accounting process & concepts business transactions & completing accounting cycle by:...

Masters of Business AdministrationAccounting for Managers

Accounting Process & ConceptsBusiness Transactions & Completing Accounting Cycle

By: Associate Professor Dr. GholamReza Zandi

[email protected]

The Role of Accounting Records

Establishes accountability for assets and transactions.

Establishes accountability for assets and transactions.

Keeps track of routine business activities.Keeps track of routine business activities.

Obtains detailed information about a particular transaction.

Obtains detailed information about a particular transaction.

Evaluates efficiency and performance within company.

Evaluates efficiency and performance within company.

Maintains evidence of a company’s business activities.

Maintains evidence of a company’s business activities.

The Ledger

The entire group of accounts is kept

together in an accounting record

called a ledger.

The entire group of accounts is kept

together in an accounting record

called a ledger.

Cash

Accounts Payable

Capital Stock

Accounts are individual records showing increases

and decreases.

Accounts are individual records showing increases

and decreases.

The Use of Accounts

Increases are recorded on one side of the T

account, and decreases are recorded on the

other side.

Left or

Debit Side

Right or

Credit Side

Title of Account

Cash1/20 80,000 1/21 52,000 1/26 600 1/22 6,000 1/31 2,200 1/27 6,800

1/31 200 1/31 1,200

1/31 16,600

Receipts are on

the debit side.

Payments are on the credit side.

The balance is the difference between the debit and credit entries

in the account.

The balance is the difference between the debit and credit entries

in the account.

Debit and Credit Entries

A = L + OEASSETS

Debit for

Increase

Credit for

Decrease

EQUITIES

Debit for

Decrease

Credit for

Increase

LIABILITIES

Debit for

Decrease

Credit for

Increase

Debits and credits affect accounts as follows:

Debit and Credit Entries

A = L + OEDebit

balancesCredit

balances=In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

In the double-entry accounting system, every transaction is recorded by equal dollar amounts of debits and credits.

Double Entry AccountingThe Equality of Debits and Credits

Let’s record selected

transactions for Overnight

Auto Service in the accounts.

3-9

January 20: Michael McBryan and his family invested $80,000 in Overnight Auto Service and received 8,000 shares of stock at $10 per share.

January 20: Michael McBryan and his family invested $80,000 in Overnight Auto Service and received 8,000 shares of stock at $10 per share.

Capital Stock1/20 80,000

Cash1/20 80,000

Cash increases $80,000 with a debit.

Capital Stock increases $80,000

with a credit.

3-10

Jan. 21: Overnight purchased land for $52,000 cash.

Jan. 21: Overnight purchased land for $52,000 cash.

Land1/21 52,000

Cash1/20 80,000 1/21 52,000

Cash decreases $52,000 with a

credit.

Land increases $52,000 with a debit.

3-11

Jan. 22: Overnight purchased a garage for $36,000 by paying $6,000 in cash and issuing a note payable for the remaining $30,000.

Jan. 22: Overnight purchased a garage for $36,000 by paying $6,000 in cash and issuing a note payable for the remaining $30,000.

Building1/22 36,000

Cash1/20 80,000 1/21 52,000

1/22 6,000

Notes Payable1/22 30,000

Building increases $36,000 with a debit.

Cash decreases $6,000 with a credit. Notes Payable increases

$30,000 with a credit.

3-12

Jan 23: Overnight Auto Service purchased tools and equipment for $13,800 on account.

Jan 23: Overnight Auto Service purchased tools and equipment for $13,800 on account.

Tools & Equipment increases $13,800

with a debit.

Accounts Payable increases $13,800 with a

credit.

Tools & Equipment1/23 13,800

Accounts Payable1/23 13,800

3-13

Tools & Equipment

decreases $1,800 with a credit.

Accounts Receivable increases $1,800 with a

debit.

Tools & Equipment1/23 13,800 1/24 1,800

Accounts Receivable1/24 1,800

Jan 24: Overnight sold part of the tools and equipment to Ace Towing for $1,800, a price equal to Overnight’s cost. Ace agrees to pay Overnight on account in the future.

Jan 24: Overnight sold part of the tools and equipment to Ace Towing for $1,800, a price equal to Overnight’s cost. Ace agrees to pay Overnight on account in the future.

In an actual accounting system, transactions are initially recorded in the journal.

In an actual accounting system, transactions are initially recorded in the journal.

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

2015

Jan 20 Cash 80,000

Capital Stock 80,000

Owners invest cash in the business.

The Journal

Posting Journal Entries to the Ledger Accounts

Posting simply means updating the ledger accounts for

the effects of the transactions

recorded in the journal.

GENERAL JOURNAL


2015

Jan 20 Cash 80,000


Owners invest cash in the business.General LedgerCash

Date Debit Credit Balance2015

Jan 20 80,000 80,000


GENERAL JOURNAL


2015

Jan 20 Cash 80,000


Owners invest cash in the business.General LedgerCapital Stock


Jan 20 80,000 80,000


GENERAL JOURNAL


2015

Jan 21 Land 52,000

Cash 52,000

Purchased land.

Let’s see what the cash account looks like after posting the cash portion of this transaction for

Overnight Auto Service.

Let’s see what the cash account looks like after posting the cash portion of this transaction for

Overnight Auto Service.


General LedgerCash


Jan 20 80,000 80,000 21 52,000 28,000

This ledger format is referred to as a running balance.

Ledger Accounts After Posting

General LedgerCash


Jan 20 80,000 80,000 21 52,000 28,000

T accounts are simplified versions of the ledger account that only show the

debit and credit columns.

T accounts are simplified versions of the ledger account that only show the

debit and credit columns.

Ledger Accounts After Posting

Net income is not an asset it’s an increase in owners’ equity from profits of the

business.

Net income is not an asset it’s an increase in owners’ equity from profits of the

business.

A = L + OEIncrease Decrease

As income is earned, either an asset is

increased or a liability is decreased.

Increase

Net income always results in the increase of Owners’ Equity

What is Net Income?

A = L + OE

Retained Earnings

Capital Stock

Retained Earnings

The balance in the Retained Earnings account represents the total net income of the corporation over the entire

lifetime of the business, less all amounts which have been distributed to the stockholders as dividends.

The income statement summarizes the profitability of a business for a specified period of time.

The income statement summarizes the profitability of a business for a specified period of time.

The Income Statement: A Preview

Accounting Periods

Time Period PrincipleTo provide users of financial statements

with timely information, net income is

measured for relatively short accounting

periods of equal length.

Time Period PrincipleTo provide users of financial statements

with timely information, net income is

measured for relatively short accounting

periods of equal length.

Revenue and Expenses

The price for goods sold and services rendered during a given accounting period.

Increases owners’ equity.

The costs of goods and services used up in the process of earning revenue.

Decreases owner’s equity.

The Matching Principle: When To Record Revenue

Matching PrincipleRevenue should be recognized at the

time goods are sold and services are

rendered.

The Matching Principle: When To Record Expenses

Matching PrincipleExpenses should be

recorded in the period in which they

are used up.

The Accrual Basis of Accounting

Current Accounting Period

FutureAccounting Period

Jan. 1, 2015 Dec. 1, 2015 Jan. 1, 2016 Dec. 1, 2016

Cash is received or paid here

The income statement reports revenue or

expense here

The income statement reports revenue or

expenses here

Cash is received or paid here

OR

But . . .

But . . .

Debit and Credit Rules for Revenue and Expenses

EQUITIES

Debit for

Decrease

Credit for

Increase

Expenses decrease owners’ equity.

Revenues increase owners’ equity.

EXPENSES

Credit for

Decrease

Debit for

Increase

REVENUES

Debit for

Decrease

Credit for

Increase

EQUITIES

Debit for

Decrease

Credit for

Increase

Payments to owners

decrease owners’ equity.

Owners’ investments

increase owners’ equity.

DIVIDENDS

Credit for

Decrease

Debit for

Increase

Dividends

CAPITAL STOCK

Debit for

Decrease

Credit for

Increase

Let’s analyze the revenue and expense

transactions for Overnight Auto

Service for the month of February.

We will also analyze a dividend transaction.

Let’s analyze the revenue and expense

transactions for Overnight Auto

Service for the month of February.

We will also analyze a dividend transaction.

3-32

FEB. 1: Paid Daily Tribune $360 cash for newspaper advertising to be run during February.

FEB. 1: Paid Daily Tribune $360 cash for newspaper advertising to be run during February.

Advertising Expense2/1 360

Cash decreases $360 with a credit.

Advertising Expense increases $360 with a

debit.

Cash1/31 bal 16,600 2/1 360

3-33

FEB. 2: Purchased radio advertising from KRAM to be aired in February. The cost was $470, payable within 30 days.

FEB. 2: Purchased radio advertising from KRAM to be aired in February. The cost was $470, payable within 30 days.

Advertising Expense2/1 360 2/2 470

Accounts payable increases $470 with

a credit.

Advertising Expense increases $470 with a

debit.

Accounts Payable1/31 bal 7,000 2/2 470

3-34

Shop Supplies2/4 1,400

Accounts payable increases $1,400

with a credit.

Shop Supplies increases $1,400 with a debit.

Accounts Payable1/31 bal 7,000 2/2 470 2/4 1,400

FEB. 4: Purchased various supplies for $1,400, payable within 30 days. The supplies are expected to be used over the next 3 to 4 months.

FEB. 4: Purchased various supplies for $1,400, payable within 30 days. The supplies are expected to be used over the next 3 to 4 months.

3-35

Cash increases $4,980 with a debit.

Repair Service Revenue increases $4,980 with a

credit.

Cash1/31 bal 16,600 2/1 360 2/15 4,980

FEB 15: Overnight collected $4,980 cash for repairs made to vehicles of Airport Shuttle Service.

FEB 15: Overnight collected $4,980 cash for repairs made to vehicles of Airport Shuttle Service.

Repair Service Revenue1/31 bal. 2,200 2/15 4,980

3-36

Repair Service Revenue1/31 bal. 2,200 2/15 4,980 2/28 5,400

Accounts receivable

increases $5,400 with a debit.

Repair Service Revenue increases $5,400 with a

credit.

Accounts Receivable1/31 bal 1,200 2/28 5,400

FEB 28: Overnight billed Harbor Cab Co. $5,400 for maintenance and repair services provided in February, with payment to be received by March 10.

FEB 28: Overnight billed Harbor Cab Co. $5,400 for maintenance and repair services provided in February, with payment to be received by March 10.

3-37

FEB 28: Overnight paid employee’s wages earned in February, $4,900.

FEB 28: Overnight paid employee’s wages earned in February, $4,900.

Wages Expense1/31 bal. 1,200 2/28 4,900

Cash decreases $4,900 with a credit.

Wages Expense increases $4,900 with a

debit.

Cash1/31 bal 16,600 2/1 360 2/15 4,980 2/28 4,900

3-38

FEB 28: Overnight recorded a $1,600 utility bill for February. The entire amount is due March 15.

FEB 28: Overnight recorded a $1,600 utility bill for February. The entire amount is due March 15.

Utilities Expense1/31 bal. 200 2/28 1,600

Accounts Payable increases $1,600

with a credit.

Utilities Expense increases $1,600 with a

debit.

Accounts Payable1/31 bal 7,000 2/2 470 2/4 1,400 2/28 1,600

3-39

Dividends1/31 bal. - 2/28 3,200

Cash decreases $3,200 with a credit.

Dividends increase $3,200 with a debit.

FEB 28: Overnight Auto Services declares and pays a dividend of 40 cents per share to the owners of its 8,000 shares of capital stock—a total of $3,200.

FEB 28: Overnight Auto Services declares and pays a dividend of 40 cents per share to the owners of its 8,000 shares of capital stock—a total of $3,200.

Cash1/31 bal 16,600 2/1 360 2/15 4,980 2/28 4,900

2/28 3,200

Now, let’s look at the Trial Balance for

Overnight Auto Service for the

month of February.

Now, let’s look at the Trial Balance for

Overnight Auto Service for the

month of February.

All balances are taken from the ledger accounts on Feb 28 after considering all of Overnight’s transactions for the month.

The Accounting Cycle in Perspective

Accountants spend much of their time

focusing on the more analytical aspects of their

discipline.

Adjusting

entries are

needed whenever

revenue or expenses

affect more than oneaccounting

period.

Every adjusting

entry involves achange in either a

revenue or expense and an asset

or liability.

Adjusting Entries

Converting assets to expenses

Converting assets to expenses

Accruing unpaid

expenses

Accruing unpaid

expenses

Converting liabilities to

revenue

Converting liabilities to

revenue

Accruing uncollected

revenue

Accruing uncollected

revenue

Types of Adjusting Entries

Prior Periods Current Period Future Periods

TransactionPaid cash in advance of

incurring expense(creates an asset).

TransactionPaid cash in advance of

incurring expense(creates an asset).

End of Current Period

Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account.

Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account.

Converting Assets to Expenses

Mar. 1 Feb.28

$18,000 Insurance Policy Coverage for 12 Months

$1,500 Monthly Insurance Expense

On March 1, Overnight Auto Services purchased a one-year insurance policy

for $18,000.

On March 1, Overnight Auto Services purchased a one-year insurance policy

for $18,000.


GENERAL JOURNAL


Mar. 1 Unexpired Insurance 18,000

Cash 18,000

Purchase a one-year insurance policy.

Initially, costs that benefit more than one accounting period are recorded as assets.

Initially, costs that benefit more than one accounting period are recorded as assets.


The costs are expensed as they are used to generate revenue.

The costs are expensed as they are used to generate revenue.

GENERAL JOURNAL


Monthly Adjusting Entry for Insurance

Mar. 31 Insurance Expense 1,500

Unexpired Insurance 1,500

Adjusting entry to record insurance expense for March.


Insurance Expense3/31 1,500

Unexpired Insurance3/1 18,000 3/31 1,500 Bal. 16,500

Income StatementCost of assets used

this period to generate revenue.

Income StatementCost of assets used

this period to generate revenue.

Balance SheetCost of assets that

benefit future periods.

Balance SheetCost of assets that

benefit future periods.


The Concept of Depreciation

Depreciation is the systematic allocation of the cost of a depreciable asset to expense.

Depreciation is the systematic allocation of the cost of a depreciable asset to expense.

Cash (credit)Cash (credit)

Fixed Asset (debit)

Fixed Asset (debit)

On date when initial payment is made . . .

The asset’s usefulness is

partially consumed during the

period.At end of period . . .

Depreciation Expense (debit)Depreciation

Expense (debit)

Accumulated Depreciation

(credit)

Accumulated Depreciation

(credit)

On Jan. 22, 2015, Overnight Auto Service purchased a building with a useful life of

240 months for $36,000.

Using the straight-line method, calculate the monthly depreciation expense.

$36,000240

=$150/month

Depreciationexpense (per

period)= Cost of the asset

Estimated useful life

Depreciation Is Only an Estimate

Overnight Auto Service would make the following adjusting entry.

Overnight Auto Service would make the following adjusting entry.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

Feb 28 Depreciation Expense: Building 150

Accumulated Depreciation: Building 150

To record one month's depreciation.

Contra-asset Contra-asset


Overnight depreciates its $12,000 of tools and equipment over 60 months. Calculate monthly

depreciation and make the journal entry.

GENERAL JOURNAL


Feb 28 Depreciation Expense: Tools and Equipment 200

Accumulated Depreciation: Tools and Equipment 200

To record one month's depreciation.

$12,00060 months = $200 per month$12,00060 months = $200 per month


Building 36,000$ Less: Accum. depr. 1,650 34,350 Tool and Equipment 18,000$ Less: Accum. depr. 2,200 15,800

We will assume that Overnight did not record any depreciation expense in January because it operated for only a small part of the month.

We will assume that Overnight did not record any depreciation expense in January because it operated for only a small part of the month.


Cost - Accumulated Depreciation = Book Value

December 31, 2015 Balance Sheet Presentation


TransactionCollect cash in

advance of earning revenue

(creates a liability).

TransactionCollect cash in

advance of earning revenue

(creates a liability).


Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.

Adjusting Entry Recognizes portion earned as revenue, and Reduces balance of liability account.

Converting Liabilities to Revenue

Dec. 1 Feb. 28

$3,000 Rental Contract Coverage for 3 Months

$1,000 Monthly Rental Revenue

On December 1, Overnight received $3,000 in advance for a three-month rental contract.

On December 1, Overnight received $3,000 in advance for a three-month rental contract.


GENERAL JOURNAL


Dec 1 Cash 3,000

Unearned Rent Revenue 3,000

Collected $3,000 in advance for rent.

Initially, revenues that benefit more than one accounting period are recorded as liabilities. Initially, revenues that benefit more than one accounting period are recorded as liabilities.


Over time, the revenue is recognized as it is earned.

Over time, the revenue is recognized as it is earned.

GENERAL JOURNAL


Monthly Adjusting Entry for Rent Revenue

Dec 31 Unearned Rent Revenue 1,000

Rental Revenue 1,000

Adjusting entry to record rental revenue for December.


Rental Revenue12/31 1,000

Unearned Rental Revenue

12/31 1,000 12/1 3,000 Bal. 2,000

Income StatementRevenue earned this

period.

Income StatementRevenue earned this

period.

Balance SheetLiability for future

periods.

Balance SheetLiability for future

periods.



TransactionPay cash in

settlement of liability.

TransactionPay cash in

settlement of liability.


Adjusting Entry Recognizes expense

incurred, and Records liability for future payment.

Adjusting Entry Recognizes expense

incurred, and Records liability for future payment.

Accruing Unpaid Expenses

Monday,Dec. 30

Friday, Jan. 3$1,950 Wages

Expense

On Dec. 31, Overnight owes wages of $1,950. Payday is Friday, Jan. 3.

On Dec. 31, Overnight owes wages of $1,950. Payday is Friday, Jan. 3.

Tuesday,Dec. 31


GENERAL JOURNAL


Dec 31 Wages Expense 1,950

Wages Payable 1,950

Adjusting entry to accrue wages owed to employees.

Initially, an expense and a liability are recorded.

Initially, an expense and a liability are recorded.


Wages Expense12/31 1,950

Wages Payable12/31 1,950

Income StatementCost incurred this period to generate

revenue.

Income StatementCost incurred this period to generate

revenue.

Balance SheetLiability to be paid in a future period.

Balance SheetLiability to be paid in a future period.


Monday,Dec. 30

Friday, Jan. 3

$2,397 Weekly Wages

Let’s look at the entry for Jan. 3.Let’s look at the entry for Jan. 3.

Tuesday,Dec. 31

$447 Wages Expense

$1,950 Wages Expense


The liability is extinguished when the debt is paid.

The liability is extinguished when the debt is paid.

GENERAL JOURNAL


Jan 3 Wages Expense (for Jan.) 447

Wages Payable (accrued in Dec.) 1,950

Cash 2,397

Weekly payroll for Dec. 30 - Jan. 3.



TransactionCollect cash in settlement of

receivable.

TransactionCollect cash in settlement of

receivable.


Adjusting Entry Recognizes revenue earned but not yet recorded, and Records receivable.

Adjusting Entry Recognizes revenue earned but not yet recorded, and Records receivable.

Accruing Uncollected Revenue

Dec. 15 Jan. 15

$750 Repair Service

Revenue

On Dec. 31, Airport Shuttle owes Overnight half of it maintenance agreement. The one-

month fee of $1,500 is to be paid is to be paid on the 15th day of January.

On Dec. 31, Airport Shuttle owes Overnight half of it maintenance agreement. The one-

month fee of $1,500 is to be paid is to be paid on the 15th day of January.

Dec. 31


GENERAL JOURNAL


Dec 31 Accounts Receivable 750

Repair Service Revenue 750

Adjusting entry to record accrued service revenue.

Initially, the revenue is recognized and a receivable is created.

Initially, the revenue is recognized and a receivable is created.


Repair Service Revenue12/31 750

Accounts Receivable12/31 750

Income StatementRevenue earned

this period.

Income StatementRevenue earned

this period.

Balance SheetReceivable to be

collected in a future period.

Balance SheetReceivable to be

collected in a future period.


Dec. 15 Jan. 15

$1,500 Monthly Interest

$750 Service Revenue

Let’s look at the entry for January 15. Let’s look at the entry for January 15.

Dec. 31

$750 Service Revenue


The receivable is collected in a future period.The receivable is collected in a future period.

GENERAL JOURNAL


Jan 15 Cash 1,500

Repair Service Revenue (for Jan.) 750

Accounts Receivable (accrued Dec. 31) 750

To record cash collected for monthly maintenance fee.


As a corporation earns taxable income, it incurs income taxes expense, and also a liability to

governmental tax authorities.

As a corporation earns taxable income, it incurs income taxes expense, and also a liability to

governmental tax authorities.

GENERAL JOURNAL


Dec. 31 Income Taxes Expense 4,020

Income Taxes Payable 4,020

Adjusting entry to record income taxes accrued in December.

Accruing Income Taxes Expense: The Final Adjusting Entry

Costs are matched with revenue in two ways:

Costs are matched with revenue in two ways:

Direct association of costs with specific revenue

transactions.

Direct association of costs with specific revenue

transactions.

Systematic allocation of costs over the “useful life” of the

expenditure.

Systematic allocation of costs over the “useful life” of the

expenditure.

Adjusting Entries and Accounting Principles

An item is “material” if knowledge of the item might reasonably influence the decisions of users

of financial statements.

An item is “material” if knowledge of the item might reasonably influence the decisions of users

of financial statements.

Supplies

Light bulbs

Many companies immediately charge

the cost of immaterial items to

expense.

The Concept of Materiality

Effects of the Adjusting Entries

Adjustment Revenue ExpensesNet

Income Assets LiabilitiesOwners' Equity

Type IConverting Assets to Expenses No effect Increase Decrease Decrease No effect DecreaseType IIConverting Liabilities to Revenue Increase No effect Increase No effect Decrease IncreaseType IIIAccruing Unpaid Expenses No effect Increase Decrease No effect Increase DecreaseType IVAccruing Uncollected Revenue Increase No effect Increase Increase No effect Increase

Income Statement Balance Sheet

After these adjustments are posted to the ledger, Overnight’s ledger accounts will be up-to-date (except for the balance in the Retained Earnings account).

Financial Statements

Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and

quarterly information to their stockholders and to the public.

The annual report includes comparative financial statements and other information relating to the company’s financial

position, business operations, and future prospects.

The financial statements contained in the annual report must be audited by a firm of certified public accountants (CPAs).

The financial statements for Overnight Auto Service for 2015.

Net income also appears on the Statement of Retained Earnings.Net income also appears on the Statement of Retained Earnings.

The Income Statement

The Statement of Retained Earnings

The Balance Sheet

Relationships among the Financial Statements

Notes to the Financial Statements

Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions

Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions

Drafting the Notes that Accompany Financial Statements

Closing the Temporary Accounts

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.

Close Dividends to Retained Earnings.

The closing process gets the temporary

accounts ready for the next accounting

period.

Closing the Temporary Accounts

GENERAL JOURNAL


Dec 31 Repair Service Revenue 172,000

Rent Revenue EarnedRevenue Earned 3,000

Income Summary 175,000

To close the revenue accounts.

Since both revenue accounts have credit balances, the closing entry requires a debit to

the Revenue accounts.

Since both revenue accounts have credit balances, the closing entry requires a debit to

the Revenue accounts.

Closing Entries for Revenue Accounts

Closing Entries for Revenue Accounts

Closing Entries for Expense Accounts

Net Income

Since Income Summary has a $39,942 credit balance, the closing entry requires a debit to

Income Summary.

Since Income Summary has a $39,942 credit balance, the closing entry requires a debit to

Income Summary.

GENERAL JOURNAL


Dec 31 Income Summary 39,942

Retained Earnings 39,942

To close Income Summary.

Closing the Income Summary Account

Retained Earnings39,942

39,942

Income Summary135,058 175,000 39,942

-

The balance in Income Summary is now zero.

Closing the Income Summary Account

Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends

account.

Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends

account.

GENERAL JOURNAL


Dec 31 Retained Earnings 14,000

Dividends 14,000

To close the Dividends account.

Closing the Dividends Account

Closing the Dividends Account

Retained Earnings14,000 39,942

25,942

Dividends14,000 14,000

-

After-Closing Trial Balance

Evaluating Profitability

Evaluating Profitability

Evaluating Liquidity

Evaluating Liquidity

Evaluating the Business

Net Income Percentage

Net IncomeTotal Revenue

=

Return on Equity

Net IncomeAvg. Stockholders’

Equity

= CurrentRatio

Current AssetsCurrent Liabilities

=

Working Capital

Current Assets – Current Liabilities

=

Monthly

Quarterly

Jan. 1 Dec. 31

Annually

Many companies prepare financial statements at various points throughout

the year.

Many companies prepare financial statements at various points throughout

the year.

Interim Financial

Statements

Preparing Financial Statements Covering Different Periods of Time

Ethics, Fraud, and Corporate Governance

A company should disclose any facts that an intelligent person would consider necessary for the statements to

be interpreted properly.

Public companies are required to file annual reports with the Securities and Exchange

Commission (SEC). The SEC requires that companies include a section labeled

“Management Discussion and Analysis” (MD&A) because the financial statements and related notes may be inadequate for assessing the quantity and sustainability of a company’s

earnings.

The End

accounting process & concepts business transactions & completing accounting cycle by:...

Documents

journal slide

credit entries

credits slide

cash increases

decrease credit

increase credit

accounts payable increases

title of account slide