Chapter 8 Creating Financial Statements using data from Work Sheet

The Accounting Cycle:  Journalize transactions daily in a General Journal  Post account activity and ending monthly balances from the Journal to individual General Ledgers  Depreciate any assets that lost value during the fiscal period and update their account values on a Work Sheet  Create and post Financial Statements: Cash Flow, Balance Sheet, Income Statement  Update and Close All account balances: Temporary and Permanent accounts  Analyze the Financial Statements  Make decisions to improve the Business

Income Statement: Reporting Sales for the FP Reporting Total Expenses for the FP Calculating the Net Profit or Net Loss for the FP Reporting what % of sales went to pay expenses Reporting what % of sales the owner was able to keep (profit) or lost (loss)

Balance Sheet: A = L + OE Reports total Assets Reports total Liabilities Reports total Owner's Equity  If there is a Profit: Capital, at the start of the FP + Net Income – Drawing = Capital at the end of the FP  If there is a Net Loss: Capital, at the start of the FP - Net Loss – Drawing = Capital at the end of the FP

Chapter 9: Time to Close Out each Account and Prepare Accounts for the next Fiscal Period

Which accounts get closed at the end of a fiscal year? Need to get their balance to $0.00 There are 4 temporary accounts that get closed at the end of each FP: REID Both income statement accounts (1 ) Revenue (2) Expenses (3) the income summary account (4) the sole proprietor’s drawing account

REID

What is the account, ‘Income Summary’? Video:  account account The Temporary account used ONLY to CLOSE OUT revenue, expense, and drawing accounts at the end of an accounting period, so these accounts can have a $0.00 balance as the next FP is about to begin Why? Because every debit needs a credit

Why must those accounts be closed? They must begin the new fiscal year with zero balances  SALES – new FP, start with $0.00 in the account  EXPENSES, – new FP, start with $0.00 in the account  DRAWING - – new FP, start with $0.00 in the account  INCOME SUMMARY - – new FP, start with $0.00 in the account

How to we CLOSE Temporary Accounts? Revenue:  Sales has a credit balance TO CLOSE IT OUT,  Debit Sales  Credit Income Summary Expenses:  Expenses have a debit balances TO CLOSE EACH ONE OUT,  Credit each Expense  Debit Income Summary each time

How do we CLOSE Drawing? Drawing:  Drawing has a Debit balance TO CLOSE IT OUT,  Credit Drawing  Debit Capital

How do we Close Income Summary? Income Summary:  To Close out all the work that Income Summary did If there is a Profit Debit Income Summary for the Profit amount Credit Capital for the same amount If there is a Loss Debit the Loss amount to the Capital account Credit the Loss for the Income Summary account

Where do you Close out Accounts? Journalize the Closing Entries In the General Journal Then Close out the Temporary Accounts in their General Ledgers Then, prepare a Post-Closing Trial Balance with new updated, balances  The temporary accounts do not appear on this document since they now have $0.00 Balances

Review Chapter 8 Mastery Problem, text p 194 Closing out Accounts  Work Together: tear out page 175 in wkbk  Journalize closing entries on pg 177  Close out Ledger accounts on pgs

Permanent Accounts The accounts that do not get closed their balances are carried forward to the next FP  All of The balance sheet accounts are permanent accounts, except for Drawing.