College Accounting - MCCChorowitk/documents/Chapter06_003.pdf · ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible

College

Accounting

Heintz & Parry20th Edition

Chapter 6

FINANCIAL

STATEMENTS AND

THE CLOSING

PROCESS

Prepare financial statements

with the aid of a work sheet.

1

THE 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.D. E.–Del. Eq.

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.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

PREPARING FINANCIAL

STATEMENTS

• 1st: Prepare the income statement.

• 2nd: Prepare the statement of owner’s equity.

• 3rd: Prepare the balance sheet.

Jessie Jane'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



Income Statement


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.D. E.–Del. Eq.


370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Revenue



Income Statement


Revenues

Delivery fees $2,150

Dollar signs used at top of columns.



Income Statement


Revenues


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

or shown.



Income Statement


Revenues


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.D. E.–Del. Eq.


370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Expenses



Income Statement


Revenues

Delivery fees

Expenses

Wages expense

$2,150

$ 700

Dollar signs used at top of columns.



Income Statement


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 orderOR descending order by dollar amount.



Income Statement


Revenues

Delivery fees

Expenses

Wages expense

Rent expense

Telephone expense

$2,150

$ 700

200

50

Supplies expense 60

Insurance expense


25

100

Single rulings indicate addition or subtraction.©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.


Income Statement


Revenues

Delivery fees

Expenses

Wages expense

Rent expense

Telephone expense

Total expenses

$2,150

$ 700

200

50

Supplies expense 60

Insurance expense


25

100

1,135

Next, expenses are totaled.



Income Statement


Revenues

Delivery fees

Expenses

Wages expense

Rent expense

Telephone expense

Total expenses

$2,150

$ 700

200

50

Supplies expense 60

Insurance expense


25

1001,135

Net income $1,015


Net income is computed last.


Statement of Owner’s Equity


Jessica Jane, capital, June 1, 20--

The statement starts with the capital account balance as of

the beginning of theaccounting period.






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

Instead of showing revenue increasing andexpenses 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. ExpD. E.–Del. Eq.


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 accountbalance. It is the beginning balance PLUS

any additional investments.






Since Jessie made no additionalinvestments this period, we can use the capital account 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

Net income is found in the Income Statement Debit column

and the Balance Sheet Credit column.






Net 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

Net Income

The drawing account tells us the amount of assets Jessie has withdrawn from

the business for personal use.








Lastly, we calculate the endingcapital account balance and double

rule the statement.

Less withdrawals for June 150

Increase in capital 865Jessica Jane, capital, June 30, 20-- $2,865

FORMS OF BALANCE SHEETS

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.

CLASSIFIED BALANCE SHEET

• Similar items are grouped together

• Assets 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,

and prepaid insurance

Collect Receivables

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”

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 debt

• Example:

– A mortgage on an office building

• Jessie Jane does not have any long-term liabilities.


Balance Sheet

June 30, 20--

Assets

Current 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.D. E.–Del. Eq.


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

Current assets



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


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.D. E.–Del. Eq.


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

Property, plant, and equipment includesthe long-term assets

AND their related accumulated depreciation accounts.



Balance Sheet

June 30, 20--

Assets

Current assets:

Cash $370


Supplies 20




Delivery equipment

Less accum. depr.—delivery eq.

$3,600

100 3,500

$3,500 = Book Value



Balance Sheet

June 30, 20--

Assets

Current assets:

Cash $370


Supplies 20




Delivery equipment


$3,600

100 3,500

Total assets $4,715

Now for the liabilities!!!

Liabilities



Balance Sheet

June 30, 20--

Assets

Current assets:

Cash $370


Supplies 20




Delivery equipment


$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:


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

Net Income

Jessie has only two liabilitiesand they are both current…

accounts payable and wages payable.


©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Accounts payable


Liabilities


Balance Sheet

June 30, 20--

Assets

Current assets:

Cash $370


Supplies 20




Delivery equipment


$3,600

100 3,500

Total assets $4,715

Let’s shift to the lowerpart of our balance sheet.

$1,800


Balance Sheet

June 30, 20--

Liabilities


Accounts payable $1,800

Wages payable 50

Total current liabilities $1,850

Since Jessie 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



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Net Income

Caution!!! This capital amount doesnot include net income or drawing. We must use the June 30th capital

amount from the statementof owner’s equity.







This is the amount wewill put on the balance sheet.

Less withdrawals for June 150

Increase in capital 865




Balance Sheet

June 30, 20--

Liabilities


Accounts payable $1,800Wages payable 50

Total current liabilities $1,850

Owner’s Equity

Jessica Jane, 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.


ADDITIONAL INVESTMENTS BY

OWNER

• 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

• 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.

How does the additional investment affect the Statement of Owner’s Equity?


Ramon’s Shopping Service


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

Journalize and post

closing entries.

2

THE CLOSING PROCESS

• 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

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

• These accounts are 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

STEPS IN THE

CLOSING PROCESS

Close Revenue Accounts to Income Summary.

STEP #1

ADJ. T. B.

DR.CR.

ACCOUNT

TITLE

CashDR. CR.

INCOME STMT.


Del. FeesWages Exp.

J. J., Drawing



370650

20175

3600100

180050

2000150

21507002006050

25100

6100 6100

37065020

1753600

1001800

502000

1502150

7002006050

25100

1135 2150 4965 39501015 10152150 2150 4965 4965

Revenue


STEPS IN THE

CLOSING PROCESS


STEP #1

DELIVERY FEES

2,150

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

2,150(1) Bal.

STEPS IN THE

CLOSING PROCESS


STEP #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)

STEPS IN THE

CLOSING PROCESS


STEP #1

DELIVERY FEES INCOME SUMMARY

2,1502,150 2,150Bal.

—

Let’s journalizethis entry!

(1) (1)

—

CLOSING ENTRIES IN JOURNAL FORM

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.




Closing Entries1

2

3

4

5

6

7

8

9

10

11

20--June 30 Delivery Fees

Income Summary

2,150 00


2,150 00

STEPS IN THE

CLOSING PROCESS

Close Expense Accounts to Income Summary.

STEP #2

Each expense account is closedin this one closing entry.

Wages Expense

700 700 (2)Bal.

Expenses have debit balances…therefore, to close them, they

must be credited.


Wages Expense

700 700 (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.

—



Income SummaryWages Expense

700

Rent Expense

200

Supplies Expense

60

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 expense account balances

are combinedand Income Summary is debited for the total.

—

—

—

—

—

—

1,015

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Income SummaryWages Expense

700

Rent Expense

200

Supplies Expense

60

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)

—

—

—

—

—

—

1,015

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Bal.

Let’s journalize this entry!




Closing Entries1

2

3

4

5

6

7

8

9

10

11

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

Depr. Exp.—Del. Equip. 100 00

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

1,135 00

2,150 00

STEPS IN THE

CLOSING PROCESS

Close Income Summary to the Owner’s Capital Account.

STEP #3

INCOME SUMMARY

2,150 REVENUES

STEPS IN THE

CLOSING PROCESS


STEP #3

INCOME SUMMARY

2,150

EXPENSES

STEPS IN THE

CLOSING PROCESS


STEP #3

INCOME SUMMARY

1,135 2,150

1,015 Bal.

The balance in Income Summaryis the net income.

STEPS IN THE

CLOSING PROCESS


STEP #3

INCOME SUMMARY

1,135 2,150

1,015 Bal.

By debiting Income Summary,we close the account.

1,015(3)

STEPS IN THE

CLOSING PROCESS


STEP #3

INCOME SUMMARY

1,135 2,150

1,015 Bal.1,015(3)

J. JANE, CAPITAL

2,000 Bal.

1,015

We transfer the net income into the Owner’s Capital account.



Closing Entries12

13

14

15

16

17

18

19

20

21

22

20--June 30 Income Summary

Jessica Jane, Capital

1,015 00


1,015 00

STEPS IN THE

CLOSING PROCESS

Close Drawing to the Owner’s Capital Account.

STEP #4

J. JANE, DRAWING J. JANE, CAPITAL

Bal. 2,000

Bal.

150

1,015

150 (4) 150

2,865

(4)

STEPS IN THE

CLOSING PROCESS

Close Drawing to the Owner’s Capital Account.

STEP #4

J. JANE, DRAWING J. JANE, CAPITAL

Bal. 2,0001501,015

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.



Closing Entries12

13

14

15

16

17

18

19

20

21

22

20--June 30 Income Summary

Capital

1,015 00

30

Jessica Jane, Drawing

150 00Jessica Jane, Capital

150 00

The closing entries are then postedto 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.


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.


Prepare a post-closing

trial balance.

3

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 that remain open (permanent

accounts) are listed


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

Jessica Jane, Capital

Accumulated Depr.—Del. Eq.

101

122

141

145

185

185.1

202

219Wages 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.


List and describe the

steps in the accounting

cycle.

4

STEPS IN THE ACCOUNTING

CYCLE

• 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 (CONT.)

• 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.

Documents

College Accounting - MCCChorowitk/documents/Chapter06_003.pdf · ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible