ACCT 201 ACCT 201 ACCT 201 Dr. Fred Barbee1 Reporting and Preparing Financial Statements UAA –...

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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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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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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

-


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


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


Close Income Summary to Retained Earnings

Close Income Summary to Retained Earnings

Retained Earnings600 3,785

3,185


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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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


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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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.

ACCT 201 ACCT 201 ACCT 201 Dr. Fred Barbee1 Reporting and Preparing Financial Statements UAA –...

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