acct 201 acct 201 acct 201 dr. fred barbee1 reporting and preparing financial statements uaa –...
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Dr. Fred Barbee 1
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Reporting and Preparing Financial Statements
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
Chap
ter 3
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Topic LO Read HW
Closing Process
C4, C5 P4, P5
118-123
QS8, QS9, E7
Classified Balance Sheet
C6123-126
E8, E9
Decision AnalysisA2, A3
126-127
P2A
Chapter 3 - Day 2 - Agenda
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Learning Objective
Describe and prepare closing entries.
P4
Procedural
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Learning Objective
Explain why temporary accounts are closed each period.
C4
Conceptual
Temporary Accounts
Revenues
Income Summary
Exp
ense
s
Divid
end
s
Permanent Accounts
Assets
Lia
bili
ties
Retain
ed
Earn
ing
sTemporary and Permanent
Accounts
CreditDebit
CreditDebit
Post.Ref.ItemDate
Balance
Account No. ### Account Title
CreditDebit
CreditDebit
Post.Ref.ItemDate
Balance
Account No. ### Account Title
Nominal (Temporary) Accounts
Real (Permanent) Accounts
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Account Title Account No. ###
Date ItemPost.Ref. Debit Credit
Balance
Debit Credit
Real Accounts
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Real Accounts . . .
Accounts that are not closed to a zero balance at the end of each accounting period.
Permanent accounts appearing on the Balance Sheet.
Assets
Liabilities
Owner’s Equity
Assets
Liabilities
Owner’s Equity
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Account Title Account No. ###
Date ItemPost.Ref. Debit Credit
Balance
Debit Credit
Nominal Accounts
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Nominal Accounts . . .
Accounts that are closed to a zero balance at the end of each accounting period.
Temporary accounts generally appearing on the Income Statement.
Revenues
Expenses
Revenues
Expenses
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What are closing entries?
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Closing Entries . . .
Journal entries made at the end of an accounting period.
They clear all nominal accounts and prepare them to receive transactions in the new accounting period.
They summarize a period’s revenues and expenses.
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Purpose of Closing Entries
Closing entries bring the income statement accounts back to a zero balance, making them ready for a new set of transactions.
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Purpose of Closing Entries .
The closing entry process transfers the net income or net loss for the accounting period to the owner’s equity and
Reduces owner’s equity for any distributions to owners.
Is there a set procedure?
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Account Title Account No. ###
Date ItemPost.Ref. Debit Credit
Balance
Debit CreditIncome Summary
Introducing a new
account!
Overview of the Closing Process
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Revenue Accounts to Income Summary
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Consulting Revenue 7,850
Rental Revenue 300
Income Summary 8,150
Close Revenue Accounts to Income Summary
Income Summary7,850
300
8,150
Consulting Revenue7,850 7,850
-
Rental Revenue300 300
-
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary
Close Expense Accounts to Income Summary
Income Summary375 7,850
1,610 300 100
1,000 1,050
230
3,785 Utilities Expense230 230
-
Depreciation Expense- Eq.
375 375 -
Salaries Expense1,610 1,610
-
Insurance Expense100 100
-
Supplies Expense1,050 1,050
-
Rent Expense1,000 1,000
-
Net Income
Income Summary375 7,850
1,610 300 100
1,000 1,050
230
3,785
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Income Summary 3,785
Retained Earnings 3,785
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Retained Earnings
Close Income Summary to Retained Earnings
Retained Earnings600 3,785
3,185
Income Summary375 7,850
1,610 300 100
1,000 1,050
230 3,785
-
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Learning Objective
Explain and prepare a post-closing trial balance.
P5
Procedural
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Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
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Learning Objective
Identify steps in the accounting cycle.
C5
Conceptual
1. Analyze Transaction
s
2. Journalize
3. Post
4. Prepare Unadjusted
Trial Balance
5. Adjust
6. Prepare Adjusted
Trial Balance
7. Prepare Statements
8. Close
9. Prepare Post-Closing
Trial balance
10. Reverse (Optional)
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Learning Objective
Explain and prepare a classified balance sheet.
C6
Conceptual
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Classified Balance Sheet
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Current Assets/Liabilities
Current items are those expected to come due (either collected or owed) within one year or the company’s operating cycle, whichever is longer.
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Operating Cycle – Service Company – Exhibit 3-31
Cash Available
Cash paid for employee
work
Services sold to customers
Customers pay for services
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Operating Cycle – Merchandising Company
Cash Available
Cash paid for products
Products sold to
customers
Customers pay for
products
Classified Balance Sheet
Let’s look at the asset
section of a classified balance sheet.
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Current assets are assets that will be turned into cash or
expire (be used up) within the longer of one
year or the operating cycle.
Current assets are assets that will be turned into cash or
expire (be used up) within the longer of one
year or the operating cycle.
Property, plant and equipment includes assets
with useful lives of more than one year acquired for use in the
business rather than for resale.
Property, plant and equipment includes assets
with useful lives of more than one year acquired for use in the
business rather than for resale.
Other assets and intangible assets include items such as
patents, goodwill,
copyrights, etc.
Other assets and intangible assets include items such as
patents, goodwill,
copyrights, etc.
Let’s look at the liability section of a classified balance sheet.
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Classified Balance Sheet
Current liabilities are obligations that will be paid with current assets, normally
within one year.
Current liabilities are obligations that will be paid with current assets, normally
within one year.
Long-term liabilities are debts that have maturity dates extending
beyond one year from the balance sheet date.
Long-term liabilities are debts that have maturity dates extending
beyond one year from the balance sheet date.
Let’s look at the
stockholders’ equity section of a classified balance sheet.
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Contributed capital is often shown in two separate accounts . . .Common stockPaid-in capital
Contributed capital is often shown in two separate accounts . . .Common stockPaid-in capital
Comprehensive income includes gains and losses not included in the
computation of net income.
Comprehensive income includes gains and losses not included in the
computation of net income.
Retained earnings is the accumulated earnings of the company less the accumulated dividends declared.
Retained earnings is the accumulated earnings of the company less the accumulated dividends declared.
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