Fin acc l1

FINANCIAL ACCOUNTING
Lecture 1-2

LEARNING OBJECTIVES
 Accounting and business environment
 Accounting cycle

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

TYPES OF BUSINESS ORGANIZATIONS
 Service companies
 Merchandise companies
 Manufacturing companies

FORMS OF BUSINESS ORGANIZATION
 Proprietorship
 Partnership
 Corporation

BUSINESS ACTIVITIES
 Financing activities
 Investing activities

 Operating activities

Accounting

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

6

Types of accounting

Financial Cost and Tax accounting
accounting management
accounting

Users of Accounting Information

• investors
 investors
Financial Accounting • creditors
 creditors
• regulators
 regulators
EXTERNAL USERS • customers
 customers
• competitors
 competitors

8

Users of Accounting Information

• investors
Financial Accounting • creditors
• regulators
EXTERNAL USERS • Customers
• Suppliers

Financial Accounting
• owners
 Owners
INTERNAL USERS • managers
 Managers
• employees

Employees

9

ACCOUNTING CONCEPTS AND PRINCIPLES
 What is the primary objective of financial
Accounting and Reporting?

Accountants follow professional guidelines.

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

Basic Accounting Equation

Owner’s
Assets = Liabilities +
Equity

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 EQUITY
Claims 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.

= + Owner’s
Assets Liabilities
Equity

Economic
resources Claims to economic resources

Effects of Transactions on Owner’s Equity

OWNER’S EQUITY

decreased by increased by

Owner’s withdrawals Owner’s investments

Expenses Revenues

16

EFFECTS OF A BUSINESS TRANSACTION ON
ACCOUNTING EQUATION

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.

Assets = Liabilities + Owner’s Equity
Cash Owner’s Equity
(1) +$20,000 = + $20,000
Bal. $20,000 = $20,000

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 Accounts Notes Owner’s
= Payable payable 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.
+ Equity
Cash + Supplies Equipment Accounts Notes Owner’s
= Payable payable 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.
+ Equity
Cash + Accounts Supplies Equipment Accounts Notes Owner’s
Receivable = Payable payable 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).
+ 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.
+ 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 CYCLE

Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail
balance 2. Posting

7. Closing entries 3. Trial balance

Work
6. Financial 4. Adjustments
Sheet
Statements
5. Adjusted trial
balance
LO 3 Identify steps in the accounting cycle.

TRANSACTIONS 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.

DEBITS AND CREDITS

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

An Account can Account Name
be illustrated in a Debit / Dr. Credit / Cr.
T-Account form.

Owner’
Assets = Liability + s + Revenu - Expense
equity e
+ - - + - + - + + -
Bal. Bal. Bal. Bal. Bal.

DEBITS AND CREDITS

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.

LO 2 Explain double-entry rules.

1. JOURNALIZING

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

ANALYSIS OF TRANSACTION
ANALYSIS
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.

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

JOURNAL 06.01. Cash 20,000
ENTRY
Owner’s equity 20,000
ENTRIES IN Cash Owner’s equity
LEDGER
ACCOUNTS 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

P
№ Date Description R 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


10 June 30 Utilities expense 300
Cash 300
to record utilities expense

2. POSTING TO THE GENERAL LEDGER

The Ledger contains the entire group of accounts maintained by a
company.

LEDGER AND CHART OF ACCOUNTS
The chart of accounts is a list of all accounts and includes an
identifying number for each account.
Account Number Account Name Account Number Account Name
1001 Cash 4301 Owner's withdrawal
1201 Accounts receivable 5101 Revenues
1601 Supplies 7101 Rental revenue
1801 Prepaid insurance 7102 Salaries expense
2001 Equipment 7103 Insurance expense
3101 Accounts payable 7104 Rent expense
3201 Unearned revenue 7105 Supplies expense
4101 Owner's equity 7105 Utilities expense

GENERAL JOURNAL Page
№ Date Description PR Debit Cred
1 June 1 Cash 1001 20,000

General Ledger
2 June 3 Equipment 9,000
Cash Cash Acct. No. 1001
9,00
№ Date to record purchasing equipment by cash Balance
Explanation Ref. Debit Credit
3 1 1-Jun 6 Cash
June GJ 1 20,000 15,000 20,000
Notes payable 15,00
to record bank loan

Date Description PR Debit Credit
June 1 Cash 20,000

June 3 Equipment 9,000
Cash 9,000
to record purchasing equipment by cash
June 6 Cash 15,000
Owner's capital Acct. No.
Date Explanation Ref. Debit Credit Balance
1-Jun to record bank loan
GJ1 20,000 20,000

Owner’s
Cash equity
(1) 20,000 20,000 (1)

3. TRIAL BALANCE

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

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

4. 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.

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. 44

Identification of the
Accounting Period

TIME PERIOD PRINCIPLE

For reporting purposes, an
organization’s life can be divided
into separate accounting periods
 months,
 quarters,
 years, etc.

46

THE ACCOUNTING PERIOD

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

Month

The proper point in time
to recognize revenues.

REVENUE RECOGNITION . . .

Revenue is generally recognized
 At the time services are performed;
or
 When goods are sold and delivered
to a customer.

49

The proper point in time
to recognize expenses.

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.

51

Revenue
Accrual Basis
Recognition
Accounting

Matching
Principle

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.
54

An adjusting entry is recorded to
bring an asset or liability account
balance to its proper amount.

Exh.
3.4

FRAMEWORK FOR ADJUSTMENTS
Framework for Adjustments

Adjustments

Prepaid Depreciation Unearned Accrued Accrued
Expenses Revenues Expenses Revenues

Transactions where cash is paid or
received before a related expense
or revenue is recognized.

Transactions where cash is paid or
received after a related expense
or revenue is recognized.

Exh.
3.4


Adjustments


Transaction where cash is paid
before a related expense is
recognized.

ADJUSTING PREPAID EXPENSES

Resources paid Here is the check
for my first
for prior to 6 months’ rent.
receiving the
actual benefits.

Asset Expense
Unadjusted Credit Debit
Balance Adjustment Adjustment


 OnDecember 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.

Dec. 31 Rent Expense 2,000
Prepaid Rent 2,000
to record monthl y rent


 After posting, the accounts involved look
like this:

Prepaid Rent Rent Expense
12/1 $12,000 12/31 $2,000 12/31 $2,000

Exh.
3.4


Adjustments


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

ADJUSTING UNEARNED REVENUE

Cash received in
advance of Buy your season tickets for
providing all home basketball games NOW!
products or
services. “GO SEAWOLVES”

Liability Revenue
Debit Unadjusted Credit
Adjustment Balance Adjustment


On October 1, 2011, UAA sold 1,000 season
tickets to its 20 home basketball games for
$100 each. UAA makes the following entry:

Oct. 1 Cash 100,000
Unearned Basketball Revenue 100,000
Recei pts for 1,000 sea son ti ck ets


On December 31, UAA has played 10 of its
regular home games, winning 8 and
losing 2.

Dec. 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 recogni ze ba sk etba l l revenue


 After posting, the accounts involved look
like this

Unearned Basketball
Revenue Basketball Revenue
12/31 $50,000 10/1 $100,000 12/31 $50,000

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 Asset Cost – Salvage Value
=
Depreciation Useful Life

2. 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 $9,000 - $0
Depreciation =
Expense 5

= $1,800/12=150. for month 69


 Prepare the journal entry.

June 31 Depreciation Exp. 12,000
Accum. Depreciation 12,000
To record a nnua l depreci a ti on

Accumulated depreciation is
a contra asset account.


 Afterposting, the accounts involved
look like this:
Equipment Depreciation Expense
6/3 $9,000 6/30 $150

Accumulated Depreciation

6/30 $150


Kay Torres Co.Ltd
Balance Sheet
At June 30, 2011

Assets The
Cash
. equipment
. account is
. shown on
Equipment $ 9,000
Less: accumulated deprec. (150) 8,850 the balance
. sheet like
. this.
.
Total Assets

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 suppl i es expence

ADJUSTING FOR SUPPLIES

 Afterposting, the accounts involved
look like this:
Supplies Supplies Expense
6/11 $1,200 $300 6/30 6/30 $300

Exh.
3.4


Adjustments


Transaction where cash is paid
after a related expense is
recognized.

ADJUSTING FOR ACCRUED EXPENSES

Costs incurred in a Its accrued bank loan
period that are interest!
both unpaid and
unrecorded.

Expense Liability
Debit Credit
Adjustment Adjustment


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.

06/30/11 First payment
Month end Date of interest
31/12/11

06/05/11
Record adjusting
journal 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 i nterest a ccrua l


 Afterposting, the accounts involved will
look like this . . .
Interest Expense Interest Payable
06/30 $150 06/30 $150

Exh.
3.4


Adjustments


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

ADJUSTING FOR ACCRUED REVENUES

Revenues earned Yes, you can pay me
for your tax return
in a period that
when I finish the work.
are both
unrecorded and
not yet received.

Asset Revenue
Debit Credit
Adjustment Adjustment

ADJUSTING FOR ACCRUED REVENUES

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.

Dec. 31 Accounts Receivable 31,200
Service Revenues 31,200
Revenues ea rned but not recei ved

Exh.
Exhibit 3.18 3.18

Summary of Adjustments and
Financial Statement Links
Before Adjusting Adjusting
Category
B/S I/S Entry
Dr. Expense
Prepaid Expense Asset Expense
Cr. Asset
Dr. Liability
Unearned Revenue Liability Revenue
Cr. Revenue
Dr. Expense
Accrued Expenses Liability Expense
Cr. Liability
Dr. Asset
Accrued Revenues Asset Revenue
Cr. Revenue

Overstated

Understated

USING A WORKSHEET

Worksheet
A multiple-column form used in preparing
financial statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.

LO 1 Prepare a worksheet.

STEPS IN PREPARING A WORKSHEET
Illustration 4-2

1. Prepare a Trial Balance on the Worksheet
Adjusted Income
Trial Balance Adjustments Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 25,400
Accounts Receivable 5,200 Trial balance amounts
Supplies 1,200 come directly from
Equipment 9,000 ledger accounts.
Accumulated Depreciation
Accounts Payable 600
Service Revenue 7,500
Salaries Expense 1,100 Include all
accounts with
Rent expense 900
balances.
Totals 43,100 43,100

2. Enter the Adjustments in the Adjustments Columns
Adjusted Income
Cash 25,400
Accounts Receivable 5,200
Supplies 1,200 a. 300
Equipment 9,000
Accumulated Depreciation b. 150
Accounts Payable 600 Adjustments Key:
Owner's equity 20,000 (a) Supplies used.
(b) Depreciation expense.
Service Revenue 7,500
Salaries Expense 1,100 (c) Interest expense
Rent expense 900
accrued
Totals 43,100 43,100
Supplies expense a. 300
Depr. Expense b. 150
Interest expense c. 150 Enter adjustment
Interest payable c. 150 amounts, total
Totals 600 600
Add additional adjustments columns,
accounts as and check for equality.
needed.

3. Complete the Adjusted Trial Balance Columns
Adjusted Income
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 Total the adjusted trial
Salaries Expense 1,100 1,100 balance columns and
Rent expense 900 900 check for equality.
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

4. Extend Amounts to Financial Statement Columns

Adjusted Income
Trial Balance Adjustments Trial Balance Extend all asset,
Statement Balance Sheet
Cash 25,400 25,400
liability, and equity
Accounts Receivable
Supplies
5,200
1,200 a. 300
5,200
900
account balances to
Equipment 9,000 9,000 the balance sheet
Accounts Payable 600 600 columns.
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
Totals 600 600 43,400 43,400 2,900 7,500

5. Total Columns, Compute Net Income (Loss)

Adjusted Income
Cash 25,400 25,400
Accounts Receivable 5,200 5,200
Supplies 1,200 a. 300 900
Equipment 9,000 9,000
Accounts Payable 600 600
Retained Earnings
Totals 43,100 43,100
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

Compute Net Income or Net Loss.

5. Total Columns, Compute Net Income (Loss)

Adjusted Income
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
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

FINANCIAL STATEMENTS

 BALANCE SHEET
 INCOME STATEMENT
 STATEMENT OF OWNER’S EQUITY
 STATEMENT OF CASH FLOW

PREPARE THE FINANCIAL STATEMENTS
Prepare the
Kay Torres Co.ltd Income
Income Statement
For the Month Ended June 30, 2011 Statement.
Revenues:
Service revenue $ 7,500
Total revenues 7,500 A work sheet
Operating expenses: does not
Depr. expense - Equip. $ 150
Rent expense $ 900 substitute for
Salaries expense 1,100
Supplies expense 300
financial
Interest expense 150 statements.
Total expenses 2,900
Net income $ 4,600

Kay Torres Co.ltd
Income Statement
Prepare the
For the Month Ended June 30, 2011 Statement of
Revenues:
Service revenue $ 7,500 Changes in Owner’s
Total revenues 7,500 Equity.
Operating expenses:
Depr. expense - Equip. $ 150
Rent expense $ 900
Salaries expense 1,100
Kay Torres Co.ltd
Interest expense 150
Utilities expense 300 Statement of Changes in Owner's Equity
Total expenses 2,900 For the Month Ended June 30, 2011
Income before Tax $ 4,600
Income Tax Expense 460 Owner's equity 6/1/2011 $ -0-
Net Income 4140
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.ltd
Statement of Changes in Owner's Equity
Prepare the
For the Month Ended June 30, 2011 Balance Sheet.
Kay Torres Co.ltd
Owner's equity 6/1/2011 $ -0- Balance Sheet
Add: Net income $ 4,140 30-Jun-11
Investment by owner 20,000 24,140 Assets
Total 24,140 Cash $ 25,40
Accounts receivable 5,20
Less: Withdrawal by owner -
Supplies 90
Owner's equity 6/30/2011 $ 24,140 Equipment $ 9,000
Less: accum. depr. (150) 8,85
Total assets $ 40,35
Liabilities
Accounts payable $ 600
Income tax payable 460
Interest payable 150
Total liabilities $ 16,21
Owner's Equity
Owner,s equity 20,00
Retained earnings 4,14
Total Owner's Equity 24,14
Total liabilities and equity $ 40,35

CLOSING THE BOOKS

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

LO 2 Explain the process of closing the books.

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

LO 2 Explain the process of closing the books.

RECORDING CLOSING ENTRIES
Let’s see how the
Close Revenue accounts closing process
to Income Summary. works!

Close Expense accounts
to Income Summary.

Close Income Summary
account to Tax payable.
4 Close income Summary
account to Retained
Earnings

CLOSING PROCESS
Income Summary Service revenue
7,500
Balances
before
closing. 7,500

Income Summary
Revenue Accounts
7,500
7,500 7,500

7,500 -

Close Revenue
accounts to Income
Summary.


June 30 Service revenue 7,500
Income summary 7,500
to record closing entries of revenue

CLOSING PROCESS
Salary expense
1,100 1,100
Close Expense Supplies expense
accounts to Income 300 300
- Summary.
-
Rent expense
900 900 Depreciation expense
150 150
Income Summary
-
1,100 7,500
900 -
Utitilies expense
300 300 300
Interest expense
300 150 150
150
-
150
-
460
Tax payable
460 4,140 Retained earnings
0 4,140

460 4,140


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
to record closing entries of utilities expense

Income summary 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

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Fin acc l1