Liability Cr Revenue Cr.
Accrued Expenses Liability
Expense
Dr. Expense Cr. Liability
Accrued Revenues Asset
Revenue
Dr. Asset Cr. Revenue
Prepaid Expense
Overstated Understated
Asset
Exh. 3.18
USING A WORKSHEET
Worksheet A multiple-column form used in preparing financial statements. Not a permanent accounting record. Fi Five step process. Use of worksheet is optional.
LO 1 Prepare a worksheet.
STEPS IN PREPARING A WORKSHEET Illustration 4-2
1. Prepare a Trial Balance on the Worksheet
Account Titles Cash Accounts Receivable pp Supplies Equipment Accumulated Depreciation Accounts Payable Notes payable Owner's equity Service Revenue Salaries Expense Rent expense Utilities expense Totals
Trial Balance Dr. Cr. 25,400 5,200 1,200 , 9,000 600 15,000 20,000 7 500 7,500 1,100 900 300 43,100
43,100
Adjustments Dr. Cr.
Adjusted Trial Balance Dr. Cr.
Income Statement Dr. Cr.
Balance Sheet Dr. Cr.
Trial balance amounts come directly from ledger accounts.
Include all accounts with balances.
2. Enter the Adjustments in the Adjustments Columns Account Titles Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Notes payable Owner's equity Service Revenue Salaries Expense Rent expense Utilities expense Totals Supplies expense Depr. Expense Interest expense Interest payable Totals
Trial Balance Dr. Cr. 25,400 5 200 5,200 1,200 9,000
Adjustments Dr. Cr.
Adjusted Adj t d Trial Balance Dr. Cr.
IIncome Statement Dr. Cr.
Balance Sheet Dr. Cr.
a. 300 b. 150
Adjustments Key: (a) Supplies used. (b) Depreciation expense. (c) Interest expense accrued
600 15,000 20,000 , 7,500 1,100 900 300 43,100
Add additional accounts as needed.
43,100 a. 300 b. 150 c. 150 c. 150 600 600
Enter adjustment amounts,, total adjustments columns, and check for equality.
3. Complete the Adjusted Trial Balance Columns
Account Titles Cash A Accounts t RReceivable i bl Supplies Equipment Accumulated Depreciation A Accounts t PPayable bl Notes payable Owner's equity Owner's withdrawal S i Revenue Service R Salaries Expense Rent expense Utilities expense T t l Totals Supplies expense Depr. Expense Interest expense I t t payable Interest bl Totals
Trial Balance Dr. Cr. 24,400 5 200 5,200 1,200 9,000
Adjustments Dr. Cr.
a. 300
Adjusted Trial Balance Dr. Cr. 24,400 5 200 5,200 900 9,000
b. 150
1,000 7 500 7,500
1,100 900 300 43 100 43,100
7 500 7,500 1,100 900 300
43 100 43,100 a. 300 b. 150 c. 150 c. 150 600 600
Balance Sheet Dr. Cr.
150 600 15,000 20,000
600 15,000 20,000 1,000
Income Statement Dr. Cr.
300 150 150 43,400
150 43,400
Total the adjusted trial balance columns and check for equality.
4. Extend Amounts to Financial Statement Columns
Account Titles Cash Accounts Receivable Supplies q p Equipment Accumulated Depreciation Accounts Payable Notes payable Owner's equity Service Revenue Salaries Expense Rent expense Utilities expense Totals Supplies expense Depr. Expense Interest expense Interest payable Totals
Trial Balance Dr. Cr. 25,400 5,200 1,200 9,000 ,
Adjustments Dr. Cr.
a. 300
Adjusted Trial Balance Dr. Cr. 25,400 5,200 900 9,000 ,
b. 150
150 600 15,000 20,000 7,500
600 15,000 20,000 7,500 1,100 900 300 43,100
Extend all Balance assetSheet asset, Dr. Cr. liability, and equity account balances to the balance sheet columns.
Income Statement Dr. Cr.
7,500
1,100 900 300
1,100 900 300
300 150 150
300 150 150
43,100 a. 300 b. 150 c 150 c. 600
c. 150 600
43,400
150 43,400
2,900
7,500
5. Total Columns, Compute Net Income (Loss)
Account Titles Cash Acco nts Recei Accounts Receivable able Supplies Equipment Accumulated Depreciation Accounts Payable Notes payable Owner's equity Retained Earnings Service Revenue Salaries Expense Rent expense Utilities expense Totals Supplies expense Depr. Expense Interest expense Interest payable Totals Income before tax Income tax expense Net Income
Trial Balance Dr. Cr. 25,400 5 200 5,200 1,200 9,000
Adjustments Dr. Cr.
a. 300
Adjusted Trial Balance Dr. Cr. 25,400 5 200 5,200 900 9,000
b. 150
150 600 15,000 20,000
600 15,000 20,000 7,500 1,100 900 300 43,100
Income Statement Dr. Cr.
7,500
7,500
1,100 900 300
1,100 900 300
300 150 150
300 150 150
43,100 a. 300 b. 150 c. 150 600
c. 150 600
43,400
Total
Compute Net Income or Net Loss.
150 43,400
2,900 4,600 460 4,140
7,500
7,500
7,500
Balance Sheet Dr. Cr.
5. Total Columns, Compute Net Income (Loss)
Account Titles Cash Accounts Receivable Supplies Equipment Accumulated Depreciation Accounts Payable Notes payable Owner's equity Retained Earnings Service Revenue Salaries Expense R t expense Rent Utilities expense Totals Supplies expense Depr. Expense Interest expense I t Interest t payable bl Totals Income before Tax Income tax expense Net Income Tax payable Total
Trial Balance Dr. Cr. 25,400 5,200 1,200 9,000
Adjustments Dr. Cr.
a. 300
Adjusted Trial Balance Dr. Cr. 25,400 5,200 900 9,000
600 15,000 20,000
b. 150
150 600 15,000 20,000
7,500
7,500
Income Statement Dr. Cr.
Balance Sheet Dr. Cr. 25,400 5,200 900 9,000 150 600 15,000 20,000 4,140
1,100 900 300 43,100
7,500
1,100 900 300
1,100 900 300
300 150 150
300 150 150
43,100 a. 300 b. 150 c. 150 600
c. 150 600
43,400
150 43,400
150 2,900 4,600 460 4,140
7,500
7,500 ,
7,500 ,
460 40,500 ,
40,500 ,
FINANCIAL STATEMENTS BALANCE SHEET INCOME STATEMENT STATEMENT OF OWNER’S EQUITY STATEMENT OF CASH FLOW
PREPARE THE FINANCIAL STATEMENTS
nPrepare the Income Statement.
A work sheet does not substitute fo financial for statements.
oPrepare the Statement of Changes in Owner’s Equity.
pPrepare the Balance Sheet.
CLOSING THE BOOKS At the end of the accounting period, the company makes the accounts ready for the next period. period
LO 2 Explain the process of closing the books.
CLOSING THE BOOKS Closing entries formally recognize, in the general ledger, the transfer of Income tax expense to Tax payable Net income to Retained earnings.
Closing entries are only at the end of the annual accounting period.
LO 2 Explain the process of closing the books.
RECORDING CLOSING ENTRIES nClose Revenue accounts to Income Summary. oClose Expense accounts to Income Summary. pClose Income Summary account to Tax payable. 4 Close Cl iincome S Summary y account to Retained Earnings
Let’s see how the closing process works!
CLOSING PROCESS Incom e Sum m a ry
Balances before closing. Income Summary 7,500
7,500
nClose Revenue accounts to Income Summary.
Service revenue 7,500
7,500
Revenue Accounts 7,500 7,500
-
GENERAL JOURNAL â„–
Date
Description
Page 1 PR Debit Credit
June 30 Service revenue Income summary to record closing entries of revenue
7 500 7,500 7,500
CLOSING PROCESS
Salary expense 1,100 1,100
-
oClose Expense p accounts to Income Summary.
Supplies pp expense p 300 300
Rent expense 900 900
Utitilies expense 300 300
-
Tax payable 460
460
Income Summary y 1,100 7,500 900 300 300 150 150 460 4,140 0
Depreciation expense 150 150
Interest expense 150 150
Retained earnings 4 140 4,140
4,140
GENERAL JOURNAL â„–
Date
Description
Page PR Debit Credit
June 30 Service revenue
7,500
Income summary
7 500 7,500
to record closing entries of revenue
I Income summary
1 100 1,100
Salary expense
1,100
to record closing entries of salary expense Income summary
900
Rent expense to record closing entries of rent expense
900
GENERAL JOURNAL â„–
Date
Description
J June 30 Income I summary
Page PR Debit Credit 300
Utilities expense
300
to record closing entries of utilities expense
Income summary
300
Supplies expense
300
to record closing entries of Supplies expense Income summary
150
Depreciation expense to record closing entries of rent expense
150
GENERAL JOURNAL â„–
Date
Description
June 30 Income summary y
Page PR Debit Credit 150
Interest expense
150
to record closing entries of interest expense Income summary
460
Tax payable
460
to record closing entries of income tax expense Income summary
4,140
retained earnings to record closing entries of Net income
4,140