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Chapter 8
Creating Financial Statements using data from Work Sheet
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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
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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)
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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
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Chapter 9:
Time to Close Out each
Account and Prepare
Accounts for the next Fiscal
Period
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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
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REID
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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
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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
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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
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How do we CLOSE Drawing?
Drawing: Drawing has a Debit balance
TO CLOSE IT OUT, Credit Drawing Debit Capital
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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
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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
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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
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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.