GLENCOE / McGraw-Hill

Closing Entries and the Postclosing Trial Balance

2. Prepare a postclosing trial balance. 3. Interpret financial statements. 4. Review the steps in the accounting cycle. Using Accounting Information Section Objectives

Preparing the Postclosing Trial Balance Page 173

This section discusses the last two steps of the accounting cycle. Page 173 The Accounting Cycle

Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 7 Journalize and post closing entries Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information The Accounting Cycle Page 173 Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information

Objective 2 Prepare a postclosing trial balance. Page 173

A postclosing trial balance is a statement that is prepared to prove the equality of total debits and credits after the closing process is completed. ANSWER: QUESTION: What is a postclosing trial balance? Page 173

Proves that total debits equal total credits Verifies that revenue, expense, and drawing accounts have zero balances Page 173 The Postclosing Trial Balance

Page 173 Only permanent accounts appear on the postclosing trial balance. Assets Liabilities Owner’s equity

Carter Consulting Services Postclosing Trial Balance December 31, 2004 ACCOUNT NAME DEBIT CREDIT Cash 64, Accounts Receivable 4, Supplies 1, Prepaid Rent 3, Equipment 35, Accumulated Depreciation–Equipment Accounts Payable 12, Linda Carter, Capital 95, Totals 107, , Page 173 Postclosing Trial Balance

Finding and Correcting Errors Page 173

If the postclosing trial balance does not balance, the accounting records contain errors. Page 173 Use the audit trail to trace data through the accounting records.

Interpreting the Financial Statements Page 174

Objective 3 Interpret financial statements. Page 174

To interpret means to understand and explain the meaning and importance of something. ANSWER: QUESTION: What is meant by “interpreting” the financial statements? Page 174

Financial statements provide answers. Page 174 What is the cash balance? How much do customers owe the business? How much does the business owe suppliers? What is the profit or loss?

Consider the financial statements for Carter Consulting Services at the end of the accounting period. Page 175

What is the cash balance? Page 174

Carter Consulting Services Balance Sheet December 31, 2004 Assets Cash 64, Accounts Receivable 4, Supplies 1, Prepaid Rent 3, Equipment 35, Less Accumulated Depreciation , Total Assets 107, Liabilities and Owner’s Equity Liabilities Accounts Payable 12, Owner’s Equity Linda Carter, Capital 95, Total Liabilities and Owner’s Equity 107, What is the cash balance? Page 175

How much do the customers owe the business? Page 174

Carter Consulting Services Balance Sheet December 31, 2004 Assets Cash 64, Accounts Receivable 4, Supplies 1, Prepaid Rent 3, Equipment 35, Less Accumulated Depreciation , Total Assets 107, Liabilities and Owner’s Equity Liabilities Accounts Payable 12, Owner’s Equity Linda Carter, Capital 95, Total Liabilities and Owner’s Equity 107, How much do the customers owe the business? Page 175

How much does the business owe suppliers? Page 174

Carter Consulting Services Balance Sheet December 31, 2004 Assets Cash 64, Accounts Receivable 4, Supplies 1, Prepaid Rent 3, Equipment 35, Less Accumulated Depreciation , Total Assets 107, Liabilities and Owner’s Equity Liabilities Accounts Payable 12, Owner’s Equity Linda Carter, Capital 95, Total Liabilities and Owner’s Equity 107, How much does the business owe its suppliers? Page 175

What is the profit or loss? Page 174

Carter Consulting Services Income Statement Month Ended December 31, 2004 Revenue Fees Income 28, Expenses Salaries Expense 5, Utilities Expense Supplies Expense Rent Expense 3, Depr. Expense--Equipment Total Expenses 9, Net Income for the Month 18, What is the profit? Page 175

The Accounting Cycle Page 176

Objective 4 Review the steps in the accounting cycle. Page 176

The Accounting Cycle Step 1 Analyze transactions Analyze the source documents. Sales slips Purchase invoices Credit memorandums Check stubs Page 176 Step 1 Analyze transactions

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Record the effects of the transactions in a journal. Page 176 Step 2 Journalize the data about transactions

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Transfer data from the journal to the general ledger accounts. Page 176 Step 3 Post the data about transactions

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Prepare a worksheet with five sections. Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Step 4 Prepare a worksheet Page 176

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Prepare financial statements. Income Statement Statement of Owner’s Equity Balance Sheet Step 5 Prepare financial statements Page 176/177

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements The adjusting entries are a permanent record of the changes in account balances shown on the worksheet. Step 6 Journalize and post adjusting entries Page 176/177 Step 6 Journalize and post adjusting entries

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Transfer net income or net loss to owner’s equity. Reduce the balances of the temporary accounts to zero. Step 7 Journalize and post closing entries Page 176/177 Step 7 Journalize and post closing entries

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Confirm that the general ledger is in balance. Confirm that the revenue, expense, and drawing accounts have zero balances. Step 8 Prepare a postclosing trial balance Page 176/177 Step 8 Prepare a postclosing trial balance

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Use financial statements to understand and communicate the financial information and to make decisions. Step 9 Interpret the financial information Page 176/177 Step 9 Interpret the financial information

The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Page 176 Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 5 Prepare financial statements Step 4 Prepare a worksheet Step 3 Post the data about transactions Step 2 Journalize the data about transactions Step 1 Analyze transactions Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries

Flow of Data Through a Simple Accounting System Source documents Source documents are analyzed. Page 178 General journal General ledger Worksheet Financial statements Source Documents

Transactions are recorded in the general journal. Page 178 Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements General journal

Transactions are posted from the general journal to the general ledger. Page 178 Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements General ledger

Financial information is proved, adjusted, and summarized on the worksheet. Page 178 Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements Worksheet

Financial information is reported on financial statements. Page 178 Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements Financial statements

REVIEWREVIEW A postclosing trial balance is a statement to prove the _______ of total debits and credits. Only the __________ accounts appear on the postclosing trial balance. Preparing a postclosing trial balance is the ______ step of the accounting cycle. eighth permanent equality Complete the following sentences:

REVIEWREVIEW The ninth step of the accounting cycle is ___________ the financial statements. The flow of data through an accounting system begins with a(n) _______________. The financial statement that reports the same items as the postclosing trial balance is the ____________. balance sheet Complete the following sentences: interpreting source document

Thank You for using College Accounting, Tenth Edition Price Haddock Brock