CHAPTER 6
FINANCIAL
STATEMENTS AND THE
CLOSING PROCESS
Material CopyrightProtected: Janice
Stoudemire and
Barbara Wagers
Chapter 6
Financial Statements and the Closing Process
Learning Objectives
1.
2.
3.
4.
Financial Statements
Closing Entries
Post-Closing Trial Balance
Accounting Cycle
YOUR CHAPTER GUIDES
WHO
SAID IT?
I can't bring
myself to
regret the
decisions that
brought me to
Forks. They
also brought
me to Edward.
Edward
WHO
SAID
IT?
Your number was up
the first time I met
you.
WHO SAID
IT?
It sounded as
if you were
having Bella for
lunch, and we
came to see if
you would
share.
OBJECTIVE 1:
PREPARE FINANCIAL
STATEMENTS WITH
THE AID OF A WORK
SHEET
GOOD NEWS!
 Same
as chapter 2, just a
little fine-tuning!
INCOME STATEMENT
All
numbers from Income
Statement column of
worksheet (or ATB)
Order of expenses
NetSolutions
Income Statement
For Two Months Ended December 31, 2008
Revenues:
Professional Fees
Service Fees
Total revenues
Expenses:
Wages expense
Supplies expense
Rent expense
Utilities expense
Miscellaneous expense
Insurance expense
Depreciation expense
Total expenses
Net income
$16,840
120
$16,960
$ 4,525
2,040
1,600
985
455
100
50
9,755
$ 7,205
STATEMENT OF OE
Bill
Beginning Capital
Is
Investments
The
Total Investments
Nicest
Net Income
Waiter
Withdrawals
In
Increase (or Decrease) in Capital
England
Ending Capital
STATEMENT OF OE
Drawing
comes from Balance
Sheet column of worksheet
(or ATB)
Capital account balance =
beginning balance +
investments
NetSolutions
Statement of Owner’s Equity
For Two Months Ended December 31, 2008
Chris Clark, capital, Nov, 1, 2008
$
0
Investment by owner
15,000
Total Investments
$15,000
Net Income
$7,205
Less withdrawals
4,000
Increase in owner’s equity
3,205
Chris Clark, capital, December 31, 2008 $18,205
BALANCE SHEET
 All
numbers except Capital come
from Balance Sheet column of
worksheet (or ATB)
– Where does Capital come from?
 Now CLASSIFIED Balance Sheet
– Two groups for assets
– Two groups for liabilities
CLASSIFIED BALANCE
SHEET
Extension of Balance
Sheet format from
Chapter 1
“Classify” accounts
into categories
Why? Make Balance
Sheet more useful
CURRENT ASSETS
•Assets we expect
to collect in cash,
sell, or consume
within one year
•Listed in order of
decreasing
liquidity (CRISP)
\ 6
4
ORDER OF CURRENT ASSETS
Cash
Receivables
Inventories
Supplies
Prepaid Items
PROPERTY, PLANT, AND
EQUIPMENT
• Long-term assets used
in the operation of
the business
• Fixed assets or plant
assets
• Shown “Less
Accumulated Deprec.”
PROPERTY, PLANT, AND
EQUIPMENT
Listed in order of “permanence”
1.Land
2.Building
3.Equipment, Furniture,
Machinery, etc.
NetSolutions
Balance Sheet
December 31, 2008
ASSETS
Current assets:
Cash
$ 2,065
Accounts receivable
2,720
Supplies
760
Prepaid insurance
2,300
Total current assets
$ 7,845
Property, plant, and
equipment:
Land
$10,000
Office equipment
1,800
Less accum. depr.
(50)
1,750
Total property, plant,
and equipment
11,750
Total assets
$19,595
CLASSIFICATION OF
LIABILITIES
Divided into two
categories:
1.Current
2.Long-term
I can’t believe
I owe
this much!
CURRENT LIABILITIES
Obligations to be
paid or performed
within one year
LONG-TERM LIABILITIES
Debts that are due
in more than one
year
NetSolutions
Balance Sheet
December 31, 2008
LIABILITIES
Current Liabilities:
Accounts Payable
$ 900
Wages Payable
250
Total Current Liabilities
Long-Term Liabilities:
Mortgage Payable
Total liabilities
240
$ 1,390
OWNER’S EQUITY
Chris Clark, capital
Total liabilities and owner’s equity
18,205
$19,595
$1,150
HOMEWORK:
EXERCISES 6-1A, 6-2A, 6-3A
Prepare Financial Statements
WHO
SAID
IT?
Good luck
tended to
avoid me.
Bella
WHO SAID IT?
Bella!
We're
making
Italiano for
you
Esme
WHO SAID IT?
It’s healthy to ditch class
now and then.
Edward
OBJECTIVE 2:
JOURNALIZE AND
POST CLOSING
ENTRIES
WHEN TO PREPARE CLOSING
ENTRIES?
At the end of an
accounting period
WHY PREPARE CLOSING
ENTRIES?
To get ready for
the next period by
clearing revenue,
expense, and
drawing accounts
of their balances
Why?
WHY PREPARE CLOSING
ENTRIES?
 To summarize a
period’s revenues
and expenses and
transfer net
income/loss to
Capital
TWO TYPES OF ACCOUNTS
• Revenues, expenses,
and drawing are
temporary (nominal)
accounts
• Assets, liabilities,
and capital are
permanent (real)
accounts
INCOME SUMMARY
• New account used
to summarize net
income or net loss.
• Temporary account
that must be
closed at year-end
• Never appears on
financial statement
CLOSING ENTRIES
Revenues
Expenses
Income Summary
Drawing
CLOSING ENTRIES
Hope this
helps!
Rudolph
Enjoys
Icy
Days
FOUR CLOSING ENTRIES
Close Revenues:
Revenue ()
XXX
Revenue ()
XXX
Income Summary
XXX
Close Expenses:
Income Summary
XXX
Expense ()
XXX
Expense ()
XXX
FOUR CLOSING ENTRIES
Close Income Summary:
• How do I figure the amount to
make this entry for?
• Draw a T-account for Income
Summary and post the first
two entries
• Make an entry to get Income
Summary to a zero balance!
FOUR CLOSING ENTRIES
Close Income Summary :
If Net Income
Income Summary () XXX
Owner, Capital ()
XXX
If Net Loss
Owner, Capital () XXX
Income Summary () XXX
FOUR CLOSING ENTRIES
Close Drawing:
Owner, Capital () XXX
Owner, Drawing () XXX
But don’t close out Capital!
WHO SAID IT?
Let's not play
with our food
Laurent
WHO SAID IT?
It’s
better if
we’re not
friends.
Trust
me.
CLOSING ENTRIES EXAMPLE
Accounts Payable
8
Accounts Receivable
9
Accum. Depreciation 13
Cash
31
Depreciation Exp.
5
Edward Cullen, Capital 33
Edward Cullen, Drawing 7
Equipment
Notes Payable
Notes Receivable
Professional Fees
Rent Expense
Salaries Expense
Service Fees
40
20
12
52
14
10
2
PUT A STAR BESIDE THOSE THAT WE WILL
CLOSE OUT!
CLOSING ENTRIES EXAMPLE
Accounts Payable
8
Accounts Receivable
9
Accum. Depreciation 13
Cash
31
Depreciation Expense
5
Edward Cullen, Capital 33
Edward Cullen, Drawing 7
Equipment
Notes Payable
Notes Receivable
Professional Fees
Rent Expense
Salaries Expense
Service Fees
40
20
12
52
14
10
2
CLOSING ENTRIES EXAMPLE
Close Revenues:
Professional Fees ()
Service Fees ()
Income Summary
52
2
54
CLOSING ENTRIES EXAMPLE
Close Expenses:
Income
29
Skip a Summary
line!
Depreciation Expense () 5
Rent Expense ()
14
Salaries Expense ()
10
CLOSING ENTRIES EXAMPLE
Close Income Summary:
Income Summary
54
29
25
Income Summary ()
25
Edward Cullen, Capital () 25
CLOSING ENTRIES EXAMPLE
Close Drawing:
Skip
a line!
Edward
Cullen, Capital () 7
Edward Cullen, Drawing ()
7
CLOSING ENTRIES EXAMPLE
Prepare Statement of Owner’s Equity 2017
(beginning capital =$30, additional inv. =$3)
E. Cullen, Capital, Jan. 1, 2017
$30
Investments during Year
3
Total Investment
Net Income for Year
$33
$25
Less Withdrawals for Year
Increase in capital
E. Cullen, Capital, Dec. 31, 2017
7
18
$51
CLOSING ENTRIES EXAMPLE
What is the new ending balance
in the Capital account?
Edward Cullen, Capital
7
33
25
51
Same as
balance on
Statement
of OE!!
OBJECTIVE 3:
PREPARE A POSTCLOSING TRIAL
BALANCE
ACCOUNTS AFTER CLOSING
• Revenue, expense, drawing, and
Income Summary accounts have
zero balances
• Asset, liability, and capital
accounts have balances and are
ready for the next period
ACCOUNTS AFTER CLOSING
 Capital account balance now
equals that on Statement of OE
 Has been increased by net
income and decreased by
drawing (and net loss)
 Balance Sheet accounts show
correct balances, which carry
forward to the next period
POST-CLOSING TRIAL BALANCE
How? List all GL
Not
accounts and
their balances
Only Balance Sheet
accounts (assets,
liabilities, capital)
have balances!
ANOTHER one!
POST-CLOSING TRIAL BALANCE
Why prepare one?
Why am I
Be sure adjusting and doing this???
closing entries were
correctly
journalized and
posted!
Be sure debits still
equal credits!
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Assets
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
10,000
1,800
19,645
50
900
250
240
18,205
19,645
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Liabilities
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
10,000
1,800
19,645
50
900
250
240
18,205
19,645
NetSolutions
Post-Closing Trial Balance
December 31, 2002
Owner’s
Equity
11
12
14
15
17
18
19
21
22
23
31
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Land
Office Equipment
Accum. Depreciation
Accounts Payable
Wages Payable
Unearned Rent
Chris Clark, Capital
2,065
2,720
760
2,300
10,000
1,800
19,645
50
900
250
240
18,205
19,645
IN-CLASS ASSIGNMENT:
EXERCISE 6-4A
skip the t-accounts if pencil and paper
Prepare closing entries
HOMEWORK:
PROBLEM 6-9A
Prepare closing entries, postclosing Trial Balance
OBJECTIVE 4: LIST
AND DESCRIBE THE
STEPS IN THE
ACCOUNTING CYCLE
ACCOUNTING CYCLE – DURING
THE PERIOD
• Analyze transactions
• Record them in journal
• Post entries to the
ledger
ACCOUNTING CYCLE – END OF
THE PERIOD
• Prepare Unadjusted
Trial Balance
• Analyze
Adjustments needed
• Prepare Worksheet
• Journalize/post
Adjusting Entries
ACCOUNTING CYCLE – END OF
THE PERIOD
• Prepare Financial
Statements
• Journalize/post
Closing Entries
• Prepare PostClosing Trial
Balance
HOMEWORK:
MASTERY PROBLEM
WHO
SAID IT?
Edward
Do I
dazzle
you?
WHO SAID IT?
Ah...
you
brought
a snack.
Chapter 6
Financial Statements and the Closing Process
Learning Objectives
1.
2.
3.
4.
Financial Statements
Closing Entries
Post-Closing Trial Balance
Accounting Cycle