Chapter
13
Skyline College
13-1
Classified Financial Statements
At the end of the period, Simpson Antiques
prepares three financial statements:

Income statement
 Statement of owner's equity
 Balance sheet
13-2
The the balance sheet is arranged in a classified
format.
This makes the financial statement more useful
to the readers.
A classified Balance Sheet is formatted
where accounts are divided into groups of
similar accounts and a subtotal is given
for each group.
13-3
The Multiple-Step
Income Statement
A multiple-step income statement is
a type of income statement on which
several subtotals are computed
before the net income is calculated.
13-4
The Single-Step
Income Statement
A single-step income statement is a
format in which only one computation
is needed to determine the net income.
(Total Revenue – Total Expenses = Net Income)
13-5
Single-step Income Statement
The format lists all revenues in one section and
all expenses in another section.
JT Consulting Services
Income Statement
Month Ended December 31, 2007
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depreciation Expense - Equipment
Total Expenses
Net Income for the Month
13-6
28,000
5,000
600
500
3,000
583
9,683
18,317
Operating Revenue
The first section of the multiple-step income
statement contains the revenue from operations.
This is the revenue earned from normal business
activities.
Other income is presented separately near the
bottom of the statement.
13-7
Operating Revenue
The operating revenue for Simpson Antiques is
net sales of merchandise.
Sales
<Sales Returns and Allowances>
<Sales Discounts>
Net Sales
This is an internal calculation which does not
appear on the income statement
13-8
Operating Revenue
Income Statement
Year Ended December 31, 2007
Operating Revenue
Net Sales
Cost of Goods Sold
549,150.00
Net sales for Simpson Antiques
13-9
Cost of Goods Sold
The Cost of Goods Sold section contains information
about the cost of the merchandise that was sold during
the period.
Three elements are needed to compute the cost of
goods sold:

Beginning inventory
 Net delivered cost of purchases
 Ending inventory
13-10
Net Delivered Cost of Purchases
Purchases
+ Freight In
<Purchases Returns and Allowances>
<Purchases Discounts>
Net Delivered Cost of Purchases
13-11
Schedule of Cost of Goods Sold
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
<Ending Merchandise Inventory>
Cost of Goods Sold
This is usually footnoted in the
financial statements rather than
appearing on the income statement
13-12
Cost of Goods Sold
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Operating Revenue
Net Sales
Cost of Goods Sold
549,150.00
330,120.00
Cost of goods sold
13-13
Gross Profit on Sales
Gross profit is the difference between net
sales and the cost of goods sold.

For Simpson Antiques net sales is the revenue earned from selling
clothes.

Cost of goods sold is what Simpson Antiques paid for the clothes that
were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and provide a
profit.
13-14
Gross profit on sales for Simpson Antiques
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Net Nonoperating Expense
Net Income for Year
549,150.00
330,120.00
219,030.00
100.00
48,302.25
13-15
Operating Expenses
Operating expenses are expenses that arise
from normal business activities.
Simpson Antiques separates operating
expenses into two categories:

Selling Expenses
 General and Administrative Expenses
13-16
Operating Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
94,615.00
27,600.00
Salaries for salespersons and
advertising
26,500.00
2,450.00
are examples of selling expenses.
13-17
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167836.2
Operating Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
Rent, utilities, and salaries for office employees
are examples of general and administrative
79,690.00
7,425.00
expenses.
13-18
125.00
4,975.00
2,400.00
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167836.2
Net Income or Net Loss from
Operations
The format for determining net income (or net loss)
from operations is:
Gross Profit on Sales
(Total Operating Expenses)
Net Income (or Net Loss) from Operations
13-19
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
Net Income from Operations
Net Income for Year
549,150.00
330,120.00
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
Net income from operations 94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167,836.20
51,193.80
48,302.25
13-20
Other Income and Other Expenses

Income that is earned from sources other than normal business
activities appears in the Other Income section.

For Simpson Antiques other income includes interest on notes
receivable and one miscellaneous income item.

Expenses that are not directly connected with business operations
appear in the Other Expenses section.
13-21
Other Income and Other Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
51,143.80
166.00
582.00
748.00
770.00
22.00
13-22
Net Income or Net Loss



Net income is all the revenue minus all the
expenses.
If there is a net loss, it appears in parentheses.
Net income or net loss is used to prepare the
statement of owner's equity.
13-23
Net income for Simpson Antiques
Simpson Antiques
Income Statement
Year Ended December 31, 2007
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Total Selling Expenses
Total Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
Net Income for Year
549,150.00
330,120.00
219,030.00
94,615.00
167,836.20
51,193.80
166.00
582.00
748.00
770.00
22.00
51,171.80
13-24
The Statement of Owner's Equity


The statement of owner's equity reports the changes that occurred
in the owner's financial interest during the period.
The ending capital balance for Patricia Simpson, $84,792.80, is
used to prepare the balance sheet.
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2007
Patricia Simpson, Capital, January 1, 2007
61,221.00
Net Income for Year
51,171.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
23,571.80
Patricia Simpson, Capital, December 31, 2007
84,792.80
13-25
Current Assets
Current assets are assets consisting
of cash, items that normally will be
converted into cash within one year,
or items that will be used up within
one year.
13-26
Current Assets
Current assets are listed in the
order of liquidity.
Liquidity is the ease with which an
item can be converted into cash.
13-27
Current Assets
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Current Assets
Cash
Petty Cash Fund
Notes Receivable
Accounts Receivable
Less Allow. for Doubtful Accounts
Interest Receivable
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
Prepaid Interest
Total Current Assets
13,136.00
100.00
1,200.00
32,000.00
1,050.00
1,325.00
4,900.00
75.00
Current assets for Simpson Antiques
13-28
30,950.00
30.00
47,000.00
6,300.00
98,716.00
Property, Plant & Equipment
Property, Plant & Equipment (PP&E)
is property that will be used in the
business for longer than one year.
The balance sheet shows three amounts for each
category of plant and equipment :
Asset
(Accumulated depreciation)
Book value
13-29
Plant and Equipment
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Prepaid Interest
Total Current Assets
Property, Plant and Equipment
Store Equipment
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Total Property, Plant and Equipment
Total Assets
Total Liability and Owner’s Equity
75.00
30,000.00
2,400.00
5,000.00
700.00
6,300.00
98,716.00
27,600.00
4,300.00
31,900.00
130,616.00
130,616.00
Total property, plant and equipment
13-30
Current Liabilities
Current liabilities are debts that must be
paid within one year using current assets.
 Current liabilities are usually listed in order of
priority of payment.
 Management must ensure that funds are available
to pay current liabilities when they become due in
order to maintain the firm's good credit reputation.
13-31
Current Liabilities
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Prepaid Interest
Total Current Assets
Total Plant and Equipment
Total Assets
75.00
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
Notes Payable-Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Fed. Unemployment Tax Pay.
State Unemployment Tax Pay.
Salaries Payable
Sales Tax Payable
Total Current Liabilities
6,300.00
98,716.00
31,900.00
130,616.00
Total current liabilities
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
6,984.00
45,823.20
13-32
Long-Term Liabilities
Long-term liabilities are any debts
that are not considered current.
 Although repayment of long-term liabilities might
not be due for several years, management must
make sure that periodic interest is paid promptly.
 Long-term liabilities include mortgages, notes
payable, and loans payable.
13-33
Owner's Equity
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2007
Patricia Simpson, Capital, January 1, 2007
61,221.00
Net Income for Year
51,171.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
23,571.80
Patricia Simpson, Capital, December 31, 2007
84,792.80
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Owner’s Equity
Patricia Simpson, Capital
Total Liabilities and Owner's Equity
84,792.80
130,616.00
The ending balance from the statement of owner’s equity is
transferred to the Owner's Equity section of the balance sheet.
13-34
Adjusting Entries
 All
adjustments are shown on the worksheet.
 After
the financial statements have been prepared, the
adjustments are made a permanent part of the
accounting records.
 They
are recorded in the general journal as adjusting
journal entries and are posted to the general ledger.
13-35
Journalizing the Adjusting Entries

Each adjusting entry shows how the adjustment was calculated.

Supervisors and auditors need to understand, without additional
explanation, why the adjustment was made.
13-36
Adjusting Entries
Type of
Adjustment
Worksheet
Reference
Purpose
Inventory
(a – b)
Removes beginning inventory and adds ending
inventory to the accounting records.
Expense
(c – e)
Matches expense to revenue for the period; the credit
is to a contra asset account.
Accrued Expense
(f – i)
Matches expense to revenue for the period; the credit
is to a liability account.
Prepaid Expense
(j – l)
Matches expense to revenue for the period; the credit
is to an asset account.
(m – n)
Recognizes income earned in the period.
The debit is to an asset account (Interest
Receivable) or a liability account (Sales Tax
Payable).
Accrued Income
13-37
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
PAGE
DEBIT
25
CREDIT
Adjusting Entries
2007
Dec. 31
(Adjustment a)
Income Summary
Merchandise Inventory
To transfer beginning inventory
to Income Summary
52,000.00
52,000.00
(Adjustment b)
31
Merchandise Inventory
47,000.00
Income Summary
47,000.00
To record ending inventory
13-38
GENERAL JOURNAL
DATE
DESCRIPTION
2007
Adjusting Entries
Dec. 31
POST.
REF.
(Adjustment c)
Uncollectible Accounts Expense
Allowance for Doubtful Accounts
PAGE
DEBIT
25
CREDIT
800.00
800.00
To record estimated loss from
uncollectible amounts based on 0.8%
of net credit sales of $100,000
(Adjustment d)
31
Depreciation Expense – Store Equip.
2,400.00
Accum. Depreciation - Store Equip.
2,400.00
To record depreciation for 2007 as
shown by schedule on file.
(Adjustment e)
31
Depreciation Expense – Office Equip.
Accum. Depreciation - Office Equip.
To record depreciation for 2007 as
shown by schedule on file.
13-39
700.00
700.00
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
PAGE
DEBIT
25
CREDIT
Adjusting Entries
2007
Dec. 31
(Adjustment f)
Salaries Expense - Sales
Salaries Payable
1,200.00
1,200.00
To record accrued salaries of parttime sales clerks for Dec. 28-31
(Adjustment g)
31
Payroll Taxes Expense
Social Security Tax Payable
Medicare Tax Payable
91.80
74.40
17.40
To record accrued payroll tax on
accrued salaries for Dec. 28-31
13-40
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
PAGE
DEBIT
25
CREDIT
Adjusting Entries
2007
(Adjustment h)
Dec. 31 Payroll Taxes Expense
Fed. Unemployment Tax Payable
State Unemployment Tax Payable
74.40
9.60
64.80
To record accrued payroll tax on
accrued salaries for Dec. 28-31
(Adjustment i)
31
Interest Expense
Interest Payable
20.00
20.00
To record interest on a 2-month,
$2,000, 12% note payable dated
Dec. 1, 2007
13-41
GENERAL JOURNAL
DATE
DESCRIPTION
2007
Adjusting Entries
Dec. 31
POST.
REF.
(Adjustment j)
Supplies Expense
Supplies
PAGE
DEBIT
26
CREDIT
4,975.00
4,975.00
To record supplies used
(Adjustment k)
31
Insurance Expense
Prepaid Insurance
2,450.00
2,450.00
To record expired insurance on 3-year
policy purchased for $7,350 on
Jan. 2, 2007
31
(Adjustment l)
Interest Expense
Prepaid Interest
150.00
150.00
To record transfer of 2/3 of prepaid
interest of $225 for a 3-month, 10%
note payable issued to bank on Nov.
1, 2007
13-42
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
PAGE
DEBIT
27
CREDIT
Adjusting Entries
2007
Dec. 31
(Adjustment m)
Interest Receivable
Interest Income
30.00
30.00
To record accrued interest earned on
a 4-month, 15% note receivable dated
Nov. 1, 2007
($1,200 x 0.15 x 2/12)
(Adjustment n)
31
Sales Tax Payable
216.00
Miscellaneous Income
216.00
To record accrued commission
earned on sales tax owed for fourth
quarter of 2007:
Sales Tax Payable
$7,200
Commission rate
x 0.03
Commission due
$ 216
13-43
Posting the Adjusting Entries

After the adjustments have been recorded in the general journal,
they are promptly posted to the general ledger.

The word Adjusting is entered in the Description column of each
general ledger account.
13-44
Journalizing and Posting the
Closing Entries

At the end of the period, the temporary
accounts are closed.

The temporary accounts are:

Revenue accounts
 Cost of goods sold accounts
 Expense accounts
 Drawing account
13-45
There are four steps in the closing process.
1.
Close revenue accounts and cost of goods sold accounts with
credit balances to Income Summary.
2.
Close expense accounts and cost of goods sold accounts with
debit balances to Income Summary.
3.
Close Income Summary, which now reflects the net income or
loss for the period, to owner's capital.
4.
Close the drawing account to owner's capital.
13-46
Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with
credit balances.
GENERAL JOURNAL
DATE
2007
Dec. 31
DESCRIPTION
POST.
REF.
DEBIT
PAGE
28
CREDIT
Closing Entries
Sales
Interest Income
Miscellaneous Income
Purchases Returns and Allowances
Purchases Discounts
Income Summary
561,650.00
166.00
582.00
3,050.00
3,130.00
568,578.00
Debit each account, except Income Summary, for its balance. Credit Income
Summary for the total.
13-47
Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with
Debit Balances.
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
Income Summary
Sales Returns and Allowances
Purchases
Freight
In
Credit each
account,
except Income Summary,
SummarySalaries
for theExpense
total. – Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equip
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equip.
Interest Expense
Dec.
31
13-48
PAGE
DEBIT
28
CREDIT
512,406.20
for its balance.
13,000.00
321,500.00
9,800.00
Debit
Income
79,990.00
7,425.00
125.00
4,975.00
2,400.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
770.00
Step 3: Closing the Income Summary Account.

The third closing entry transfers the Income Summary balance to the
owner's capital account.
 This closes the Income Summary account, which remains closed until it is
used in the end-of-period process for the next year.
 For Simpson Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b)
Closing Entries
12/31
12/31
52,000.00
512,406.20
12/31
12/31
564,406.20
615,578.00
Bal.
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Income Summary
Patricia Simpson, Capital
47,000.00
568,578.00
51,171.80
PAGE
DEBIT
28
CREDIT
51,171.80
51,171.80
13-49
Step 4: Closing the Drawing account.
This entry closes the drawing account and updates the capital account.
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Patricia Simpson, Capital
Patricia Simpson, Drawing
PAGE
DEBIT
28
CREDIT
27,600.00
27,600.00
13-50
Posting the Closing Entries

The closing entries are posted from the general journal to the
general ledger.

This process brings the temporary account balances to zero.

The word Closing is entered in the Description column.
13-51
Preparing a Postclosing Trial Balance

Prepare a postclosing trial balance to confirm
that the general ledger is in balance.

Only the accounts that have balances – the asset,
liability and owner's capital accounts – appear on
the postclosing trial balance.

The postclosing trial balance matches the
amounts reported on the balance sheet.

To verify this, compare the postclosing trial
balance with the balance sheet.
13-52
Only the accounts that have balances—the asset, liability and owner's
capital accounts—appear on the postclosing trial balance.
Simpson Antiques
Postclosing Trial Balance
December 31, 2007
Cash
13,136.00
Petty Cash Fund
100.00
Notes Receivable
1,200.00
Accounts Receivable
32,000.00
Allowance for Doubtful Accounts
Interest Receivable
30.00
Merchandise Inventory
47,000.00
Supplies
1,325.00
Prepaid Insurance
4,900.00
Prepaid Interest
75.00
Store Equipment
30,000.00
Accumulated Depreciation - Store Equipment
Office Equipment
5,000.00
Accumulated Depreciation - Office Equipment
Notes Payable - Trade
Notes Payable - Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employees Income Taxes Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Salaries Payable
Sales Tax Payable
Patricia Simpson, Capital
Totals
134,766.00
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Current Assets
Cash
Petty Cash Fund
Notes Receivable
1,050.00Receivable
Accounts
Less Allow. for Doubtful Accounts
Interest Receivable
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
2,400.00
Prepaid Interest
Total Current Assets
700.00
Plant and Equipment
2,000.00
Store Equipment
9,000.00
Less Accumulated Depreciation
24,129.00
Office Equipment
20.00
Less
Accumulated Depreciation
1,158.40
Total
Plant and Equipment
267.40
Total990.00
Assets
9.60
64.80
1,200.00
6,984.00
84,792.80
134,766.00
13-53
13,136.00
100.00
1,200.00
32,000.00
1,050.00
1,325.00
4,900.00
75.00
30,950.00
30.00
47,000.00
6,300.00
98,716.00
30,000.00
2,400.00 27,600.00
5,000.00
700.00 4,300.00
Asset Accounts
31,900.00
130,616.00
To verify this, compare the postclosing trial balance with the balance
sheet.
Simpson Antiques
Simpson Antiques
Postclosing Trial Balance
Balance Sheet
December 31, 2007
Year
Ended
December 31, 2007
Cash
13,136.00
Petty Cash Fund
100.00
Owner’s Equity
Notes Receivable
1,200.00
Patricia
Simpson,
Capital
Accounts Receivable
32,000.00
Total
Liability
and
Allowance for Doubtful Accounts
1,050.00Owner’s Equity
Interest Receivable
30.00
Merchandise Inventory
47,000.00
Supplies
1,325.00
Prepaid Insurance
4,900.00
Prepaid Interest
75.00
Store Equipment
30,000.00
Accumulated Depreciation - Store Equipment
2,400.00
Office Equipment
5,000.00
Accumulated Depreciation - Office Equipment
700.00
Notes Payable - Trade
2,000.00
Notes Payable - Bank
9,000.00
Accounts Payable
24,129.00
Interest Payable
20.00
Social Security Tax Payable
1,158.40
Medicare Tax Payable
267.40
Employees Income Taxes Payable
990.00
Federal Unemployment Tax Payable
9.60
State Unemployment Tax Payable
64.80
Salaries Payable
1,200.00
Sales Tax Payable
6,984.00
Patricia Simpson, Capital
84,792.80
Totals
134,766.00 134,766.00
84,792.00
130,616.00
Capital Account
13-54
Preparing a Postclosing Trial Balance
Simpson Antiques
Postclosing Trial Balance
December 31, 2007
Cash
13,136.00
Petty Cash Fund
100.00
Notes Receivable
1,200.00
Accounts Receivable
32,000.00
Allowance for Doubtful Accounts
Interest Receivable
30.00
Merchandise Inventory
47,000.00
Supplies
1,325.00
Prepaid Insurance
4,900.00
Prepaid Interest
75.00
Store Equipment
30,000.00
Accumulated Depreciation - Store Equipment
Office Equipment
5,000.00
Accumulated Depreciation - Office Equipment
Notes Payable - Trade
Notes Payable - Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employees Income Taxes Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Salaries Payable
Sales Tax Payable
Patricia Simpson, Capital
Totals
134,766.00
Temporary accounts do not
appear on the postclosing trial
balance.
1,050.00
Revenue
Cost of
Goods Sold
Expenses
Withdrawals
2,400.00
700.00
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
6,984.00
84,792.80
134,766.00
13-55
Ratios and other measurements are used to analyze
and interpret financial statements.
Two such measurements are used by Simpson
Antiques:

Gross profit percentage
 Current ratio
13-56
Gross Profit Percentage
The gross profit percentage is the amount
of gross profit from each dollar of sales.

The gross profit percentage is calculated by
dividing gross profit by net sales.

For Simpson Antiques, for every dollar of net
sales, gross profit was almost 40 cents.
Gross profit
$219,030
=
Net sales
$549,150
13-57
= 0.3988
=
39.9%
Current Ratio
The current ratio provides a measure of a firm's
liquidity or ability to pay its current debts.

Simpson Antiques has $2.15 in current assets for
every dollar of current liabilities.

The current ratio is calculated in the following
manner:
Current assets
$98,716.00
=
Current liabilities
$45,823.20
13-58
= 2.15 to 1
Journalizing and Posting
Reversing Entries
Reversing entries are journal entries
made to reverse the effect of certain
adjusting entries involving accrued
income or accrued expenses.
Only accruals are reversed.
13-59
Reversing Entry
At the beginning of the year, a reversing entry is made. This will
simplify recordkeeping when the paychecks are issued.
GENERAL JOURNAL
DATE
2007
DESCRIPTION
POST.
REF.
PAGE
DEBIT
25
CREDIT
Adjusting Entries
(Adjustment f)
Dec.
31 Salaries Expense—Sales
Salaries Payable
602
229
1,200.00
1,200.00
GENERAL JOURNAL
DATE
2008
Jan.
DESCRIPTION
POST.
REF.
PAGE
DEBIT
29
CREDIT
Reversing Entries
1 Salaries Payable
Salaries Expense—Sales
1,200.00
1,200.00
13-60
On January 3 the payment of $1,700 of salaries is recorded in the
normal manner.
GENERAL JOURNAL
DATE
2008
Jan. 3
DESCRIPTION
POST.
REF.
Salaries Expense
Cash
DEBIT
PAGE
30
CREDIT
1,700.00
1,700.00
13-61
Reversing Accrued Salaries Expense
Salaries Expense
12/31
1,200
Salaries Payable
Closing 1,200
1/1
1,200
Bal.
1,200
1/1
1,200
12/31
Bal.
1,200
0
The credit balance in Salaries Expense is unusual because the
normal balance of an expense account is a debit.
13-62
After this entry is posted, the expense is properly divided between
two periods.
Salaries Expense
12/31
1/3
Bal.
1,200 Closing 1,200
1/1
1,200
1,700
500
Salaries Payable
Cash
12/31 1,200
1/1 1,200
December
January
Total
=
=
=
13-63
1/3
$1,200 last period
$ 500 this period
$1,700
1,700
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
13-64
Step 6
Journalize and
post adjusting
entries