Completion of the Accounting Cycle for a Merchandise Company Chapter 12 Completion of the Accounting Cycle for a Merchandise Company © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 1 Preparing financial statements for a merchandise company LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

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

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

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Problem 12B-1 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

Statement of Owner’s Equity Beginning Capital LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Statement of Owner’s Equity -Withdrawals +Net Income LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Statement of Owner’s Equity -Withdrawals -Net Loss LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Statement of Owner’s Equity LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

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

Classified Balance Sheet LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Classified Balance Sheet LO-1 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 2 Recording adjusting and closing entries LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Recording Adjusting Entries Refer to Problem 11A-2 again LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Recording Adjusting Entries LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Recording Adjusting Entries Dec 31 Insurance Expense 150 Prepaid Insurance LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Recording Adjusting Entries LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Recording Adjusting Entries LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

Recording Closing Entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

Recording Closing Entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

Recording Closing Entries © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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. LO-2 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

Learning Objective 3 Preparing post-closing trial balance LO-3 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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

Learning Objective 4 Completing reversing entries LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

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 LO-4 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

End of Chapter 12 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater