Chapter 12 Completion of the Accounting Cycle for

Learning Objective 1 Preparing financial statements for a merchandise company © 2010 Prentice Hall

The Income Statement Companies want to know how well they did during the year

Operating Expenses Includes both Selling and Administrative Expenses SELLING EXPENSES • Sales Salaries Expense

The Income Statement Shows: Net Sales - Cost of Goods Sold = Gross Profit

We will start with Problem 12 B-1 We will break down the various sections

Problem 12 B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach,

Statement of Owner’s Equity Financial statement that reveals changes in capital Information to prepare

Statement of Owner’s Equity We will use 12 B-2 to illustrate the preparation of

Statement of Owner’s Equity Beginning Capital © 2010 Prentice Hall Business Publishing, College Accounting:

Statement of Owner’s Equity -Withdrawals +Net Income © 2010 Prentice Hall Business Publishing, College

Statement of Owner’s Equity -Withdrawals -Net Loss © 2010 Prentice Hall Business Publishing, College

Statement of Owner’s Equity © 2010 Prentice Hall Business Publishing, College Accounting: A Practical

Classified Balance Sheet Current Assets ◦ Will be converted into cash or used up

Classified Balance Sheet Plant and Equipment ◦ Long-lived assets ◦ Used in production or

Classified Balance Sheet Current liabilities ◦ Debts or obligations that must be paid within

Classified Balance Sheet Long-term Liabilities ◦ Debts or obligations that are not due and

Classified Balance Sheet Current Assets Plant & Equipment Current Liabilities Long-term Liabilities Note: $3,

Classified Balance Sheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach,

Learning Objective 2 Recording adjusting and closing entries © 2010 Prentice Hall Business Publishing,

Recording Adjusting Entries Refer to Problem 11 A-2 again © 2010 Prentice Hall Business

Recording Adjusting Entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach,

Recording Adjusting Entries Dec 31 Insurance Expense Prepaid Insurance © 2010 Prentice Hall Business

Recording Closing Entries Step 1: Close all balances on income statement credit column except

Recording Closing Entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach,

Recording Closing Entries Step 2: Close all balances on the income statement debit column

Recording Closing Entries Income Summary 600 9, 036 310 Adjusting Entries Closing Entries Bal

Recording Closing Entries There were no withdrawals by Jim Spool, however had he made

Learning Objective 3 Preparing post-closing trial balance © 2010 Prentice Hall Business Publishing, College

Post-Closing Trial Balance Prepared from the general ledger Trial balance prepared after all temporary

Learning Objective 4 Completing reversing entries © 2010 Prentice Hall Business Publishing, College Accounting:

Reversing Entries Optional bookkeeping technique Certain adjusting entries are reversed (switched) on the first

Reversing Entries When there is an increase in an asset account (no previous balance)

End of Chapter 12 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical

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The Income Statement Companies want to know how well they did during the year ◦ Net sales ◦ Returns ◦ Cost of goods sold (C. O. G. S. ) ◦ Returned goods © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Operating Expenses Includes both Selling and Administrative Expenses SELLING EXPENSES • Sales Salaries Expense • Delivery Expense • Advertising Expense • Depreciation Expense, Store Equipment • Insurance Expense © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater ADMINISTRATIVE EXPENSES • Rent • Office Salaries Expense • Utilities Expense • Supplies Expense • Depreciation Expense, Office Equipment

The Income Statement Shows: Net Sales - Cost of Goods Sold = Gross Profit - Operating Expenses = Net Income from Operations + Other Income - Other Expenses Net Income © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

We will start with Problem 12 B-1 We will break down the various sections of the income statement by completing problem 12 B-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Statement of Owner’s Equity Financial statement that reveals changes in capital Information to prepare comes from Balance sheet section of worksheet Ending capital figure is transferred to the balance sheet © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Statement of Owner’s Equity We will use 12 B-2 to illustrate the preparation of the Statement of Owner’s Equity and a Classified Balance Sheet. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Classified Balance Sheet Current Assets ◦ Will be converted into cash or used up during normal operating cycle or one year, whichever is longer ◦ Listed in order of liquidity © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Classified Balance Sheet Plant and Equipment ◦ Long-lived assets ◦ Used in production or sale of goods or services ◦ Usually listed in order according to how long they will last © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Classified Balance Sheet Current liabilities ◦ Debts or obligations that must be paid within one year or one operating cycle ◦ Includes currently maturing portions of long-term liabilities © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Classified Balance Sheet Long-term Liabilities ◦ Debts or obligations that are not due and payable for a comparatively long period (at least one year) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Classified Balance Sheet Current Assets Plant & Equipment Current Liabilities Long-term Liabilities Note: $3, 000 of Mortgage is due within one year © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-1

Recording Closing Entries Step 1: Close all balances on income statement credit column except Income Summary © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-2

Recording Closing Entries Step 2: Close all balances on the income statement debit column except Income Summary © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-2

Recording Closing Entries Income Summary 600 9, 036 310 Adjusting Entries Closing Entries Bal 1, 984 11, 310 Step 3: Transfer the balance of the Income Summary account to the Capital account © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-2

Recording Closing Entries There were no withdrawals by Jim Spool, however had he made withdrawals the journal entry would be as presented above. Step 4: Transfer the balance of the Owner’s Withdrawal account to the Capital account. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-2

Post-Closing Trial Balance Prepared from the general ledger Trial balance prepared after all temporary accounts have been closed Only permanent accounts have nonzero balances © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-3

Reversing Entries Optional bookkeeping technique Certain adjusting entries are reversed (switched) on the first day of the new accounting period Transactions in the new period can be recorded without referring back to prior adjusting entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-4

Reversing Entries When there is an increase in an asset account (no previous balance) ◦ Example: Debit interest receivable, credit interest income When there is an increase in a liability account (no previous balance) ◦ Example: Debit wages expense, credit wages payable © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11 e by Slater LO-4