McGraw-Hill/Irwin 1-1 13 –1

Chapter
13
Section Objectives
1.
Prepare a classified income statement from the worksheet.
2.
Prepare a statement of owner’s equity from the worksheet.
3.
Prepare a classified balance sheet from the worksheet.
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Objective 1
Prepare a classified income statement from the worksheet
A classified income statement is sometimes called a multiple-step income statement .
13 –3

QUESTION:
What is a single-step income statement?
ANSWER:
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)
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Net sales for Whiteside Antiques
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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
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Purchases
Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
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Beginning Merchandise Inventory
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
13 –8

Beginning Merchandise Inventory
Net Delivered Cost of Purchases
Cost of Goods Available for Sale
Less Ending Inventory
Cost of Goods Sold
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 Merchandise Inventory is the one account that appears on both the income statement and the balance sheet.
 Beginning and ending merchandise inventory balances appear on the income statement.
 Ending merchandise inventory also appears on the balance sheet in the Assets section.
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Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2013
Purchases
Freight In
Delivered Cost of Purchases
Less Purchases Returns and Allowances 3,050.00
Purchases Discounts
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2013
Cost of Goods Sold
3,130.00
321,500.00
9,800.00
331,300.00
6,180.00
52,000.00
325,120.00
377,120.00
47,000.00
330,120.00
Merchandise available for sale
Cost of goods sold
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 For Whiteside Antiques net sales is the revenue earned from selling antique items.
 Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period.
 Gross profit is what is left to cover operating expenses and provide a profit.
 Gross profit is the difference between the net sales and the cost of goods sold
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Gross profit on sales for Whiteside Antiques
Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2013
Purchases
Freight In
321,500.00
9,800.00
331,300.00
Delivered Cost of Purchases
Less Purchases Returns and Allowances
Purchases Discounts
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2013
Cost of Goods Sold
Gross Profit on Sales
3,050.00
3,130.00
6,180.00
52,000.00
325,120.00
377,120.00
47,000.00
561,650.00
12,500.00
549,150.00
330,120.00
219,030.00
13 –13

Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
79,690.00
7,425.00
125.00
4,975.00
2,400.00
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
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
94,615.00
73,221.20
Salaries for salespersons and advertising are examples of selling expenses
219,030.00
167836.2
13 –14

Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
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
79,690.00
7,425.00
125.00
4,975.00
2,400.00
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
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
94,615.00
73,221.20
219,030.00
167836.20
Rent, utilities, and salaries for office employees are examples of general and administrative expenses
13 –15

Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
Operating Revenue
Sales
Less Sales Returns and Allowances
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
79,690.00
125.00
4,975.00
2,400.00
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
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
94,615.00
73,221.20
561,650.00
12,500.00
549,150.00
330,120.00
219,030.00
167,836.20
51,193.80
13 –16

Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
166.00
366.00
532.00
770.00
51,193.80
238.00
13 –17

Net income for Whiteside Antiques
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Total Selling Expenses
Total Administrative Expenses
Total Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
Whiteside Antiques
Partial Income Statement
Year Ended December 31, 2013
166.00
366.00
549,150.00
330,120.00
219,030.00
94,615.00
73,221.20
167,836.20
51,193.80
532.00
770.00
238.00
13 –18

Objective 2
Prepare a Statement of Owner’s
Equity from the worksheet
 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 Bill Whiteside, $84,576.80, is used to prepare the balance sheet.
Whiteside Antiques
Statement of Owner's Equity
Year Ended December 31, 2013
Bill Whiteside, Capital, January 1, 2013
Net Income for Year
Less Withdrawals for the Year
Increase in Capital
Bill Whiteside, Capital, December 31, 2013
50,955.80
27,600.00
61,221.00
23,355.80
84,567.80
13 –19

Objective 3
Prepare a classified balance sheet from the worksheet
QUESTION:
What are current assets?
ANSWER:
Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year.
13 –20

Whiteside Antiques
Partial Balance Sheet
December 31, 2013
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
32,000.00
1,050.00
1,325.00
4,900.00
75.00
Current assets for Whiteside Antiques
13,136.00
100.00
1,200.00
30,950.00
30.00
47,000.00
6,300.00
98,716.00
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 Noncurrent assets are called long-term assets.
 An important category of long-term assets is plant and equipment.
 For many businesses plant and equipment represents a sizable investment.
Whiteside Antiques
Balance Sheet
December 31, 2013
Assets
Prepaid Interest
Total Current Assets
Plant and Equipment
Store Equipment
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Total Plant and Equipment
Total Assets
30,000.00
2,400.00
5,000.00
700.00
75.00
6,300.00
98,716.00
27,600.00
4,300.00
31,900.00
130,616.00
13 –22

Whiteside Antiques
Partial Balance Sheet
December 31, 2013
Assets
Prepaid Interest
Total Current Assets
Total Plant and Equipment
Total Assets
Total current liabilities
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
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
7,200.00
46,039.20
6,300.00
98,716.00
31,900.00
130,616.00
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 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 –24

Statement of Owner's Equity
Year Ended December 31, 2013
Bill Whiteside, Capital, January 1, 2013
Net Income for Year
Less Withdrawals for the Year
Increase in Capital
Bill Whiteside, Capital, December 31, 2013
50,955.80
27,600.00
61,221.00
23,355.80
84,576.80
Whiteside Antiques
Partial Balance Sheet
December 31, 2013
Assets
Owner’s Equity
Bill Whiteside, Capital
Total Liabilities and Owner's Equity
84,576.80
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 –25

Chapter
13
Section Objectives
4.
Journalize and post the adjusting entries.
5.
Journalize and post the closing entries.
6.
Prepare a postclosing trial balance.
7.
Journalize and post reversing entries.
13 –26

Objective 4
Journalize and post the 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 –27

Type of
Adjustment
Inventory
Worksheet
Reference
Purpose
(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)
Accrued Interest
(m)
Matches expense to revenue for the period; the credit is to an asset account.
Recognizes interest earned in the period.
The debit is to an asset account, (interest receivable) and the credit is to a revenue account.
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Objective 5
Journalize and Post the
Closing Entries
 At the end of the period, the temporary accounts are closed.
 The temporary accounts are:
 Revenue accounts
 Cost of goods sold and expense accounts
 Expense accounts
 Drawing account
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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.
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Step 1: Closing the Revenue Accounts and the Cost of Goods Sold
Accounts with credit balances.
GENERAL JOURNAL
PAGE 28
DATE DESCRIPTION POST. DEBIT CREDIT
REF.
2013
Dec. 31
Closing Entries
Sales
Interest Income
561,650.00
166.00
Miscellaneous Income
Purchases Returns and Allowances 3,050.00
Purchases Discounts 3,130.00
Income Summary
366.00
568,362.00
Debit each account, except Income Summary, for its balance. Credit
Income Summary for the total.
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Step 2: Closing the Expense Accounts and the Cost of Goods Sold
Accounts with Debit Balances
Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.
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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 Whiteside Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b)
Closing Entries
12/31 52,000.00
12/31 512,406.20
564,406.20
Dec. 31 Income Summary
Bill Whiteside, Capital
12/31
12/31
Bal.
47,000.00
568,362.00
615,362.00
50,955.80
DATE DESCRIPTION
GENERAL JOURNAL
PAGE
28
POST. DEBIT CREDIT
REF.
50,955.80
50,955.80
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Step 4: Closing the Drawing account
This entry closes the drawing account and updates the capital account
DATE DESCRIPTION
GENERAL JOURNAL
PAGE
28
POST. DEBIT CREDIT
REF.
Dec. 31 Bill Whiteside, Capital
Bill Whiteside, Drawing
27,600.00
27,600.00
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 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.
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Objective 6
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.
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Only the accounts that have balances —the asset, liability and owner's capital accounts —appear on the postclosing trial balance
Temporary accounts do not appear on the postclosing trial balance
Revenue
Cost of
Goods Sold
Expenses Withdrawals
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13 –38

Objective 7
Journalize and post reversing entries
QUESTION:
What are reversing entries?
ANSWER:
Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses.
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13 –40

Flow of Financial Data through an Accounting System
13 –41

for using
College Accounting:
A Contemporary Approach, 2 nd Edition
Haddock • Price • Farina
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