Chapter 8

Creating Financial Statements using data from Work Sheet

The Accounting Cycle:1. Journalize transactions daily in a General

Journal2. Post account activity and ending monthly

balances from the Journal to individual General Ledgers

3. Depreciate any assets that lost value during the fiscal period and update their account values on a Work Sheet

4. Create and post Financial Statements: Cash Flow, Balance Sheet, Income Statement

5. Update and Close All account balances: Temporary and Permanent accounts

6. Analyze the Financial Statements 7. Make decisions to improve the Business

Income Statement:

Reporting Sales for the FPReporting Total Expenses for the FPCalculating the Net Profit or Net Loss

for the FPReporting what % of sales went to

pay expensesReporting what % of sales the owner

was able to keep (profit) or lost (loss)

Balance Sheet: A = L + OE

Reports total Assets Reports total Liabilities Reports total Owner's Equity

If there is a Profit: Capital, at the start of the FP + Net Income –

Drawing = Capital at the end of the FP

If there is a Net Loss: Capital, at the start of the FP - Net Loss – Drawing

= Capital at the end of the FP

Chapter 9:

Time to Close Out each

Account and Prepare

Accounts for the next Fiscal

Period

Which accounts get closed at the end of a fiscal year? Need to get their balance to $0.00 There are 4 temporary

accounts that get closed at the end of each FP:

REID Both income statement

accounts • (1) Revenue• (2) Expenses

(3) the income summary account

(4) the sole proprietor’s drawing account

REID

What is the account, ‘Income Summary’?

Video: http://video.answers.com/accounting-income-su

mmary-account-281449910

The Temporary account used ONLY to CLOSE OUT revenue, expense, and drawing accounts at the end of an accounting period, so these accounts can have a $0.00 balance as the next FP is about to begin

Why? Because every debit needs a credit

Why must those accounts be closed?

They must begin the new fiscal year with zero balances

SALES – new FP, start with $0.00 in the account

EXPENSES, – new FP, start with $0.00 in the account

DRAWING - – new FP, start with $0.00 in the account

INCOME SUMMARY - – new FP, start with $0.00 in the account

How to we CLOSE Temporary Accounts? Revenue:

Sales has a credit balance TO CLOSE IT OUT,

Debit Sales Credit Income Summary

Expenses: Expenses have a debit balances

TO CLOSE EACH ONE OUT, Credit each Expense Debit Income Summary each time

How do we CLOSE Drawing?

Drawing: Drawing has a Debit balance

TO CLOSE IT OUT, Credit Drawing Debit Capital

How do we Close Income Summary?Income Summary:

To Close out all the work that Income Summary did

If there is a Profit• Debit Income Summary for the Profit amount• Credit Capital for the same amount

If there is a Loss• Debit the Loss amount to the Capital account• Credit the Loss for the Income Summary account

Where do you Close out Accounts?Journalize the Closing Entries In the

General JournalThen Close out the Temporary

Accounts in their General LedgersThen, prepare a Post-Closing Trial

Balance with new updated, balances The temporary accounts do not appear on

this document since they now have $0.00 Balances

Review

Chapter 8 Mastery Problem, text p 194

Closing out Accounts Work Together: tear out page 175 in

wkbk Journalize closing entries on pg 177 Close out Ledger accounts on pgs 179-

181

Permanent Accounts

The accounts that do not get closed their balances are carried forward to

the next FP All of The balance sheet accounts are

permanent accounts, except for Drawing.