fin acc l1

FINANCIAL ACCOUNTING

Lecture 1-2

LEARNING OBJECTIVES

Accounting and business environment Accounting cycle

TYPES OF BUSINESS ORGANIZATIONS

To start a business you need:• An idea that will become a product or service• A market of customers who want the product or service

you offer

Service companies Merchandise companies Manufacturing companies

FORMS OF BUSINESS ORGANIZATION Proprietorship Partnership Corporation

BUSINESS ACTIVITIES

Financing activities Investing activities Operating activities

- a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements.

6

Accounting

Financial accounting

Cost and management accounting

Types of accounting

Tax accounting

investors creditors regulators customers competito

rs

8

EXTERNAL USERS

Financial Accounting

Users of Accounting InformationUsers of Accounting Information

• investors• creditors• regulators• customers• competitor

s

owners managers employees

9

EXTERNAL USERS


• investors• creditors• regulators• Customers• Suppliers

INTERNAL USERS


Users of Accounting InformationUsers of Accounting Information

• Owners• Managers• Employees

ACCOUNTING CONCEPTS AND PRINCIPLES

What is the primary objective of financial Accounting and Reporting?

Accountants follow professional guidelines.Accountants follow professional guidelines.

The rules that govern accounting are called GAAP(generally accepted accounting principles).

The rules that govern accounting are called GAAP(generally accepted accounting principles).

Financial Accounting Standards Board (FASB)

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND CONCEPTS

Entity - Every entity is a separate economic unit and should be kept distinct from the activities of its owners and other companies

Monetary Unit - only economic events that have monetary transactions will be reported in the financial statements

Cost Principle - assets are presented at their original (historical) cost

Going Concern - companies are established with the goal that they will operate for an indefinitely long period of time

11-52

Periodicity - economic activities of any firm can be divided into discrete time periods for reporting purposes

Matching Principle -all revenues must be recorded in the accounting period in which the goods are sold or services are rendered and all expenses must be recorded in the accounting period in which they are incurred to produce such revenues

AssetsAssets LiabilitiesLiabilitiesOwner’s Equity

Owner’s Equity

= +

Basic Accounting Equation

The basic tool of accounting is the accounting equation. It measures the economic resources of a business and claims to those resources.

The accounting equation shows how assets, liabilities, and owner’s equity are related.

The accounting equation shows the financial position of the business.

ASSETS , LIABILITIES, AND OWNER’S EQUITY

Assets are the economic resources of a business that are expected to provide benefits to the business in the future.

Assets are what the business owns. For example: Cash, merchandise inventory,

furniture, and land.

ASSETS , LIABILITIES, AND OWNER’S EQUITYClaims to those assets come from two sources: Liabilities are outsider claims to the assets of a

business. Owner’s equity or capital represents the insider

claims to the assets of a business.

AssetsAssets =LiabilitiesLiabilities + Owner’s

EquityOwner’s Equity

Economic resourcesEconomic resources Claims to economic resourcesClaims to economic resources

16

OWNER’S EQUITY

Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity

Owner’s withdrawals

Expenses

Owner’s investments

Revenues

decreased by increased by

EFFECTS OF A BUSINESS TRANSACTION ON ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity

Cash Owner’s Equity

(1) +$20,000 = + $20,000

Bal. $20,000 = $20,000

1. Investment by owner. Kay Torres invests $20,000 of her own money to start business . The Kay Torres Travel Agency began an activity on June 1, 2011.

2. Purchase an equipment for cash. The travel agency purchases equipment, paying cash of $9,000.


Cash + Equipment = Owner’s Equity

(1) +$20,000 + $20,000

(2) -$9,000 +$9,000

Bal. $11,000 + $9,000= $20,000

3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank.


Cash + Equipment = Notes payable Owner’s Equity

(1) +$20,000 + $20,000

(2) -$9,000 +$9,000

(3) +$15,000 +$15,000

Bal. $26,000 + $9,000= $15,000 + $20,000

4. Purchase supplies on credit. The travel agency purchases office supplies for the agency, agreeing to pay $1,200 within 30 days.

Assets = Liabilities +

Owner’s Equity

Cash + Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) +$20,000

+ $20,000

(2) -$9,000 +$9,000

(3) +$15,000

+$15,000

(4) +$1,200 +$1,200

Bal. $26,000 + $1,200+ $9,000= $1,200+

$15,000 + $20,000

5. Provide services for cash. The travel agency makes $2,300 of travel arrangements and collects this amount in cash.


Owner’s Equity

Cash + Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) +$20,000

+ $20,000

(2) -$9,000 +$9,000

(3) +$15,000

+$15,000

(4) +$1,200 +$1,200

(5) +$2,300 +$2,300

Bal. $28,300 + $1,200+ $9,000= $1,200+

$15,000 + $22,300

6. Provide services on credit. The travel agency performs $5,200 of services and ,in return, receives clients promises to pay this $5,200 within one month.


Owner’s Equity

Cash + Accounts Receivable

Supplies Equipment =

AccountsPayable

Notes payable

Owner’s Equity

(1) +$20,000

+ $20,000

(2) -$9,000

+$9,000

(3) +$15,000

+$15,000

(4) +$1,200 +$1,200

(5) +$2,300

+$2,300

(6) +$5,200 +$5,200

Bal. $28,300

+ $5,200 $1,200+ $9,000= $1,200+

$15,000

+$27,500

7. Partial payments of accounts payable. The travel agency pays $600 to the store where it purchased $1,200 worth of supplies in transaction (4).


Owner’s Equity



AccountsPayable

Notes payable

Owner’s Equity

(4) +$1,200 +$1,200

(5) +$2,300

+$2,300

(6) +$5,200 +$5,200

(7)-$600 -$600

Bal. $27,700

+ $5,200+ $1,200+ $9,000= $600+

$15,000

+$27,500

8. (8),(9),(10). Payments of expenses. During the month, the travel agency pays $900 in cash for building rent, $1,100 for salaries, and $300 for utilities.


Owner’s Equity



AccountsPayable

Notes payable

Owner’s Equity

(4) +$1,200 +$1,200

(5) +$2,300

+$2,300

(6) +$5,200 +$5,200

(7)-$600 -$600

(8) -$900 -$900

(9)-$1,100 -$1,100

(10)-$300 -$300

Bal. $25,400

+ $5,200+ $1,200+ $9,000= $600+

$15,000

+$25,200

THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE

LO 3 Identify steps in the accounting cycle.

TransactionsTransactions

1. Journalization1. Journalization

6. Financial Statements6. Financial Statements

7. Closing entries7. Closing entries

8. Post-closing trail balance8. Post-closing trail balance

9. Reversing entries9. Reversing entries

3. Trial balance3. Trial balance

2. Posting2. Posting

5. Adjusted trial balance

5. Adjusted trial balance

4. Adjustments4. AdjustmentsWork SheetWork Sheet

TRANSACTIONS AND EVENTSTRANSACTIONS AND EVENTS

What to Record?

FASB states, “transactions and other events and circumstances that affect a business enterprise.”

Types of Events:

External – between a business and its environment.

Internal – event occurring entirely within a business.

Account Name

Debit / Dr. Credit / Cr.

DEBITS AND CREDITSDEBITS AND CREDITS

An arrangement that shows the effect of transactions on an account.Debit = “Left”Credit = “Right”

Account

An Account can be illustrated in a T-Account form.

Assets +Liability

=Owne

r’s equity

+ Revenue

- Expense

+ + + + +- - - - -

Bal.

Bal.

Bal.

Bal.

Bal.

DEBITS AND CREDITSDEBITS AND CREDITS

LO 2 Explain double-entry rules.

An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account and crediting another.

DEBITS must equal CREDITS.

General Journal – a chronological record of transactions. Journal Entries are recorded in the journal.

1. JOURNALIZING1. JOURNALIZING

ANALYSIS OF TRANSACTIONANALYSIS

DEBIT-CREDIT RULES

Increases in assets are recorded by debits; debit cash $20,000Increases in owner’s equity are recorded by credits; credit owner’s equity

JOURNAL ENTRY

06.01. Cash 20,000 Owner’s equity 20,000

ENTRIES IN LEDGER ACCOUNTS

Cash Owner’s equity

1. Investment by owner. Kay Torres invests $20,000 of her own money to start business . The Kay Torres Travel Agency began an activity on June 1, 2011.

06/01. 20,000 20,000 06/01

GENERAL JOURNAL Page 1№ Date Description PR Debit Credit

1 June 1 Cash 20,000

Owner's equity 20,000

to record owner's investment

2 June 3 Equipment 9,000

Cash 9,000

to record purchasing equipment by cash


Notes payable 15,000

to record bank loan

GENERAL JOURNAL Page 1

№ Date DescriptionPR Debit Credit

4 June 11 Supplies 1,200

Accounts payable 1,200

to record purchasing supplies on credit


Service revenue 2,300

to record providing services for cash

6 June 19 Accounts receivable 5,200


to record providing services on credit


7 June 21 Accounts payable 600

Cash 600

to record partial payment of accounts payable

8 June 26 Building rent expense 900

Cash 900

to record building rent expense

9 June 28 Salary expense 1,100

Cash 1,100

to record salary expense


№ Date Description PR Debit Credit

10 June 30 Utilities expense 300

Cash 300

to record utilities expense

The Ledger contains the entire group of accounts maintained by a

company.

2. POSTING TO THE GENERAL LEDGER2. POSTING TO THE GENERAL LEDGER

LEDGER AND CHART OF ACCOUNTS

The chart of accounts is a list of all accounts and includes anidentifying number for each account.

The chart of accounts is a list of all accounts and includes anidentifying number for each account.

Account Number Account Name Account Number Account Name1001 Cash 4301 Owner's withdrawal1201 Accounts receivable 5101 Revenues1601 Supplies 7101 Rental revenue1801 Prepaid insurance 7102 Salaries expense2001 Equipment 7103 Insurance expense

3101 Accounts payable 7104 Rent expense

3201 Unearned revenue 7105 Supplies expense4101 Owner's equity 7105 Utilities expense


1 June 1 Cash 1001 20,000



2 June 3 Equipment 9,000

Cash 9,000




to record bank loan

Cash Acct. No. 1001

№ Date Explanation Ref. Debit Credit Balance

1 1-J un GJ 1 20,000 20,000

General Ledger

GENERAL JOURNAL Page 1Date Description PR Debit Credit

June 1 Cash 20,000



June 3 Equipment 9,000

Cash 9,000


June 6 Cash 15,000


to record bank loan

Owner's capital Acct. No.

Date Explanation Ref. Debit Credit Balance

1-J un GJ 1 20,000 20,000

CashOwner’s equity

(1) 20,000 20,000 (1)

Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances.

3. TRIAL BALANCE3. TRIAL BALANCE

Acct. No. Account Debit Credit

Cash 25,400$

Accounts receivable 5,200

Supplies 1,200

Equipment 9,000

Accounts payable 600$

Note payable 15,000



Building rent expense 900

Salary expense 1,100

Utilities expense 300

43,100$ 43,100$

TRIAL BALANCE

4. ADJUSTING ENTRIES4. ADJUSTING ENTRIES

Revenues - recorded in the period in which they are earned.

Expenses - recognized in the period in which they are incurred.

Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed.

44

PROBLEMS IN ACCOUNTING MEASUREMENTS

The identification of the accounting period.

The proper point in time to recognize revenue.

The appropriate moment to record an expense.

Identification of the Accounting Period

46

TIME PERIOD PRINCIPLE

For reporting purposes, an organization’s life can be divided into separate accounting periodsmonths, quarters, years, etc.

1 2 3 4 5 6 7 8 9 10 11 12

1 2 3 4

Annual

1 2

Month

Quarter

Semiannual

THE ACCOUNTING PERIOD

The proper point in time to recognize

revenues.

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REVENUE RECOGNITION . . .

Revenue is generally recognized At the time services are

performed; or

When goods are sold and delivered to a customer.

The proper point in time to recognize

expenses.

51

THE MATCHING PRINCIPLE

The matching principle requires that all expenses incurred to generate the revenues recognized in an accounting period be matched with those revenues.

Accrual Basis Accounting

Revenue Recognition

Matching Principle

Accrual Basis Accounting

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ACCRUAL BASIS ACCOUNTING

Revenues are recognized (recorded) when earned, without regard to when cash is received;

Expenses are recorded as incurred without regard to when they are paid.

An adjusting entry is recorded to bring an asset or liability account balance to

its proper amount.

Fra m ew ork for Adjustm ents

PrepaidExpenses

Depreciation UnearnedRevenues

AccruedExpenses

AccruedRevenues

Adjustm ents

Transactions where cash is paid orreceived before a related expense

or revenue is recognized.

FRAMEWORK FOR ADJUSTMENTS

Transactions where cash is paid orreceived after a related expense

or revenue is recognized.

Exh.3.4


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustm ents


Exh.3.4

Transaction where cash is paid before a related expense

is recognized.

Here is the checkfor my first

6 months’ rent.

Resources paid for prior to

receiving the actual benefits.

Asset Expense

UnadjustedBalance

CreditAdjustment

DebitAdjustment

ADJUSTING PREPAID EXPENSES



Dec. 31 Rent Expense 2,000

Prepaid Rent 2,000

to record monthly rent


On December 1, 2011, Scott Company paid $12,000 to cover rent for December 2011 through May 2012.

Let’s look at the adjusting journal entry needed on December 31, 2011.

Prepaid Rent Rent Expense12/1 $12,000 12/31 $2,00012/31 $2,000


After posting, the accounts involved look like this:


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustm ents


Exh.3.4

Transaction where cash is received before a related

revenue is recognized.

Buy your season tickets forall home basketball games NOW!

“GO SEAWOLVES”

ADJUSTING UNEARNED REVENUE

Cash received in advance of providing

products or services.

Liability RevenueUnadjusted

BalanceCredit

AdjustmentDebit

Adjustment


Oct. 1 Cash 100,000

Unearned Basketball Revenue 100,000

Receipts for 1,000 season tickets


On October 1, 2011, UAA sold 1,000 season tickets to its 20 home

basketball games for $100 each. UAA makes the following entry:


Dec. 31


On December 31, UAA has played 10 of its regular home games, winning 8

and losing 2.

Prepare the appropriate Adjusting Entry on December 31

Prepare the appropriate Adjusting Entry on December 31


On December 31, UAA has played 10 of its regular home games, winning 8

and losing 2.


Dec. 31 Unearned Basketball Revenue 50,000

Basketball Revenue 50,000

to recognize basketball revenue

Unearned BasketballRevenue Basketball Revenue

10/1 $100,000 12/31 $50,00012/31 $50,000


After posting, the accounts involved look like this


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustm ents


Exh.3.4

Transaction where cash is paid before a related expense

is recognized.

ADJUSTING FOR DEPRECIATION

Depreciation is the process of computing expense from allocating the cost of plant and equipment over its expected useful lives.

Straight-Line Depreciation =

Asset Cost – Salvage Value

Useful Life

69

ADJUSTING FOR DEPRECIATION2. Purchase an equipment for cash. The travel agency purchases equipment, paying cash of $9,000.

• Let’s compute depreciation expense for the year ended June 30, 2011.

2011 Depreciation Expense

=

$9,000 - $0

5

= $1,800/12=150. for month


Prepare the journal entry.


June 31 Depreciation Exp. 12,000

Accum. Depreciation 12,000

To record annual depreciation

Accumulated depreciation isa contra asset account.

Equipment Depreciation Expense

6/3 $9,000 6/30 $150

Accumulated Depreciation

6/30 $150



Kay Torres Co.LtdBalance Sheet

At June 30, 2011

Assets Cash . . .Equipment 9,000$ Less: accumulated deprec. (150) 8,850 . . .Total Assets

The equipment account is shown on

the balance sheet like

this.


ADJUSTING FOR SUPPLIES

At the end of current period balance of Supplies was $900 . So we must adjust supplies expense.

–Prepare the journal entry.


June 30 Supplies expense 300

Supplies 300

To record supplies expence

Supplies Supplies Expense

6/11 $1,200 6/30 $300

ADJUSTING FOR SUPPLIES


$300 6/30


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustm ents


Exh.3.4

Transaction where cash is paid after a related expense

is recognized.

Its accrued bank loan interest!

Costs incurred in a period that are

both unpaid and unrecorded.

ADJUSTING FOR ACCRUED EXPENSES

Expense LiabilityCredit

AdjustmentDebit

Adjustment

06/05/11

06/30/11Month end

First paymentDate of interest

31/12/11

Record adjustingjournal entry.


3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.



June 30 Interest expense 150

Interest payable 150

to record interest accrual

3. Borrow cash from the bank. The travel agency borrows $15,000 cash from the bank and signs a 2 year note payable to the bank. Interest rate 12%. Must pay at the end year.

Interest Expense Interest Payable06/30 $150 06/30 $150


After posting, the accounts involved will look like this . . .


PrepaidExpenses


AccruedExpenses

AccruedRevenues

Adjustm ents


Exh.3.4

Transaction where cash is received after a related revenue is recognized.

Yes, you can pay mefor your tax return

when I finish the work.

ADJUSTING FOR ACCRUED REVENUES

Revenues earned in a period that

are both unrecorded and not yet received.

Asset Revenue

CreditAdjustment

DebitAdjustment

Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry

necessary on December 31, 2002, the end of the company’s fiscal year.

ADJUSTING FOR ACCRUED REVENUES


Dec. 31 Accounts Receivable 31,200

Service Revenues 31,200

Revenues earned but not received

Exh.3.18

CategoryBefore Adjusting

Adjusting EntryB/S I/S

Prepaid Expense

Asset ExpenseDr. Expense Cr. Asset

Unearned Revenue Liability Revenue

Dr. Liability Cr. Revenue

Accrued Expenses

Liability ExpenseDr. Expense Cr. Liability

Accrued Revenues Asset Revenue

Dr. Asset Cr. Revenue

Exhibit 3.18

Summary of Adjustments and

Financial Statement Links

Overstated

Understated

A multiple-column form used in preparing financial statements.

Not a permanent accounting record.

Five step process.

Use of worksheet is optional.

USING A WORKSHEETUSING A WORKSHEET

LO 1 Prepare a worksheet.

Worksheet

STEPS IN PREPARING A WORKSHEETSTEPS IN PREPARING A WORKSHEET

Illustration 4-2

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 Accounts Receivable 5,200 Supplies 1,200 Equipment 9,000 Accumulated DepreciationAccounts Payable 600 Notes payable 15,000 Owner's equity 20,000 Service Revenue 7,500 Salaries Expense 1,100 Rent expense 900 Utilities expense 300

Totals 43,100 43,100

Balance SheetAdjusted Income

Trial Balance Adjustments Trial Balance Statement

1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come directly from ledger accounts.

Include all accounts with balances.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 Accounts Receivable 5,200 Supplies 1,200 a. 300Equipment 9,000 Accumulated Depreciation b. 150Accounts Payable 600 Notes payable 15,000 Owner's equity 20,000

Service Revenue 7,500 Salaries Expense 1,100 Rent expense 900 Utilities expense 300

Totals 43,100 43,100

Supplies expense a. 300Depr. Expense b. 150Interest expense c. 150

Interest payable c. 150Totals 600 600



2. Enter the Adjustments in the Adjustments Columns

Add additional accounts as needed.

Enter adjustment amounts, total adjustments columns,and check for equality.

Adjustments Key:(a) Supplies used.(b) Depreciation

expense.(c) Interest expense

accrued

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 24,400 24,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Owner's withdrawal 1,000 1,000 Service Revenue 7,500 7,500 Salaries Expense 1,100 1,100 Rent expense 900 900 Utilities expense 300 300

Totals 43,100 43,100

Supplies expense a. 300 300 Depr. Expense b. 150 150 Interest expense c. 150 150

Interest payable c. 150 150 Totals 600 600 43,400 43,400



3. Complete the Adjusted Trial Balance Columns

Total the adjusted trial balance columns and check for equality.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100

Supplies expense a. 300 300 300 Depr. Expense b. 150 150 150 Interest expense c. 150 150 150

Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500



4. Extend Amounts to Financial Statement Columns

Extend all asset, liability, and equity account balances to the balance sheet columns.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 Accounts Receivable 5,200 5,200 Supplies 1,200 a. 300 900 Equipment 9,000 9,000 Accumulated Depreciation b. 150 150 Accounts Payable 600 600 Notes payable 15,000 15,000 Owner's equity 20,000 20,000 Retained EarningsService Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100


Interest payable c. 150 150 Totals 600 600 43,400 43,400 2,900 7,500 Income before tax 4,600 Income tax expense 460

Net Income 4,140

Total 7,500 7,500



5. Total Columns, Compute Net Income (Loss)

Compute Net Income or Net Loss.

Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Cash 25,400 25,400 25,400 Accounts Receivable 5,200 5,200 5,200 Supplies 1,200 a. 300 900 900 Equipment 9,000 9,000 9,000 Accumulated Depreciation b. 150 150 150 Accounts Payable 600 600 600 Notes payable 15,000 15,000 15,000 Owner's equity 20,000 20,000 20,000

Retained Earnings 4,140 Service Revenue 7,500 7,500 7,500 Salaries Expense 1,100 1,100 1,100 Rent expense 900 900 900 Utilities expense 300 300 300

Totals 43,100 43,100


Interest payable c. 150 150 150 Totals 600 600 43,400 43,400 2,900 7,500 Income before Tax 4,600 Income tax expense 460

Net Income 4,140 460 Tax payable

Total 7,500 7,500 40,500 40,500



5. Total Columns, Compute Net Income (Loss)

BALANCE SHEET

INCOME STATEMENT

STATEMENT OF OWNER’S EQUITY

STATEMENT OF CASH FLOW

FINANCIAL STATEMENTS

Kay Torres Co.ltdIncome Statement

For the Month Ended June 30, 2011Revenues:Service revenue 7,500$ Total revenues 7,500 Operating expenses: Depr. expense - Equip. 150$ Rent expense 900$ Salaries expense 1,100 Supplies expense 300 Interest expense 150 Utilities expense 300 Total expenses 2,900 Net income 4,600$

Prepare the Income

Statement.

PREPARE THE FINANCIAL STATEMENTS

A work sheet does

not substitute

for financial statements.

A work sheet does

not substitute

for financial statements.

Prepare the Statement of Changes in Owner’s Equity.

Kay Torres Co.ltdStatement of Changes in Owner's Equity

For the Month Ended June 30, 2011

Owner's equity 6/1/2011 $ -0-Add: Net income 4,140$ Investment by owner 20,000 24,140 Total 24,140 Less: Withdrawal by owner - Owner's equity 6/30/2011 24,140$

Kay Torres Co.ltdIncome Statement

For the Month Ended June 30, 2011Revenues:Service revenue 7,500$ Total revenues 7,500 Operating expenses: Depr. expense - Equip. 150$ Rent expense 900$ Salaries expense 1,100 Supplies expense 300 Interest expense 150 Utilities expense 300 Total expenses 2,900 Income before Tax 4,600$ Income Tax Expense 460Net Income 4140

Kay Torres Co.ltdBalance Sheet

30-Jun-11

AssetsCash 25,400$ Accounts receivable 5,200 Supplies 900 Equipment 9,000$ Less: accum. depr. (150) 8,850 Total assets 40,350$

LiabilitiesAccounts payable 600$ Notes payable 15,000 Income tax payable 460 Interest payable 150 Total liabilities 16,210$

Owner's EquityOwner,s equity 20,000 Retained earnings 4,140 Total Owner's Equity 24,140 Total liabilities and equity 40,350$

Prepare the Balance Sheet.

Kay Torres Co.ltdStatement of Changes in Owner's Equity

For the Month Ended June 30, 2011

Owner's equity 6/1/2011 $ -0-Add: Net income 4,140$ Investment by owner 20,000 24,140 Total 24,140 Less: Withdrawal by owner - Owner's equity 6/30/2011 24,140$

At the end of the accounting period, the company makes the accounts ready for the next period.

CLOSING THE BOOKSCLOSING THE BOOKS

LO 2 Explain the process of closing the books.

Closing entries formally recognize, in the general ledger, the transfer of

Income tax expense to Tax payable

Net income to Retained earnings.

CLOSING THE BOOKSCLOSING THE BOOKS

LO 2 Explain the process of closing the books.

Closing entries are only at the end of the annual accounting period.

Let’s see how the closing

process works!

RECORDING CLOSING ENTRIES

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Tax payable.

4 Close income Summary account to Retained Earnings

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Tax payable.

4 Close income Summary account to Retained Earnings

Balances before closing.

Income Summary Service revenue7,500

7,500

CLOSING PROCESS

Revenue Accounts7,500 7,500

-

Income Summary7,500

7,500

Close Revenue accounts to

Income Summary.



June 30 Service revenue 7,500

Income summary 7,500

to record closing entries of revenue

Income Summary1,100 7,500

900 300300150150460

4,1400

Tax payable460

460

Close Expense accounts to

Income Summary.

Salary expense 1,100 1,100

-

CLOSING PROCESS

Rent expense900 900

-

Utitilies expense300 300

-

Supplies expense300 300

-

Depreciation expense150 150

-

Interest expense150 150

-

Retained earnings4,140

4,140

GENERAL JOURNAL Page


June 30 Service revenue 7,500


to record closing entries of revenue


Salary expense 1,100

to record closing entries of salary expense

Income summary 900

Rent expense 900

to record closing entries of rent expense



June 30 Income summary 300

Utilities expense 300

to record closing entries of utilities expense

Income summary 300

Supplies expense 300

to record closing entries of Supplies expense

Income summary 150

Depreciation expense 150

to record closing entries of rent expense



June 30 Income summary 150

Interest expense 150

to record closing entries of interest expense

Income summary 460

Tax payable 460

to record closing entries of income tax expense


retained earnings 4,140

to record closing entries of Net income

fin acc l1

Business

liabilities owners

accounting period

owners equity cash

accounting concepts

owners equityassets

owners equityclaims

owners equitycashowners

notes payable owners