chapter - mccchorowitk/documents/chapter_06.pdf · adj. t. b. cr. dr. account title cash dr. cr....

Chapter

© 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.

6 Financial Statements and the Closing Process

Learning Objective


1

Prepare financial statements with the aid of a work sheet.


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.



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




Revenues are shown first.

Revenues


ADJ. T. B. DR. CR.

ACCOUNT TITLE

Cash DR. CR.

INCOME STMT.



D.W, Drawing

Rent Exp Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.


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




Revenues Delivery fees $2,150

Dollar signs used at top of columns.





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

or shown.





Expenses are shown next.

Expenses


ADJ. T. B. DR. CR.

ACCOUNT TITLE

Cash DR. CR.

INCOME STMT.

Accts. Rec. Supplies Ppd. Ins. Del. Eq. A. D.–Del. Eq. Accts Pay Wages Pay. D.W, Cap.


D.W, Drawing

Rent Exp. Sup. Exp. Tel. Exp. Ins. Exp. D. E.–Del. Eq.


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




Revenues Delivery fees

Expenses Wages expense

$2,150

$ 700

Dollar signs used at top of columns.





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.





Telephone expense

$2,150

$ 700 200



25 100


Single rulings indicate addition or subtraction.





Telephone expense

Total expenses

$2,150

$ 700 200



25 100

1,135

Next, expenses are totaled.






Telephone expense

Total expenses

$2,150

$ 700 200



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


Damon Williams, capital, June 1, 20--

The statement starts with the capital account balance as of

the beginning of the accounting period.





$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.


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.


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.





Since Damon made no additional investments this period, we can use the capital account balance

from the work sheet.

$2,000





Next, we add in the net income/loss from the income statement or

from the work sheet.

$2,000


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



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.




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


ADJ. T. B. DR. CR.

ACCOUNT TITLE

Cash DR. CR.

INCOME STMT.



D.W, Drawing



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.





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



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


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


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


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


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


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


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.


ADJ. T. B. DR. CR.

ACCOUNT TITLE

Cash DR. CR.

INCOME STMT.



D.W, Drawing

Rent Exp. Sup. Exp Tel. Exp. Ins. Exp. D. E.–Del. Eq.


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




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

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.


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.





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.






$3,600 100 3,500

Total assets $4,715

Now for the liabilities!!!

Liabilities







$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

Cash DR. CR.

INCOME STMT.


Del. Fees Wages Exp

D.W, Drawing



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.


Accounts payable Current liabilities:

Liabilities






$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.


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


ADJ. T. B. DR. CR.

ACCOUNT TITLE

Cash DR. CR.

INCOME STMT.



D.W, Drawing



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.





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



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.


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.

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


Learning Objective


2

Journalize and post closing entries.


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


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


Accumulate information for a specific accounting period All accounts not on the balance sheet

Revenues Expenses Drawing

These accounts are CLOSED

Temporary Accounts


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.



D.W, Drawing



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





DELIVERY FEES 2,150

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

2,150 (1) Bal.




DELIVERY FEES INCOME SUMMARY 2,150

We are, in effect, transferring the balance to the

income summary account.

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




DELIVERY FEES INCOME SUMMARY 2,150 2,150 2,150 Bal.

—

Let’s journalize this entry!

(1) (1)

—


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.




2 3 4

5 6 7 8 9

10

20-- June 30 Delivery Fees

Income Summary 2,150 00

2,150 00


STEP #2 Close Expense Accounts to Income Summary.


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.


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.

—


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.


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!



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


STEP #3 Close Income Summary to the Owner’s Capital Account.


INCOME SUMMARY 2,150 REVENUES




INCOME SUMMARY

2,150

EXPENSES




INCOME SUMMARY 1,135 2,150

1,015 Bal.

The balance in Income Summary is the net income.




INCOME SUMMARY 1,135 2,150

1,015 Bal.

By debiting Income Summary, we close the account.

1,015 (3)




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.



13 14

15 16 17 18 19 20 21

20-- June 30 Income Summary

Damon Williams, Capital 1,015 00

1,015 00



STEP #4 Close Drawing to the Owner’s Capital Account.


D. Williams, DRAWING


Bal. 2,000

Bal.

150 1,015

150 (4) 150

2,865

(4)


STEP #4 Close Drawing to the Owner’s Capital Account.


D. Williams, DRAWING


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.




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.


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.


Your Perspective-Bookkeeper

Learning Objective


3

Prepare a 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

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.


Learning Objective


4

List and describe the 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


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.)

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