the accounting cycle
TRANSCRIPT
The Accounting Cycle
Chapter # 2
Resource person: Furqan-ul-haq Siddiqui
References:
Accounting the Basis for Business Decision . By: Meigs, Williams, Haka, Betner (9th/11th edition)
Internet
The Role of Accounting RecordsMany businesses have several hundred or even
thousand business transactions each day. Is it possible for business to prepare balance
sheet after every transaction…….? o Yes / NoAccounting transactions are recorded in the
accounting books and at the end of year accounting period, a balance sheet is prepared from these transactions. 2
Illustration 3-1
Transaction Identification Process
Recording ProcessSteps 1, 2, and 3 of Accounting Cycle
The General The General JournalJournalThe General The General JournalJournal Transactions are initially recorded in chronological order in a
journal before being transferred to the accounts. The general journal is an accounting log book that contains a
complete listing of a company's accounting transactions documented in chronological order, and using the double-entry method of bookkeeping.
Entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.
JournalizingJournalizingJournalizingJournalizing
Entering transaction data in the journal is known as journalizing.
Separate journal entries are made for each transaction.
A complete entry consists of:
a. the date of the transaction,
b. the accounts and amounts to be debited and credited, and
c. a brief explanation of the transaction.
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
2003
May 1 Cash 8,000
Capital Stock 8,000
Owners invest cash in the business.
Debit & Credit In accounting, "debit" and "credit" have the
following meanings: Debit -"Enter in the left column of" Credit- "Enter in the right column of“That's all. Debit refers to the left column;
credit refers to the right column. The term debit comes from the Latin debitum which means "that which is
owing" (the past participle of debitere "to owe"). Debit is abbreviated to Dr (for debtor who owes money to the company). The term credit comes from the Latin credere/credit meaning "to trust or believe"/"he trusts or believes" via the French credit and the Italian credito 8
Each transaction consists of debits and credits For Every Transaction:
The Value of Debits = The Value of Credits The basic accounting equation is as follows: Assets = Equity + Liabilities (A = E + L)
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Expanded Accounting Equation
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12
13
14
15
16
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The entire group of accounts is kept together in an
accounting record called a ledger.The entire group of accounts is kept together in an
accounting record called a ledger.
An account is an individual record showing increases and decreases in a single balance sheet item e.g. Asset, Liability, or Shareholders’ Equity itemThree parts:
1) The title of the account2) A left or debit side3) A right or credit side
An account is an individual record showing increases and decreases in a single balance sheet item e.g. Asset, Liability, or Shareholders’ Equity itemThree parts:
1) The title of the account2) A left or debit side3) A right or credit side
Steps 1, 2, and 3 of Accounting Cycle
The Use of Accounts
Increases are recorded on one
side of the T-account, and decreases are
recorded on the other side.
Left or
Debit Side
Right or
Credit Side
Title of Account
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Posting Journal Entries to the Ledger Accounts
Posting involves copying information from the journal to the ledger accounts.
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Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and CreditsDebits and CreditsDebits and CreditsIf Debit entries are greater thangreater than Credit entries, the account will have a debit balance.
$10,000 Transaction #2$3,000
$15,000$15,000
8,000Transaction #3
Balance
Transaction #1
Account Name
Debit / Dr. Credit / Cr.
Debits and CreditsDebits and CreditsDebits and CreditsDebits and CreditsIf Credit entries are greater thangreater than Debit entries, the account will have a credit balance.
$10,000 Transaction #2$3,000
$1,000$1,000
8,000 Transaction #3
Balance
Transaction #1
General LedgerCash
Date Debit Credit Balance2003
May 1 8,000 8,000 2 2,500 5,500
This ledger format is referred to as a running balance (as opposed to simple
T accounts).
This ledger format is referred to as a running balance (as opposed to simple
T accounts).
Ledger Accounts After Posting
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Net income is not an asset it’s an increase in owners’ equity from profits of the business.
Net income is not an asset it’s an increase in owners’ equity from profits of the business.
AA = LL + OEOEIncrease Decrease Increase
Either (or both) of these effects occur as net income
is earned . . .
. . . but this is what “net income”
really means.
What is Net Income?
AA = LL + OEOERetained Earnings
Capital Stock
Retained Earnings
The balance in the Retained Earnings account represents the total net income of the corporation over the entire lifetime of the business, less all amounts which have been distributed to the stockholders as dividends.
Net Income = Revenue - Expenses
The price for goods sold
and services rendered during a given accounting
period.
Increases owner’s equity.
The costs of goods and services used up
in the process of earning revenue.
Decreases owner’s equity.
The Realization Principle: When To Record Revenue
Realization Principle
Revenue should be recognized at the time
goods are sold and services are rendered.
On July 25 a radio station contracts with a car dealership to air a series of one-minute advertisements during August. If all of the agreed-upon ads are aired in August, but payment for the ads is not received until September, in which month should the station recognize the advertising revenue? The month in which it rendered the services that
earned the advertising revenue. In other words, revenue is recognized when it is
earned, without regard to when a contract is signed or when cash payment for providing goods or services is received. 33
The Matching Principle: When To Record Expenses
Matching PrincipleExpenses should be
recorded in the period in which they
are used up.
The salaries earned by a company’s marketing team for serving customers in July are not paid until early August. In which month should these salaries be regarded as expenses—July or August? The answer is July, because July is the month in
which the marketing team’s services helped to produce revenue.
In deciding when to report an expense in the income statement, the critical question is, “In what period does the cash expenditure help to produce revenue?”— not, “When does the payment of cash occur?”
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Expenditures Benefiting More than One Accounting Period
Many expenditures made by a business benefit two or more accounting periods.
If a company prepares monthly income statements, then allocates only proportion of expense which is actually incurred for that month.
If the 12-month Insurance policy costs $2,400, the insurance expense for each month amounts to $200 ($2,400 cost/12 months).
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The Accrual & Cash Basis of Accounting The method of recognizing revenue in the accounting
records when it is earned and recognizing expenses when the related goods or services are used is called the accrual basis of accounting.
The purpose of accrual accounting is to measure the profitability of the economic activities conducted during the accounting period.
In cash basis of accounting, revenue is recognized when cash is collected from the customer, rather than when the company sells goods or renders services and same with expenses.
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Expanded Accounting Equation
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry.
SIMPLE AND COMPOUND JOURNAL ENTRIESSIMPLE AND COMPOUND JOURNAL ENTRIESSIMPLE AND COMPOUND JOURNAL ENTRIESSIMPLE AND COMPOUND JOURNAL ENTRIES
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry.
COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY
2
1
3
COMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRYCOMPOUND JOURNAL ENTRY
This is the wrong format; all debits must be listed before the credits are listed.
This is the wrong format; all debits must be listed before the credits are listed.
Journalize transactions.
Post entries to the ledger accounts.
Prepare trial balance.
Make end-of-accounting period
adjustments.
Prepare adjusted trial balance.
Prepare financial
statements.
Prepare after closing trial balance.
Journalize and post closing
entries.
The Accounting Cycle
The Trial Balance Before using the account balances to prepare a balance
sheet, it is desirable to prove that the total of accounts with debit balances is in fact equal to the total of accounts with credit balances.
This proof of the equality of debit and credit balances is called a trial balance.
A trial balance is a two-column schedule listing the names and balances of all the accounts in the order in which they appear in the ledger ;
the debit balances are listed in the left-hand column and the credit balances in the right-hand column.
The totals of the two columns should agree. 43
that the trial balance contains both balance sheet and income statement accounts.
Suppose that the debit and credit totals of the trial balance do not agree. This situation indicates that one or more errors have been made.
Typical of such errors are;
1. the posting of a debit as a credit, or vice versa;
2. arithmetic mistakes in determining account balances;
3. clerical errors in copying account balances into the trial balance;
4. listing a debit balance in the credit column of the trial balance, or vice versa; and
5. errors in addition of the trial balance. 44
Adjusting Entries Adjusting entries are journal entries usually made
at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.
Adjusting Entries bring certain account balances up to date at the end of the accounting period.
They are sometimes called Balance Day adjustments because they are made on balance day.
Adjusting Entries are necessary when accrual basis accounting is used. 45
Reason for Adjustments It can be inefficient and costly to account for certain types
of transactions on a daily basis.
An example of the inefficiency of recording certain transactions follows:
Each time an employee removes a pen from the supplies closet, a journal entry debiting Supplies Expense and crediting Supplies for $1.25 (estimated cost of pen) should be recorded. However, it would be very costly and inefficient to try to keep up with each little transaction like this. So instead, we wait until the end of the accounting period and determine the total amount of supplies used. Then we make one adjusting entry to account for all the supplies used during the period.
Generally a month, a quarter, or a year.
Fiscal year vs. calendar year
Also known as the “Periodicity Assumption”
Accountants divide the economic life of a business into artificial time periods (Time Period Assumption).
Jan. Feb. Mar. Apr. Dec.. . . . .
Timing Issues
GAAP relationships in revenue and expense recognitionGAAP relationships in revenue and expense recognition
Adjusting entries are required each time financial statements are prepared.
Adjusting entries can be classified as Prepayments (prepaid expenses or unearned revenues), accruals (accrued revenues or accrued expenses), or estimates (Depriciation).
Prepayments
1. Prepaid Expenses — Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned Revenues — Revenues received in cash and recorded as liabilities before they are earned.
Accruals
1. Accrued Revenues — Revenues earned but not yet received in cash or recorded.
2. Accrued Expenses — Expenses incurred but not yet paid in cash or recorded.
Estimates
1. Depreciation — Allocation of the cost of capital assets to expense over their useful lives.
ADJUSTED TRIAL BALANCEADJUSTED TRIAL BALANCE An Adjusted Trial Balance is prepared after all
adjusting entries have been journalized and posted. It shows the balances of all accounts at the end of
the accounting period and the effects of all financial events that have occurred during the period.
It proves the equality of the total debit and credit balances in the ledger after all adjustments have been made.
Financial statements can be prepared directly from the adjusted trial balance.
Debit Credit Debit CreditCash 15,200$ 15,200$ Accounts Receivable 200 Advertising Supplies 2,500 1,000 Prepaid Insurance 600 550 Office Equipment 5,000 5,000 Accumulated Amort'n. 83$ Notes Payable 5,000$ 5,000 Accounts Payable 2,500 2,500 Unearned Revenue 1,200 800 Salaries Payable 1,200 Interest Payable 25 C.R. Byrd, Capital 10,000 10,000 C.R. Byrd, Drawings 500 500 Service Revenue 10,000 10,600 Adv. Supplies Expense 1,500 Amortization Expense 83 Insurance Expense 50 Salaries Expense 4,000 5,200 Rent Expense 900 900 Interest Expense 25
28,700$ 28,700$ 30,208$ 30,208$
Pioneer Advertising AgencyTrial Balance
October 31, 2002Before Adjustment After Adjustment
Trial Balance And Adjusted Trial Balance ComparedTrial Balance And Adjusted Trial Balance Compared Trial Balance And Adjusted Trial Balance ComparedTrial Balance And Adjusted Trial Balance Compared
Preparing Financial StatementsPreparing Financial StatementsFinancial statements can be prepared directly from an adjusted trial balance.
1.The income statement is prepared from the revenue and expense accounts.2.The statement of owner’s equity is derived from the owner’s capital and drawings accounts and the net income (or net loss) shown in the income statement.3.The balance sheet is then prepared from the asset and liability accounts and the ending owner’s capital balance as reported in the statement of owner’s equity.
Preparation of the income statement and the statement of Preparation of the income statement and the statement of owner’s equity from the adjusted trial balanceowner’s equity from the adjusted trial balance
RevenuesService Revenue 10,600$
ExpensesAdv. Supplies Expense 1,500$ Amortization Expense 83 Insurance Expense 50 Salaries Expense 5,200 Rent Expense 900 Interest Expense 25 Total Expenses 7,758
Net Income 2,842$
Pioneer Advertising AgencyIncome Statement
For the Month Ended October 31, 2002
C.R. Byrd, Capital, October 1 -$ Add: Investments 10,000 Net income 2,842
12,842 Less: Drawings 500 C.R. Byrd, Capital, October 31 12,342$
Statement of Owner's EquityFor the Month Ended October 31, 2002
Pioneer Advertising Agency
Debit CreditCash 15,200$ Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Amort'n. 83$ Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 25 C.R. Byrd, Capital 10,000 C.R. Byrd, Drawings 500 Service Revenue 10,600 Adv. Supplies Expense 1,500 Amortization Expense 83 Insurance Expense 50 Salaries Expense 5,200 Rent Expense 900 Interest Expense 25
30,208$ 30,208$
Pioneer Advertising AgencyAdjusted Trial Balance
October 31, 2002
Debit CreditCash 15,200$ Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Amort'n. 83$ Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 25 C.R. Byrd, Capital 10,000 C.R. Byrd, Drawings 500 Service Revenue 10,600 Adv. Supplies Expense 1,500 Amortization Expense 83 Insurance Expense 50 Salaries Expense 5,200 Rent Expense 900 Interest Expense 25
30,208$ 30,208$
Pioneer Advertising AgencyAdjusted Trial Balance
October 31, 2002
Cash 15,200$ Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000$ Less: Accumulated Amortization 83 4,917
Total Assets 21,867$
Liabilities and Owner's EquityLiabilities Notes Payable 5,000$ Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 25
Total Liabilities 9,525$ Owner's EquityC.R. Byrd, Capital 12,342 Total Liabilities and Owner's Equity 21,867$
October 31, 2002Assets
Pioneer Advertising AgencyBalance Sheet
Preparation of the balance sheet from the adjusted Preparation of the balance sheet from the adjusted trial balancetrial balance
Preparation of the balance sheet from the adjusted Preparation of the balance sheet from the adjusted trial balancetrial balance
From Statement of Owner’s
Equity
From Statement of Owner’s
Equity
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The Accounting Worksheet Used to help move data from the trial balance to the
financial statements An internal document – not financial statement multiple-column form used for the adjustment
process and preparing financial statements working tool for the accountant not a permanent accounting record Eases preparation of adjusting entries and financial
statements
A work sheet is not a permanent accounting record
When it is used:financial statements are prepared from the work
sheetadjustments are journalized and posted from the
work sheet after financial statements, so management can receive the financial statements more quickly
Remember
To Prepare A Work Sheet
1. Prepare the trial balance
2. Enter adjustments in the adjustments columns
3. Enter adjusted balances in adjusted trial balance columns
4. Extend adjusted trial balance amounts to the appropriate financial statement columns
5. 5 Total the statement columns, compute net income (loss), and complete the work sheet
Now, let’s see how this works!
Example of a Work Sheet
FastForwardWork Sheet
For Month Ended December 31, 2004
First, enter the
unadjusted trial balance amounts to
the worksheet!
First, enter the
unadjusted trial balance amounts to
the worksheet!
Here are our adjusting entries for December.
a) Insurance expense 100
Prepaid insurance 100
b) Supplies expense 1050
Supplies 1050
c) Depreciation expense 375
Accum. Depr. – Equip. 375
Here Are More Adjusting Entries for December.
d) Unearned revenue 250
Consulting Revenue 250
e) Salaries Expense 210
Salaries Payable 210
f) Accounts Receivable 1,800
Consulting Revenue 1,800
Next, enter the adjustments!
Next, enter the adjustments!
FastForwardWork Sheet
For Month Ended December 31, 2004
Prepare the adjusted trial
balance!
Prepare the adjusted trial
balance!
FastForwardWork Sheet
For Month Ended December 31, 2004
FastForwardWork Sheet
For Month Ended December 31, 2004
Then, extend the adjusted trial balance amounts to the financial statements!
Then, extend the adjusted trial balance amounts to the financial statements!
FastForwardWork Sheet
For Month Ended December 31, 2004
Total statement columns, compute income or loss, and balance columns.
Total statement columns, compute income or loss, and balance columns.
Prepare the IncomeStatement.
Prepare the Financial Statements
A work sheet does not
substitute for financial
statements.
A work sheet does not
substitute for financial
statements.
Prepare the Statement of Changes in Owner’s Equity.
FastForwardBalance Sheet
December 31, 2004
AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$
FastForwardBalance Sheet
December 31, 2004
AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000$ Less: accum. depr. (375) 25,625 Total assets 42,345$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned consulting revenues 2,750 Total liabilities 9,160$
Owner's EquityC.Taylor, Capital 33,185 Total liabilities and equity 42,345$
Prepare the Balance Sheet.
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Closing Entries Lets, we are reporting sales and expenses for January,
for example, February sales and expenses should start with a zero balance to properly report sales, expenses, and net income only for the month of February.
Revenue, expense, and capital withdrawal (dividend) accounts are temporary accounts that are reset at the end of the accounting period so that they will have zero balances at the start of the next period.
Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts.
Temporary vs. Permanent AccountsTEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawing Owner’s capital account
Now, let’s talk about closing entries and income summary!
CLOSING ENTRIES
Closing entries Transfer net income (loss) and owner’s drawings to
owner’s capital Journalizing and posting is a required step in the
accounting cycle
Income Summary A temporary account Used in closing revenue and expense accounts Minimizes the details in the permanent owner’s capital
account
Resets revenue, expense and withdrawal account balances to zero at the end of the period.
Helps summarize a period’s revenues and expenses in the Income Summary account.
Identify accounts for closing.
Record and post closing entries.
Prepare post-closing trial balance.
Closing Process
Temporary Accounts
Revenues
Income Summary
Exp
ense
s
With
draw
als
Permanent Accounts
Assets
Lia
bili
ties
Ow
ner’s
Cap
ital
The closing process applies only to
temporary accounts.
The closing process applies only to
temporary accounts.
Temporary and Permanent Accounts
Let’s see how the closing process
works!
Recording Closing Entries
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
Balances before closing.
Income Summary
Owner's Capital30,000
30,000
Revenue Accounts25,000
25,000
Withdrawals Account5,000
5,000
Expense Accounts10,000
10,000
Closing Process
Income Summary25,000
25,000
Close Revenue accounts to Income
Summary.
Owner's Capital30,000
30,000
Revenue Accounts25,000 25,000
-
Withdrawals Account5,000
5,000
Expense Accounts10,000
10,000
Closing Process
Income Summary10,000 25,000
15,000 Owner's Capital30,000
30,000
Revenue Accounts25,000 25,000
-
Withdrawals Account5,000
5,000
Close Expense accounts to Income
Summary.
Expense Accounts10,000 10,000
-
Closing Process
The balance in Income Summary equals net
income.
The balance in Income Summary equals net
income.
Owner's Capital30,000 15,000
45,000
Owner's Capital30,000 15,000
45,000
Withdrawals Account5,000
5,000
Withdrawals Account5,000
5,000
Close Income Summary to
Owner’s Capital.
Revenue Accounts25,000 25,000
-
Expense Accounts10,000 10,000
-
Income Summary10,000 25,000 15,000
-
Closing Process
Owner's Capital30,000 15,000
45,000
Owner's Capital5,000 30,000
15,000
40,000
Withdrawals Account5,000
5,000
Withdrawals Account5,000 5,000
-
Revenue Accounts25,000 25,000
-
Expense Accounts10,000 10,000
-
Income Summary10,000 25,000 15,000
-
Closing Process
Close Withdrawals account to Owner’s
Capital.
Using the adjusted trial balance, let’s prepare the
closing entries for
FastForward.
Close Revenue accounts to
Income Summary.
Close Revenue Accounts to Income Summary
Dec. 31 Consulting revenue 7,850 Rental revenue 300
Income summary 8,150
Dec. 31 Consulting revenue 7,850 Rental revenue 300
Income summary 8,150
Now, let’s look at the ledger accounts after posting this closing entry.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Expense Accounts to Income Summary
Dec. 31 Income summary 4,365Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230
Income Summary4,365 7,850
300 3,785
Utilities Expense230 230
-
Rent Expense1,000 1,000
-
Net Income
Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary Close Expense Accounts to Income Summary
Supplies Expense1,050 1,050
-
Depreciation Expense- Eq.
375 375 -
Salaries Expense1,610 1,610
-
Insurance Expense100 100
-
Close Income Summary to
Owner’s Capital.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Income Summary to Owner’s Capital
Dec. 31 Income summary 3,785C. Taylor, Capital 3,785
C. Taylor, Capital30,000 3,785
33,785
Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital Close Income Summary to Owner’s Capital
Income Summary4,365 7,850 3,785 300
-
Close Withdrawals to
Owner’s Capital.
Now, let’s look at the ledger accounts after posting this closing entry.
Close Withdrawals to Owner’s Capital
Dec. 31 C. Taylor, Capital 600C. Taylor, Withdrawals 600
C. Taylor, Capital600 30,000
3,785
33,185
C. Taylor, Withdrawals
600 600
-
Close Withdrawals to Owner’s Capital
Close Withdrawals to Owner’s Capital
About Closing Entries
Be Careful!
Remember: owner’s drawing does not move to
the Income Summary account. Owner’s drawing
is not an expense and it is not a factor in
determining net income.
POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized the post-closing trial balance is prepared from the ledger.
The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
Let’s look at FastForward’s
post-closing trial balance.
Post-Closing Trial Balance
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
List of permanent accounts and their balances after posting closing entries.
Total debits and credits must be equal.
Post-Closing Trial Balance
Journalize transactions.
Post entries to the ledger accounts.
Prepare trial balance.
Make end-of-accounting period
adjustments.
Prepare adjusted trial balance.
Prepare financial
statements.
Prepare after closing trial balance.
Journalize and post closing
entries.
The Accounting Cycle
What is the difference between accounts payable and notes payable?
Notes Payable involves a written promissory note. For example, if your company wishes to borrow $100,000 from its bank, the bank will require company officers to sign a formal loan agreement before the bank provides the money.
Contrast the bank loan with phoning one of your company’s suppliers and asking for a delivery of products or supplies. On the next day the products arrive and you sign the delivery receipt. A few days later your company receives an invoice from the supplier and it states that the payment for the products is due in 30 days. 97
This transaction did not involve a promissory note. As a result, this transaction is recorded in your company’s general ledger account Accounts Payable.
Accounts payable are amounts due to vendors in the normal course of business, such as for rent and utilities, supplies, and the like.
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