College
Accounting
First Canadian Edition
Price • Haddock • Brock • Hahn • Reed
McGraw-Hill Ryerson
1
COMPLETING THE
ACCOUNTING CYCLE FOR A
MERCHANDISING BUSINESS
2
OBJECTIVE 1
Prepare a classified
income statement
from the worksheet.
3
FINANCIAL STATEMENT
HEADINGS
Headings answer the following questions:
Name of the company
Name of the financial statement
Period of time covered by the
statement or date of the statement
4
FASHION WORLD
Income Statement (Partial)
Year Ended December 31, 20X4
Operating Revenue
Sales
409,650.00
Less Sales Returns and Allowances
13,000.00
Net Sales
396,650.00
Cost of Goods Sold
Delivered Cost of Goods Sold
253,800.00
Less Purchase Returns and Allowances
2,790.99
Cost of Goods Sold
251,009.01
Gross Profit on Sales
145,640.99
Operating Expenses
Selling Expenses
Sales Salaries Expense
56,490.00
Wages Expense
14,700.00
Advertising Expense
7,425.00
Supplies Expense
4,240.00
Cash Short or Over
125.00
Amortization Expense: Store Equipment 2,100.00
Total Selling Expenses
8,508.00
Subtract Sales Returns and Allowances
5
FASHION WORLD
Income Statement (Continued)
Year Ended December 31, 20X4
Gross Profit on Sales
Operating Expenses
Selling Expenses
Sales Salaries Expense
Wages Expense
Advertising Expense
Supplies Expense
Cash Short or Over
Amortization Expense: Store Equipment
Total Selling Expenses
The Total
Operating Expenses
General and Administrative
Expenses
Rent Expense are subtracted from the Gross
Profit on Sales to determine
Insurance Expense
Utilities Expense the Net Income from
Office Salaries Expense
Operations
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Merchandise Inventory Loss
Amortization Expense: Office Equipment
Total General and Administrative Expenses
145,640.99
56,490.00
14,700.00
7,425.00
4,240.00
125.00
2,100.00
85,080.00
13,500.00
1,800.00
2,915.00
16,500.00
6,331.76
2,720.00
630.00
500.00
600.00
6
45,497.75
FASHION WORLD
Income Statement (Partial)
Year Ended December 31, 20X4
Beginning Cost of Goods Sold
253,800.00
Less Purchase Returns and Allowances
2,790.99
Ending Cost of Goods Sold
251,009.01
Gross Profit on Sales
145,640.99
Operating Expenses
Selling Expenses
Sales Salaries Expense
56,490.00
Wages Expense
14,700.00
Advertising Expense
7,425.00
7
Supplies Expense
4,240.00
Cash Short or Over
125.00
Amortization Expense: Store Equipment 2,100.00
Total Selling Expenses
8,508.00
7
Financial Statement forms do not have Debit and Credit Columns. They
have “Totals Columns and “Totaling Columns”. Total columns are the ones
to the right and any calculations (addition and/or subtraction) of figures used
to arrive at totals are completed to the left.
FASHION WORLD
Income Statement (Partial)
Year Ended December 31, 20X4
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Delivered Cost of Goods Sold
253,800.00
Less Purchase Returns and Allowances
2,790.99
Ending Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Selling Expenses
Sales Salaries Expense
56,490.00
Wages Expense
14,700.00
Advertising Expense
7,425.00
Supplies Expense
4,240.00
Cash Short or Over
125.00
Amortization Expense: Store Equipment 2,100.00
Total Selling Expenses
8,508.00
The Cost of Goods Sold is subtracted from net sales
to determine Gross Profit on Sales.
409,650.00
13,000.00
396,650.00
251,009.01
145,640.99
8
FASHION WORLD
Income Statement (Continued)
Year Ended December 31, 20X4
Net Income from Operations
Other Income
Miscellaneous Income
Other Expenses
Interest Expense
Net Other Expense
Net Income
14,898.44
68.00
434.95
366.95
14,696.29
• Other Income Accounts are added.
• Interest Expense is subtracted from Total Other
Income.
• The Net Nonoperating Expense is subtracted from
the Net Income from Operations to determine the
Net Income for Year.
9
OBJECTIVE 2
Prepare a statement
of owner’s equity
from the worksheet.
10
FASHION WORLD
Statement of Owner’s Equity
Year Ended December 31, 20X4
Carolyn Wells, Capital, January 1, 20X4
Net Income for Year
Less Withdrawals for the Year
Decrease in Capital
Carolyn Wells, Capital, December 31, 20X4
71,632.76
14,696.29
30,000.00
15,303.71
56,329.05
The Statement of Owner’s Equity reports the
changes that have occurred in the owner’s
financial interest during the fiscal period. This
statement is prepared before the Balance Sheet
so that the amount of the ending capital is
available for use in the Owner’s Equity section of
the Balance Sheet.
11
FASHION WORLD
Statement of Owner’s Equity
Year Ended December 31, 20X4
Carolyn Wells, Capital, January 1, 20X4
Investments
Net Income for Year
Subtotal
Less Withdrawals for the Year
Carolyn Wells, Capital, December 31, 20X4
71,632.76
2,000.00
14,696.29
16,696.29
88,329.05
30,000.00
58,329.05
This is an example of a Statement of Owner’s
Equity when additional investment has been
made by the owner during the period.
12
FASHION WORLD
Statement of Owner’s Equity
Year Ended December 31, 20X4
Carolyn Wells, Capital, January 1, 20X4
Net Income for Year
Less Withdrawals for the Year
Decrease in Capital
Carolyn Wells, Capital, December 31, 20X4
71,632.76
14,696.29
30,000.00
15303.71
56,329.05
Fashion World had a decrease in capital since the
withdrawals were more than the income for the period.
FASHION WORLD
Statement of Owner’s Equity
Year Ended December 31, 20X4
Carolyn Wells, Capital, January 1, 20X4
Net Income for Year
Less Withdrawals for the Year
Increase in Capital
Carolyn Wells, Capital, December 31, 20X4
71,632.76
14,696.29
10,000.00
This shows Fashion World with an increase in capital.
4,696.29
76,329.05
13
FASHION WORLD
Statement of Owner’s Equity
Year Ended December 31, 20X4
Carolyn Wells, Capital, January 1, 20X4
Net Loss for Year
Less Withdrawals for the Year
Decrease in Capital
Carolyn Wells, Capital, December 31, 20X4
71,632.76
16,796.00
24,000.00
40,796.00
30,836.76
This Statement of Owner’s Equity shows
Fashion World with a Net Loss for Year.
14
OBJECTIVE 3
Prepare a classified
balance sheet
from the worksheet.
15
FASHION WORLD
Balance Sheet (partial)
December 31, 20X4
Assets
Current Assets
Cash
Petty Cash
Accounts Receivable
Less Allow. for Doubtful Accounts
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
Total Current Assets
Capital Assets
Plant and Equipment
Store Equipment
Less Accumulated Amortization
Office Equipment
Less Accumulated Amortization
Total Plant and Equipment
Total Assets
CURRENT
ASSETS
7,200.00
100.00
23,568.00
730.00
1,660.00
3,000.00
12,000.00
2,100.00
3,500.00
600.00
22,838.00
31,500.00
4,660.00
66,298.00
9,900.00
2,900.00
12,800.00
79,098.00
16
FASHION WORLD
Balance Sheet (partial)
December 31, 20X4
Assets
Current Assets
Cash
Petty Cash
Accounts Receivable
Less Allow. for Doubtful Accounts
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
Total Current Assets
Capital Assets
Plant and Equipment
Store Equipment
Less Accumulated Amortization
Office Equipment
Less Accumulated Amortization
Total Plant and Equipment
Total Assets
PLANT
AND
EQUIPMENT
7,200.00
100.00
23,568.00
730.00
1,660.00
3,000.00
12,000.00
2,100.00
3,500.00
600.00
22,838.00
31,500.00
4,660.00
66,298.00
9,900.00
2,900.00
12,800.00
79,098.00
17
FASHION WORLD
Balance Sheet (partial)
December 31, 20X4
Assets
Current Assets
Cash
Petty Cash
Accounts Receivable
23,568.00
Less Allow. for Doubtful Accounts
730.00
Merchandise Inventory
Prepaid Expenses
The Total Plant and Equipment
Supplies
1,660.00
is added to the Total Current
Prepaid Insurance
3,000.00
Total Current Assets
Assets. The sum is the Total
Capital Assets
Assets.
Plant and Equipment
Store Equipment
12,000.00
Less Accumulated Amortization
2,100.00
9,900.00
Office Equipment
3,500.00
Less Accumulated Amortization
600.00
2,900.00
Total Plant and Equipment
Total Assets
7,200.00
100.00
22,838.00
31,500.00
4,660.00
66,298.00
12,800.00
79,098.00
18
FASHION WORLD
Balance Sheet (Continued)
December 31, 20X4
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable: Trade
Notes Payable: Bank
Accounts Payable
Interest Payable
CPP Contributions Payable
EI Premiums Payable
Wages Payable
GST Payable
Less Prepaid GST
Provincial Sales Tax Payable
Total Current Liabilities
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
CURRENT
LIABILITIES
2,390.00
1,460.00
3,000.00
9,000.00
3,138.00
434.95
610.00
225.00
2,700.00
930.00
2,731.00
22,768.95
56,329.05
79,098.00
19
FASHION WORLD
Balance Sheet (Continued)
December 31, 20X4
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable: Trade
Notes Payable: Bank
Accounts Payable
Interest Payable
CPP Contributions Payable
EI Premiums Payable
Wages Payable
GST Payable
Less Prepaid GST
Provincial Sales Tax Payable
Total Current Liabilities
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
OWNER’S
EQUITY
2,390.00
1,460.00
3,000.00
9,000.00
3,138.00
434.95
610.00
225.00
2,700.00
930.00
2,731.00
22,768.95
56,329.05
79,098.00
20
FASHION WORLD
Balance Sheet (Continued)
December 31, 20X4
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable: Trade
Notes Payable: Bank
Accounts Payable
Interest Payable
CPP Contributions Payable
EI Premiums Payable
Wages Payable
GST Payable
Less Prepaid GST
Provincial Sales Tax Payable
Total Current Liabilities
•
3,000.00
9,000.00
3,138.00
434.95
Total Current Liabilities
and
610.00
Carolyn Wells, Capital
are
225.00
added. The sum is the
Total
2,700.00
Liability2,390.00
and Owner’s
930.00
Equity. 1,460.00
2,731.00
• This total should be equal to
Total Assets.
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
22,768.95
56,329.05
79,098.00
21
OBJECTIVE 4
Journalize and post
the adjusting entries.
22
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
Page
DEBIT
25
CREDIT
Adjusting Entries
20X4
Adjustment a
Dec. 31 Merchandise Inventory
Merchandise Inventory
To reduce the inventory carrying to the
actual physical inventory count
5050
1021
500.00
5056
1012
630.00
500.00
Adjustment b
31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
To record estimated loss from uncollectible
accounts based on 0.3% of net credit sales
of $210,000
From the worksheet, journalize the
adjusting entries in the general journal.
Above are Adjustments a & b.
630.00
23
An End-of-Period
Worksheet
ACCOUNT NAME
Cash
Petty Cash
Accounts Receivable
Allowance for Doubtful Accounts
Merchandise Inventory
Prepaid Insurance
Supplies
Store Equipment
Accumulated Amortization: Store Equipment
Office Equipment
Accumulated Amortization: Office Equipment
Notes Payable: Trade
Notes Payable: Bank
Accounts Payable
Interest Payable
CPP Contributions Payable
EI Premiums Payable
Wages Payable
Prepaid GST
GST Payable
Provincial Sales Tax Payable
Carolyn Wells, Capital
Carolyn Wells, Drawing
Sales
Sales Returns and Allowances
Miscellaneous Income
Cost of Goods Sold
Merchandise Inventory Loss
Sales Salaries Expense
Wages Expense
Advertising Expense
Supplies Expense
Cash Short or Over
FASHION WORLD
Worksheet (Partial)
For the Year Ended December 31, 20X4
The
adjusting
TRIAL
BALANCE entries are
DEBITtaken from the
CREDIT
7,200.00adjustment columns of
100.00
23,500.00the worksheet.
(i)
100.00
33,009.01Lowercase letters are
4,800.00
5,900.00used to identify the
12,000.00
Debit & Credit part of
3,500.00
each entry. For
example, “a”3,000.00
debit and
9,000.00
3,138.00
credit.
359.01
ADJUSTMENTS
DEBIT
CREDIT
68.00
(b)
630.00
(a)
500.00
(h) 1,800.00
(g) 4,240.00
(c) 2,100.00
(d)
600.00
(f)
75.94
610.00
225.00
(e) 2,700.00
1,460.00
2,390.00
2,731.00
71,632.76
30,000.00
409,650.00
13,000.00
(i)
68.00
250,000.00
(a)
56,490.00
12,000.00
7,425.00
500.00
(e) 2,700.00
(g) 4,240.00
125.00
24
GENERAL JOURNAL
DATE
DESCRIPTION
Page
POST.
REF.
DEBIT
5013
2,700.00
25
CREDIT
Adjusting Entries
20X4
(Adjustment f)
Dec. 31 Wages Expense
Salaries Payable
To record accrued salaries of part-time
salesclerks for Dec. 28-31
1
ACCOUNT
DATE
2,700.00
5
2 3
Wages Expense
EXPLANATION
20X4
Dec. 31 Balance
31 Adjusting
ACCOUNT NO.
POST.
REF.

J25
DEBIT
2,700.00
CREDIT
4
5013
BALANCE
DEBIT
CREDIT
12,000.00
14,700.00
Steps in Posting from Journal to Ledger
25
After all adjusting entries have been
posted, the balances of the general
ledger accounts should match the
amounts shown in the Adjusted Trial
Balance section of the worksheet.
26
OBJECTIVE 5
Journalize and post
the closing entries.
27
CLOSING ENTRIES
• The figures that are used to close the
temporary accounts are found in the
Income Statement section of the
worksheet.
• The temporary accounts are: the
revenue, cost, and expense accounts.
28
FASHION WORLD
Worksheet (Partial)
Year Ended December 31, 20X4
ACCOUNT NAME
Sales
Miscellaneous Income
ADJUSTED TRIAL BALANCE
DEBIT
CREDIT
409,650.00
68.00
INCOME STATEMENT
DEBIT
CREDIT
409,650.00
68.00
BALANCE SHEET
DEBIT
CREDIT
CLOSING REVENUE ACCOUNTS
In order to close these accounts,
make an entry opposite its balance
(example, credits become debits).
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
Sales
Miscellaneous Income
Income Summary
POST.
REF.
4001
4093
Page
DEBIT
28
CREDIT
409,650.00
68.00
409,582.99
29
CLOSING THE DRAWING ACCOUNT
TO OWNER’S EQUITY
Reduce Capital With A Debit Entry
Close Drawing With A Credit Entry
30
After the four closing
entries have been posted,
only the Balance Sheet
accounts have balances.
All other accounts
have been closed.
31
OBJECTIVE 6
Prepare a postclosing
trial balance.
32
OBJECTIVE 7
List the steps in the
Accounting cycle.
33
ACCOUNTS RECEIVABLE AREA
Sales
Journal
GENERAL LEDGER
AND FINANCIAL
REPORTING AREA
Accounts
Receivable
Ledger
Cash
Receipts
Journal
Source
documents
General
Ledger
General
Journal
Worksheet
Financial
Statements
ACCOUNTS PAYABLE AREA
Purchases
Journal
Accounts
Payable
Ledger
Cash
Payments
Journal
34