SESSION 2
Recording
Transactions &
Preparing
Financial
Statements
9/12/2019
Flow of Accounting Data
The Accounting Cycle
Session 2
1
Financial Accounting Road Map
 Session 1: What are the financial statements and
what accounts appear in them?
 Session 2 Current: How does information
from business transactions get processed
and compiled into financial statements?
 Session 3: Preparing Financial Statements - When
should a company record revenue and expenses?
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DOING THE ACCOUNTING
i. Identify what constitutes a business transaction and recognize
common balance sheet account titles used in accounting for
business transactions.
ii.
Apply transaction analysis to simple business transactions in
terms of the accounting model:
Assets = Liabilities + Stockholders' Equity
iii. Determine the impact of business transactions on the balance
sheet using two basic tools:
Journal entries
T-accounts
iv. Prepare a Trial Balance and simple classified
Balance Sheet and Income Statement.
3
Understanding the Business
Knowing What
business
activities affect
Financial
Statements
Understanding
Balances in
Financial
Statements
Knowing When
to record business
transactions
in Financial
Statements
Knowing How
specific business
activities affect
Financial
Statements
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Financial Accounting and Reporting Conceptual Framework
Objective of Financial Reporting to External Users: (Ch. 2)
To provide financial information about the reporting entity that is useful to
Existing and potential Investors, Creditors, Suppliers, Customers and other stakeholders
Fundamental Qualitative Characteristics of Useful Information: (Ch. 2)
 Relevance (including materiality) and Faithful Representation
 Comparability and Consistency
 Verifiability
 Timeliness
 Understandability
Elements to Be Measured and Reported:
 Assets, Liabilities, Stockholders’ Equity, Distributions to Owners (Ch. 2)
 Revenues, Expenses, Gains, and Losses (Ch. 3)
Recognition, Measurement, and Disclosure Concepts:
Assumptions: Separate Entity,
Going Concern (Ch. 2),
Accounting Period (Ch. 2-3)
Principles: Measurement Basis – Historical Cost (Ch. 2);
Revenue Recognition and Expense Recognition (Ch. 3)
5
Decision
Outcomes:
Business
Activities
and
Transactions
The Financial Accounting Cycle
Decisions by
Internal
and
External
Stakeholders
Provides Feedback to Manages and
Performance Info to External users
Data Input to
Accounting
Process
1.
Analysis of
Transactions
This is The Accounting Cycle
2. The Financial Accounting Process
Output of
Accounting
Process
3.
Preparation
of Financial
Reports
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Decision
Outcomes:
Business
Activities
and
Transactions
Decisions by
Internal
and
External
Stakeholders
Data Input to
Accounting
Process
|
|
The Financial Accounting Process
1.
Analysis of
Business
Transactions
2.
Recording
Accounting
Transactions
***
Journal
Entries
3.
Classifying
Transactions
***
Posting to
Ledger
Accounts
7.
5.
Updating
Entries
6.
Verifying
Updates
***
***
Preparing a
End of Period
Adjustments
***
Preparing
an Adjusted
Trial Balance
4.
Verifying
Entries
Trial Balance
The Accounting following Business Transactions
Preparation
of
Financial
Statements
8.
Cleaning Up
***
Preparing
Closing
Entries
9.
Verifying
Cleanup
***
Post‐
Closing
Trial
Balance
The Accounting at the End of Period
7
Back to the Flow of Accounting Data
(“Accounting Cycle”)
1.
Analysis of Accounting Transactions
2. Record journal entry
ACCOUNTING ENTRIES
AT TRANSACTION DATE
3. Post to ledger (t-accounts)
4. Prepare trial balance
5. Record adjusting entries
6. Prepare adjusted trial balance
7. Prepare financial statements
ACCOUNTING ENTRIES
AT END OF PERIOD
8. Close the books
9. Prepare post closing trial balance
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Step 1: Analyzing Accounting Transactions
 An Accounting Transaction is any activity that alters the
financial position of the business and can be reliably recorded.
 In other words, a Transaction qualifies as an Accounting Transaction
only if it alters the financial position of the company.
 How does a Business Transaction ALTER a Co.’s Financial Position?
A change in Financial Position occurs whenever a business transaction
results in a change in:
 Assets
 Liabilities and/or
 Equity Account balances
In other words, accounting transactions are transactions that
alters the Accounting Equation: Assets = Liabilities + Equity
9
What is Double Entry Accounting System?
 Double Entry Accounting:
 There are at least two components of Assets, Liabilities
and/or Equity affected by a transaction. Hence there must be
at least two entries
 Why?
Accounting Equation: Assets = Liabilities + Equity
Must always balance
10
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The Accounting Period


Companies measure their performance over
discrete time periods of equal duration
Most common time period for measuring
income or profits are
 Fiscal
year (12 months)
 Fiscal Quarter (3 months - interim period)
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11
How Business Transactions Affect
The Accounting Equation
An Illustration
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Linking Beginning and Ending Balance Sheets
A Graphical Representation
Ending
Financial Position
(Balance Sheet)
Beginning
Financial Position
Balance Sheet
Date: 1/1/2010
(end of previous period)
Business Transactions
During Fiscal 2010

Date: 12/31/2010
(end of current period)
Begin of Period
End of Period
1/1/2010
12/31/2010
TIME
The Accounting Period (1 year)
13
Elements of the Accounting Equation
A=
Assets
Economic
resources with
probable future
benefits owned
or controlled by
the entity.
L
Liabilities
+
Debts or obligations
(claims to a company’s
resources) to be repaid
with assets or services
In future periods
SE
Stockholders’ Equity
The financing provided
by the owners and
business operations.
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Recording Business Accounting Transactions
Balancing the Accounting Equation
Step 1: Ask—What was received and what was given?
 Identify the accounts (by title) affected and make sure at least
two accounts change.
 Classify them by type of account. Was the account an asset
(A), a liability (L), or a stockholders’ equity (SE) account?
 Determine the direction of the effect. Did the account increase
[+] or decrease [−]?
Step 2: Verify—Is the accounting equation in balance?
 Verify the equality of the accounting equation
A =
Assets
L
+
Liabilities
SE
Stockholders’ Equity
15
Linking Beginning and Ending Balance Sheets
A Graphical Representation
Ending
Financial Position
(Balance Sheet)
Beginning
Financial Position
Balance Sheet
Date: 1/1/2010
(end of previous period)
Date: 12/31/2010
Business Transactions
During Fiscal 2010

Begin of Period
End of Period
1/1/2010
12/31/2010
The
Accounting
Period
TIME
16
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Partco - Effect Of Transactions on Accounting Equation
Beginning
Balance Sheet
12/13/2009 = 1/1/2010
Business
Transactions
during 2010
Accounting
Period
17
9
Transactions Cash +
Beg. Balance,
1/1/10
+ 300
Assets
=
=
=
PARTCO SUPPLIES COMPANY
Analysis of Transaction for 2010
(In Thousands of Dollars)
+100
Accounts
Prepaid
+ Merchandize
Receivable
Inventory + Rent + Equipmt
+40
=
+ 860
b.
=
+ 400
c.
=
a.
d1.
=
=
e.
=
d2.
f.
=
=
=
=
=
=
g.
h.
i.
j.
d3.
Balance,
12/31/10
Liabilities +
+
+ 600
Retained
Income
Stockholders' Equity
+300
Accounts
Paid–in
Payable + Capital
+ 800
9/12/2019
Summary of Partco’s Supplies Co.
Financial Performance for 2010
Revenues
Net Cash From Operations
Net Cash From Investing
Net Cash From Financing
Net Increase in Cash
Beginning Cash
Ending Cash
$1,600
1,558
$ 42
Expenses
Net Income
End of Period Simplified
Balance Sheet
Partco Supplies Co.
Cash Flow Statement
As of Dec. 31 2010
Partco Supplies Co.
Income Statement
For the year ended Dec. 31 2010
Net Income
Dividends
Ending Retained Earnings
Cash
396
Other Assets
Total
1,346
$1,742
Liabilities & Equity
Liabilities
Capital Stock
Partco Supplies Co.
Statement of Retained Earnings
For the year ended Dec. 31 2010
Beginning Retained Earnings
12/31/2010
Assets
$196
0
(100)
$96
$300
$396
900
300
Ret. Earnings
Total
542
$1,742
$ 600
42
100
$ 542
19
Linking Beginning and Ending Balance Sheets – PARTCO SUPPLIES
Statement of Cash Flows
Net Cash From Operations
Net Cash From Investing
Net Cash From Financing
Net Increase in Cash
Simple Balance Sheet
1/1/2010
Assets
Cash
300
Other Assets
1,400
Total
$1,700
Liabilities & Equity
Liabilities
800
Capital Stock 300
Ret. Earnings
Total
$1,700
Begin of Period
1/1/2010
600
$196
0
(100)
$96
Beginning Cash
$300
Ending Cash
$396
Simple Balance Sheet
12/31/2010
Income Statement
Revenues
$1,600
Less Cost of Goods Sold
1,200
Gross Profit
400
Less Operating Expenses
Expense Transactions
200During
Outcome Wages
of Business
Depreciation Expense
20
Rent Expense
68
Miscellaneous Expense
70
Total Operating Expenses
358
Net Income
$ 42
Assets
Cash
396
Other Assets
Period 
Total
$1,742
Liabilities & Equity
Liabilities
900
Capital Stock 300
Ret. Earnings
Statement of Retained Earnings
Beginning Retained Earnings
Total
542
$1,742
$ 600
Net Income
42
Dividends
100
Ending Retained Earnings
1,346
$ 542
End of Period
12/31/2010
TIME
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Accounting Transactions - Accounts
Recap:
 An Accounting Transaction is any activity that changes the
financial position of the business, and can be reliably recorded
in an Account.
 Financial effects of transactions are accumulated,
summarized and classified into separate Accounts
21
What is a Financial Statement Account
An Account is an accumulation of the dollar effects of Accounting
Transactions on each component of financial statements. A separate
Account exists for each asset, liability, owners’ equity (common stock,
retained earnings, revenue, expenses) .
* Components of Assets, Liabilities and Equity are called Accounts
Assets
Accounts
Stockholders
Equity
Accounts
Liabilities
Accounts
Common Stock
& Retained
Earnings
Accounts
Expense
Accounts
Revenues
22
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Typical Account Titles
Accounts with
“receivable” in
the title are
always assets;
they represent
amounts owed
by (receivable
from) customers
and others to
the business.
Liability
Accounts
Asset
Accounts
•
•
•
•
Prepaid Expenses
is always an asset; it
represents amounts
paid in advance by
the company to
others for future
benefits, such as
future insurance
coverage, rental of
property, or
advertising.
Title expense accounts by what
was incurred or used followed
by the word “expense,” except for
inventory sold, which is titled
Cost of Goods Sold.
Accounts with “payable” in the title are
always liabilities and represent
amounts owed by the company to be
paid to others in the future.
•
•
•
•
•
Cash
Short-Term
Investments
Accounts
Receivable
Notes
Receivable
Inventory
Supplies
Prepaid
Expenses
Long-Term
Investments
Equipment
•
Buildings
•
Land
•
Intangibles
•
•
•
Accounts
Payable
Accrued
Expenses
Payable
Notes
Payable
•
Taxes
Payable
•
Unearned
Revenue
•
Bonds
Payable
Stockholder’s
Equity Accts.
•
•
•
Expense
Accounts
Revenue
Accounts
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
•
•
•
•
•
Sales
Revenue
Fee
Revenue
Interest
Revenue
Rent
Revenue
Service
Revenue
•
•
•
•
•
•
•
•
Accounts with “unearned” in the
title are always liabilities
representing amounts paid in the
past to the company by others
who expect future goods or
services from the company.
•
Title revenue accounts
by their source followed
by the word “revenue.”
Cost of Goods
Sold
Wages
Expense
Rent Expense
Interest
Expense
Depreciation
Exp.
Advertising
Exp.
Insurance Exp.
Repair
Expense
Income Tax
Exp.
23
Setting up an Account
An account is represented as a simple two column table.
Account Name
Column 1
The Left
Column
Column 2
The Right
Column
Above table is known as a “T”-account
24
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9/12/2019
Setting up a T-Account
The left (first) column is referred to as the debit column
and the right (second) column is referred to as the
credit column
Account Title
Debit
Column
Credit
Column
The Left
Column
The Right
Column
Why just two columns?
A transaction can only affect an account in one of two ways:
It can either
or
the balance in the account.
25
Debits and Credits
Accounting
Equation
Rules of
Debit and
Credit
Assets
Debit
+
=
Credit
-
Current Assets Accts
Liabilities
Debit
-
Credit
+
Current Liability Accts
+ Stockholders’ Equity
Debit
-
Credit
+
Common Stock
Ret. Earnings Accts
Non-cur Assets Accts
Non-cur Liability Accts
Revenue Accts
Dividend Accts
Every accounting transaction
involves both a debit and a credit
entry. WHY?
To keep equation balanced.
Expense Accts
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27 of 40
27
Decision
Outcomes:
Business
Activities
and
Transactions
Decisions by
Internal
and
External
Stakeholders
Data Input to
Accounting
Process
1.
Analysis of
Business
Transactions
2.
Recording
Accounting
Transactions
***
Journal
Entries
3.
Classifying
Transactions
***
Posting to
Ledger
Accounts
The Accounting following Business Transactions
5.
Updating
Entries
6.
Verifying
Updates
***
***
Preparing a
End of Period
Adjustments
***
Preparing
an Adjusted
Trial Balance
4.
Verifying
Entries
Trial Balance
7.
Preparation
of
Financial
Statements
8.
Cleaning Up
***
Preparing
Closing
Entries
9.
Verifying
Cleanup
***
Post‐
Closing
Trial
Balance
The Accounting at the End of Period
28
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9/12/2019
Back to the Flow of Accounting Data
(“Accounting Cycle”)
1. Understanding and Analyzing the transaction
2.Record journal entry
These steps use the rules of
debits and credits to record
3. Post to ledger (t-accounts) every business transaction
4. Prepare trial balance
5. Record adjusting entries
6. Prepare adjusted trial balance
7. Close the books
8. Prepare post closing trial balance
9. Prepare financial statements
29
How Do Companies Keep Track of Account Balances?
Journal Entries
(General Journal)
T-accounts
General Ledger
(Collection of T-Accounts)
30
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Step 2: Record Journal Entry
 Accountants record transactions first in a JOURNAL
a chronological record of an entity’s transactions like
a logbook.
 Journal entries follow the same debit and credit rules
31
The Journal Entry
A complete journal entry includes:
• The date of the transaction
• The title of the account debited (placed flush left)
• The title of the account credited (indented slightly)
• The dollar amount of the debit (left)
• The dollar amount of the credit (right)
• A short narrative of the transaction
Key Items: Account Name; Amount Debited Amount Credited
Company Name
Date
Acct. Name
$Amt. Debited
$Amt. Credited
32
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9/12/2019
Business
Transactions
during 2010
Accounting
Period
33
PARTCO SUPPLIES COMPANY
Analysis of Transaction for 2010
(In Thousands of Dollars)
Assets
=
Liabilities
+
Accounts
Payable
+
=
+ 800
+
=
+1,000
Merchandise Prepaid
Accounts
+
+
Receivable
Inventory + Rent + Equipmt =
Cash
Transactions
Beg. Balance,
12/31/09
+ 300
+
400
a.
+
860
+40
+100
+1,000
b.
c.
+
d2.
–
200
+1,400
–1,200
84
+84
=
=
=
–20
h.
i.
600
– 1,200 (increase cost of goods
sold – An expense
–28
+1,250
+
+1,600 (increase sales revenue)
–40
–
300
=
d3.
e.
g.
Common Retained
+ Income
Stock
=
d1.
f.
Stockholders' Equity
– 40 (increase rent expense)
Income
Statement
–1,250
200
=
–
70
=
–
900
=
j.
–
100
=
Balance,
12/31/10
+
396
+
550
+660
+56
+80
=
– 28 (increase rent expense)
– 20 (increase depreciation
expense)
– 200 (increase wages
expense)
– 70 (increase misc. expense.)
–
900
– 100
+
900
+300
(dividends)
+
542
34
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Step 2: Record Journal Entry
Acquisition of inventory on credit for $1 million on January 1 2010.
Simplified Journal Entry of Transaction 1
1/1/2010
Dr.
Cr.
Debit
Account Name
Inventory
Accounts payable
Credit
$1,000,000
$1,000,000
Or even more simply…
1/1/2010
Inventory
Accounts Payable
$1,000,000 (+ A)
$1,000,000 (+ L)
36
18
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s
c
e
l
l
ane
ouse
xpe
ns
e
sf
or2010we
r
epai
di
nf
ul
li
nc
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hf
or$70,
000.
9/12/2019
How Do Companies Keep Track of Account
Balances?
General Ledger
Collection of all
T-Accounts
Individual
T-accounts
General Journal
Posting
47
Posting Transaction from the Journal to T Accounts
a. Acquisition of inventory on credit for $1 million on January 1 2010.
General Journal
Date
Account Titles and Explanation
(in thousands)
1-1-10 Dr. Inventory
Cr. Accounts Payable
Page G1
Debit Credit
1,000
1,000
Purchase on merchandise Inventory
General Ledger Account
INVENTORY
Debit
Credit
Old. Bal. 860
G1
New. Bal
General Ledger Account
ACCOUNTS PAYABLE
Debit
Credit
Old. Bal
800
G1
New. Bal
48
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Step 2: Record Journal Entry
b. Sales Revenue of $1.6 million was earned during the
year, $1.4 million were on account (credit sales) and
$200,000 were for cash.
Dr. Cash
Dr. Accounts Receivable
Cr. Sales Revenue
$ 200,000
1,400,000
$ 1,600,000
49
T – Accounts Partco Supplies Posting to T-Accounts
Cash
B. Bal. 300,000
b. 200,000
f. 1,250,000
Accounts Receivable
Merchandize Inventory
B. Bal. 860,000
a. 1,000,000
B. Bal. 400,000 f. 1,250,000
b. 1,400,000
d2. 84,000
g. 200,000
h. 70,000
i. 900,000
j. 100,000
E. Bal
c. 1,200,000
E. Bal. 56,000
E. Bal. 660,000
550,0000
Warehouse Equipment
E. Bal 396,000
Prepaid Rent
B. Bal. 40,000 d1. 40,000
d2. 84,000 d3. 28,000
Accum. Depreciation Equipment
B. Bal.
B. Bal. 100,000
e.
E. Bal. 100,000
E. Bal. 20,000
Accounts Payable
i.
900,000
B. Bal. 800,000
a. 1,000,000
E. Bal.
Sales Revenue
B. Bal.
0
b. 1,600,000
E. Bal. 1,600,000
900,000
Rent Expense
Cost of Goods Sold
B. Bal.
0
d1. 40,000
d3. 28,000
B. Bal.
0
c. 1,200,000
E. Bal. 68,000
E. Bal. 1,200,000
E. Bal 200,000
Depreciation Expense
B. Bal.
e.
E. Bal
0
70,000
E. Bal. 70,000
Wages Expense
B. Bal.
0
g. 200,000
Miscellaneous Expense
B. Bal.
h.
0
20,000
Common Stock
Bal. 300,000
E. Bal. 300,000
Dividends
Bal.
0
j. 100,000
E. Bal. 100,000
0
20,000
20,000
Retained Earnings
B. Bal. 600,000
E. Bal. 600,000
50
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Pit Stop: T-Acount Practice Problem
Notes payable has a normal beginning balance of
$40,200 and cash had a balance of $15,000. During the
period new borrowings total $100,000 and payments on
loans total $20,600. Use a T-account to determine the
correct ending balance in notes payable.
Is the Normal Balance of $40,200 Dr. or Cr.?
Cash
Dr.
Notes Payable
Cr.
Dr.
Cr.
51
Pit Stop: Debits and Credits Practice Problem
Beginning Accounts Receivable = 650
Credit Sales = 3,000
Ending Accounts Receivable = 420
Using a T-account, determine cash collections from
customers for accounts receivables.
Accounts Receivable
650
3,000
420
Sales Rev.
Credit 3,000
? Cash Collections
? = 3,230
Cash
$ 3,230
(650+3000) – Cash Collections = 420
(650+3000) – 420 = 3,230 Cash Collections
52
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Back to the Flow of Accounting Data
(“Accounting Cycle”)
1. Understand transaction
2. Record journal entry
3. Post to ledger (t-accounts)
4. Prepare trial balance
5. Record adjusting entries
6. Prepare adjusted trial balance
7. Prepare financial statements
8. Close the books
53
Trial Balance
Since total debits = total credits for every transaction
Sum of all debit balances = Sum of all credit balances.
Not equal only if
1. There was an error in a journal entry and
Change in Assets ≠ Change in (Liabilities + Equity)
2. Error in posting or
3. Error in calculating account balances.
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Step 4: The ‘Normal’ Balance of Accounts
on the Trial Balance
DEBIT
CREDIT
Assets…………………………….
Liabilities………………………….
Common Stock…………………..
Retained Earnings……………….
Treasury Stock …………………...
Dividends………………………….
Revenues.………………………..
Expenses……………………….…
56
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How Do Companies Keep Track of Account
Balances?
Individual
T-accounts
General Journal
General Ledger
Collection of all
T-Accounts
Posting
58
29
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T – Accounts Partco Supplies
Cash
B. Bal. 300,000
b. 200,000
f. 1,250,000
Accounts Receivable
Merchandize Inventory
B. Bal. 860,000
a. 1,000,000
B. Bal. 400,000 f. 1,250,000
b. 1,400,000
d2. 84,000
g. 200,000
h. 70,000
i. 900,000
j. 100,000
E. Bal
c. 1,200,000
E. Bal. 56,000
E. Bal. 660,000
550,0000
Warehouse Equipment
E. Bal 396,000
Prepaid Rent
B. Bal. 40,000 d1. 40,000
d2. 84,000 d3. 28,000
Accum. Depreciation Equipment
B. Bal.
B. Bal. 100,000
e.
E. Bal. 100,000
E. Bal. 20,000
Accounts Payable
i.
900,000
B. Bal. 800,000
a. 1,000,000
E. Bal.
Sales Revenue
B. Bal.
0
b. 1,600,000
E. Bal. 1,600,000
900,000
Rent Expense
Cost of Goods Sold
B. Bal.
0
d1. 40,000
d3. 28,000
B. Bal.
0
c. 1,200,000
E. Bal. 68,000
E. Bal. 1,200,000
E. Bal 200,000
Depreciation Expense
B. Bal.
e.
E. Bal
0
70,000
E. Bal. 70,000
Wages Expense
B. Bal.
0
g. 200,000
Miscellaneous Expense
B. Bal.
h.
0
20,000
Common Stock
Bal. 300,000
E. Bal. 300,000
Dividends
Bal.
0
j. 100,000
E. Bal. 100,000
0
20,000
20,000
Retained Earnings
B. Bal. 600,000
E. Bal. 600,000
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61
Decision
Outcomes:
Business
Activities
and
Transactions
Decisions by
Internal
and
External
Stakeholders
Data Input to
Accounting
Process
1.
Analysis of
Business
Transactions
2.
Recording
Accounting
Transactions
***
Journal
Entries
3.
Classifying
Transactions
***
Posting to
Ledger
Accounts
The Accounting following Business Transactions
5.
Updating
Entries
6.
Verifying
Updates
***
***
Preparing a
End of Period
Adjustments
***
Preparing
an Adjusted
Trial Balance
4.
Verifying
Entries
Trial Balance
7.
Preparation
of
Financial
Statements
8.
Cleaning Up
***
Preparing
Closing
Entries
9.
Verifying
Cleanup
***
Post‐
Closing
Trial
Balance
The Accounting at the End of Period
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Back to the Flow of Accounting Data
(“Accounting Cycle”)
1. Understand transaction
2. Record journal entry
3. Post to ledger (t-accounts)
4. Prepare trial balance
5. Record adjusting entries
6. Prepare adjusted trial balance
7. Prepare
Prepare financial
financial statements
statements
8. Close the books
9. Prepare post closing trial balance
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Step 9: Prepare Financial Statements
 Very easy to create financial statements once trial
balance is prepared.
 Just classify data from trial balance and assign to:
• Income Statement (revenues and expenses)
• Balance Sheet (assets, liabilities, owners’ equity)
• Statement of Retained Earnings (dividends)
 Calculate ending RE on balance sheet using either
(1) balance sheet equation or (2) statement of
retained earnings
65
Partco Supplies
Trial Balance As of December 31, 2010
Debits
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Rent
Equipment
Acc. Depreciation-Equipment
Accounts Payable
Common Stock
Retained Earnings
Dividends
Cost of goods sold
Wages Expense
Rent Expense
Depreciation Expense
Miscellaneous Expense
Sales Revenue
Credits
396,000
550,000
660,000
56,000
100,000
20,000
900,000
300,000
600,000
100000
1200000
200000
68000
20000
70000
_________ 1,600,000
Total $3,420,000 3,420,000
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Step 9: Prepare Financial Statements
Partco Supplies Company
Income Statement
December 31 2010
Sales Revenue
Cost of goods sold
Gross Profit
Operating Expenses:
Wages Expense
Rent Expense
Depreciation Expense
Miscellaneous Expense
Total Operating Expenses
Net Income
$ 1,600
1,200
400
200
68
20
70
358
$ 42
69
Step 9: Prepare Financial Statements
Partco Supplies
Statement of Retained Earnings
For Period Ended December 31, 2010
Retained Earnings Jan. 1, 2010
$ 600
Net Profit
42
Less Dividends
(100)
Retained Earnings Dec. 31, 2010
$ 542
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Partco Supplies
Trial Balance As of December 31, 2010
Credits
Debits
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Rent
Equipment
Acc. Depreciation-Equipment
Accounts Payable
Common Stock
Retained Earnings - Ending
Beginning
Dividends
Cost of goods sold
Wages Expense
Rent Expense
Depreciation Expense
Miscellaneous Expense
Sales Revenue
396,000
550,000
660,000
56,000
100,000
20,000
900,000
300,000
542,000
600,000
100000
1200000
200000
68000
20000
70000
_________ 1,600,000
Total $3,420,000
$1,762,000 3,420,000
1,762,000
71
Partco Supplies
Balance Sheet
As of December 31, 2010
ASSETS
Cash
Accounts Receivable
Merchandise Inventory
Prepaid Rent
Total Current assets
Property, Plant & Equipment
Equipment
Less Acc. Depreciation-Equipment
Net Prop. Plant Equip.
TOTAL ASSETS
LIABILITIES AND EQUITY
Current Liabilities
Accounts Payable
Equity
Common Stock
Retained Earnings
Total Equity
TOTAL LIABILITIES AND EQUITY
$396,000
550,000
660,000
56,000
1,662,000
100,000
(20,000)
80,000
$1,742,000
900,000
300,000
542,000
842,000
$1,742,000
Notice that Balance sheet has no revenues,
expenses or dividends. Why?
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73
Exercise
Qn. What is the amount of Total Assets
•
•
Recall that Assets = Liabilities + Equity
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37