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Unformatted text preview: Introduction To Financial Accounting HKUST Chapter 4 p Adjustments, Financial Statements, and the Quality of Earnings ACCT 101 Fall 2010 Allen Huang Chapter Four Slide 1 Review Operating cycle NI = Revenues Expenses + Gains Losses Structure of income statements Introduction To Financial Accounting HKUST Cash basis accounting vs. accrual basis accounting Revenue recognition principle g p p Matching principle Journal entries for recognizing revenues and expenses Chapter Four Slide 2 Direction of Transaction Effects Introduction To Financial Accounting HKUST For Assets: DR = Left = Increase; CR = Right = Decrease For Liab and SE: CR = Right = Increase; DR = Left = Decrease Chapter Four Slide 3 Double-Entry Bookkeeping Assets + DR Normal Balance Introduction To Financial Accounting HKUST Liabilities Shareholders' Equity - DR + CR Normal Balance - CR - DR + CR Normal Balance Contributed Capital - DR + CR Normal Balance Retained Earnings - DR + CR Normal Balance Expenses + DR Normal Balance Chapter Four Revenues - DR + CR Normal Balance Slide 4 - CR Learning Objectives for Ch 4 1. What is accounting cycle? 2. The purpose of a trial balance. Introduction To Financial Accounting HKUST 3. Analyze the adjustments necessary at the end of the period to update balance sheet and income statement accounts. 4. 4 Prepare fo r financial statements four statements. 5. The closing process. Chapter Four Slide 5 Accounting Cycle During the period: Analyze transactions. Record journal entries. Post amounts to general ledger. Introduction To Financial Accounting HKUST Close revenues, gains, expenses, and losses to R i d l Retained Earnings. At the end of the period: Unadjusted trial balance Adjust revenues and expenses. Prepare financial statements. Disseminate statements to users. Chapter Four Slide 6 The Unadjusted Trial Balance A listing of individual accounts, usually in financial statement order. Ending debit or credit balances are listed in two separate columns. Total debit account balances should = total credit account balances. Introduction To Financial Accounting HKUST Trial Balance is NOT a F/S. Chapter Four Slide 7 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Cash $ Accounts receivable Inventory Equipment Accumulated depreciation - equip. Furniture and fixtures Accumulated depreciation - furn. & fix. Accounts payable Notes payable Note that Common stock C t k total debits = Retained earnings, 12/31/08 total credits Sales revenue Cost of goods sold Operating expenses Totals Chapter Four Introduction To Financial Accounting HKUST Debit 3,900 4,985 3,300 4,800 $ 6,600 Credit 1,440 2,200 2,985 4,000 10,000 10 000 1,760 35,000 27,500 6,300 57,385 $ 57,385 Slide 8 $ The Unadjusted Trial Balance Introduction To Financial Accounting HKUST If total debits do not equal total credits on the trial balance, errors have occurred . . . in preparing balanced journal entries. in posting the correct dollar effects of a transaction transaction. in copying ending balances from the ledger to the trial balance. Chapter Four Slide 9 Prepare a trial balance Mr. Brown's Dayspa for Horses: Account Balances 31-Dec-07 Cash Accounts Receivable Supplies Prepaid Rent Prepaid Insurance Notes Receivable (due 3/31/08) Equipment Accounts Payable Unearned Service Revenue U dS i R Notes Payable (due 5/1/09) Common Stock Service Revenue Salary Expense Rent Expense Income Tax Expense Chapter Four Introduction To Financial Accounting HKUST 33,000 7,700 5,500 24,000 12,000 35,000 250,000 15,500 18,000 18 000 100,000 50,000 348,500 125,000 20,000 9,000 Slide 10 Unadjusted Trial Balance Mr. Brown's Dayspa for Horses: Unadjusted Trial Balance 31-Dec-07 Debit 33,000 7,700 5,500 24,000 12,000 35,000 250,000 Credit Introduction To Financial Accounting HKUST Cash Accounts Receivable Supplies Prepaid Rent Prepaid Insurance Notes Receivable (due 3/31/07) Equipment Accounts Payable Unearned S i R U d Service Revenue Notes Payable (due 5/1/09) Capital Stock Service Revenue Salary Expense Rent Expense Income Tax Expense Chapter Four 15,500 18,000 18 000 100,000 50,000 348,500 125,000 20,000 9,000 532,000 532,000 Slide 11 What to Adjust? Introduction To Financial Accounting HKUST Revenues are recorded when earned. Expenses are recorded when incurred. Because t B transactions occur over ti ti time, ADJUSTMENTS are required at the end of each fiscal period to get the revenues and expenses in the "right" period. Chapter Four Slide 12 Types of Adjustments Introduction To Financial Accounting HKUST There are four types of adjustments. Revenues 1. Unearned Revenues. 2. Accrued Revenues. R Expenses 3. Prepaid Expenses. 4. Accrued Expenses. E Chapter Four Slide 13 Three steps to complete the adjustments Introduction To Financial Accounting HKUST 1. Determine whether the adjustment is to an existing unearned revenue or prepaid expense or to an unrecorded accrued revenue and expense. 2. Compute the revenue earned and expense incurred up to the end of the accounting period 3. Record the adjusting journal entry. Chapter Four Slide 14 Unearned Revenues End of accounting period. Introduction To Financial Accounting HKUST Cash received. Revenues earned. Example includes rent received in advance (an unearned revenue). Chapter Four Slide 15 Unearned Revenues Introduction To Financial Accounting HKUST On December 1, 2009, Tom's Rentals received a check for $3,000, for the first four months' rent from a new tenant. tenant The entry on December 1, 2009, to record the receipt of the prepaid rent payment would be . . . GENERAL JOURNAL Date Dec Description 1 Cash Unearned Rent Revenue Page Debit 3,000 1 Credit 3,000 This is a LIABILITY account Chapter Four Slide 16 Unearned Revenues Received cash for rent < Dec 1 Introduction To Financial Accounting HKUST 4-month prepayment of rent Dec 31 Year end Jan 31 Feb 28 > Mar 31 We must record the amount of rent EARNED during December. Since the prepayment is for 4 months, we can assume that 1/4 of the rent will be earned each month. Chapter Four Slide 17 Unearned Revenues Introduction To Financial Accounting HKUST The adjustment on December 31, 2009, to reduce the liability and record the revenue earned would be: $3,000 x 1/4 = $750 per month. In effect, our obligation to let them occupy the space for a period of has decreased, because they used the space for 1 month. Chapter Four Slide 18 Unearned Revenues Introduction To Financial Accounting HKUST After we post the entry to the T-accounts, the Taccount balances look like this: Unearned Rent Revenue Dec 1 3,000 Dec 31 750 Bal. 2,250 Bal. 750 Rent Revenue Dec 31 750 Chapter Four Slide 19 Accrued Revenue End of accounting period. Introduction To Financial Accounting HKUST Revenues earned. Cash received. Example includes interest earned during the period (accrued revenue). Chapter Four Slide 20 Accrued Revenue Introduction To Financial Accounting HKUST At December 31st, Matrix, Inc. earned, but has not received, interest on its money market account of $150. The adjustment is made to debit Interest Receivable and credit Interest Revenue. Interest Receivable Dec 31 150 Bal. Chapter Four Interest Revenue Dec 31 150 Bal. 150 Slide 21 150 Prepaid Expenses End of accounting period. Introduction To Financial Accounting HKUST Cash paid. Expense incurred. Examples include prepaid rent, E l i l d id advertising, and insurance. Chapter Four Slide 22 Prepaid Expenses Introduction To Financial Accounting HKUST On January 1, 2009, Matrix, Inc. paid $3,600 for a 3-year fire insurance policy. They are paying in advance for a resource they will use over a 3-year period. The entry on January 1, 2009, to record the prepayment of insurance policy would be... GENERAL JOURNAL Date Jan. Description 1 Prepaid Insurance Expense Cash Page Debit 3,600 1 Credit 3,600 This is an ASSET account Chapter Four Slide 23 Prepaid Expenses Paid cash for insurance < 3-year insurance policy Introduction To Financial Accounting HKUST > Jan 1, 09 Dec 31, 09 Year end Dec 31, 10 Year end Dec 31, 11 Year end At th end of 2009 we determine how much the d f 2009, d t i h h of the "prepaid expense" has been used up during the period. Since the policy is for 3 years, we can assume that 1/3 of the policy will expire each year. Chapter Four Slide 24 Prepaid Expenses Introduction To Financial Accounting HKUST At December 31st, Matrix must recognize the portion of the insurance that has been consumed and becomes an expense. $3,600 x 1/3 = $1,200 per year. In effect, the prepaid asset goes down, while the expense goes up. Chapter Four Slide 25 Prepaid Expenses Introduction To Financial Accounting HKUST After we post the entry to the T-accounts, the account balances look like this: Prepaid Insurance Expense Jan 1 3,600 Dec 31 1,200 Bal. 2,400 Insurance Expense Dec 31 1,200 Bal. 1,200 Remaining two years of insurance at $1,200 per year. Chapter Four Slide 26 Accrued Expenses End of accounting period. Introduction To Financial Accounting HKUST Expense incurred. Expense paid. Examples include accrued rent, E l i l d d accrued interest, and accrued wages. Chapter Four Slide 27 Accrued Expenses Introduction To Financial Accounting HKUST As of Dec 27, 2009, Denton, Inc. had already paid $1,900,000 in 2009, wages for the year. Denton pays its employees every Friday. Year-end, Year-end Dec 31, 2009, falls on a Thursday The employees 31 2009, Thursday. have earned total wages of $50,000 for Monday through Thursday of the week ending Jan 2, 2010. 2010. GENERAL JOURNAL GENERAL JOURNAL Date Description Dec 31 Wages Expense What Should Denton's Wages Payable Entry Be on Dec 31, 2004? Debit 50,000 ? Credit 50,000 ? Chapter Four Slide 28 Accrued Expenses Introduction To Financial Accounting HKUST After we post the entry to the T-accounts, the account balances look like this: Wages Expense As of Dec 27 $1,900,000 Dec 31 50,000 Bal. Bal $1,950,000 $1 950 000 Wages Payable Dec 31 50,000 Bal. 50,000 Chapter Four Slide 29 Summary adjusting accruals/deferrals Unearned revenues (L) Introduction To Financial Accounting HKUST Examples: Unearned ticket revenue, unearned rent revenue, deferred subscription revenue Adj i entries at the end of the period: Liability Revenue Adjusting i h d f h i d i bili , Prepaid expenses (A) Examples: all kinds of prepaid expense (rent, insurance, advertising), supplies, buildings, equipment Adjusting entry at the end of the period : Expense , Asset Accrued revenues (A) Examples: Interest receivable, utility receivable receivable Adjusting entry at the end of the period : Asset , Revenue Accrued expenses (L) Examples: Interest payable, wage payable, taxes payable Adjusting entry at the end of the period : Expense , Liability Chapter Four Slide 30 End-of-period adjustment errors Failure to include items that should be accrued/deferred Introduction To Financial Accounting HKUST Failure to recognize adequate expenses/revenues End-of-period transactions recorded in the wrong period (cut-off errors) ... Chapter Four Slide 31 Accounting Estimates Introduction To Financial Accounting HKUST Certain circumstances require adjusting entries to record accounting estimates. E Examples include . . . l i l d Depreciation Bad debts Income taxes Let's look at how we handle Depreciation expense. Chapter Four Slide 32 Depreciation Introduction To Financial Accounting HKUST The accounting concept of depreciation involves the systematic and rational allocation of a long-lived asset's cost to the multiple periods it is used to generate revenue. This is a "cost allocation" concept, not a "valuation" concept. Chapter Four Slide 33 Recording Depreciation Introduction To Financial Accounting HKUST The required journal entry requires a debit to Depreciation expense and a credit to an contra account contra-account called Accumulated depreciation. GENERAL JOURNAL Date Description Dec 31 Depreciation Expense Accumulated Depreciation Page Debit $$$$ 352 Credit $$$$ As discussed earlier, this is called a Contra-Asset account. Chapter Four Slide 34 Depreciation - Example Introduction To Financial Accounting HKUST At January 31, 2009, Papa John's trial balance showed Property & equipment of $338,000 (all numbers in thousands) and Accumulated depreciation of $83,000. $83 000 For the period, Papa John's needs to record an additional $2,500 in depreciation. GENERAL JOURNAL Date Description Jan 31 D Whi tti J Depreciation Expense John's What Should Papa J h ' Sh E ld P Accumulated 31, 2001? Entry Be on JanDepreciation Page Debit 2,500 2 500 ? 352 Credit 2,500 ? Chapter Four Slide 35 Depreciation - Example Introduction To Financial Accounting HKUST After we post the entry to the T-accounts, the account balances look like this: Depreciation Expense Jan 31 2,500 Bal. 2,500 Accumulated Depreciation Jan 1 83,000 Jan J 31 2 500 2,500 Bal. 85,500 Chapter Four Slide 36 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Debit Introduction To Financial Accounting HKUST Credit Cash $ 3,900 Accounts receivable 4,985 Inventory 3,300 Equipment 4,800 Accumulated depreciation - equip. $ 1,440 Furniture and fixtures 6,600 Accumulated depreciation - furn. & fix. 2,200 Accounts payable 2,985 Notes payable Accumulated depreciation 4,000 p Common stock C t k 10,000 10 000 is a contra-asset account. 1,760 Retained earnings, 12/31/08 It is directly related to an 35,000 Sales revenue Cost of goods sold asset account27,500has the but Operating expenses 6,300 opposite balance. Totals Chapter Four $ 57,385 $ 57,385 Slide 37 Matrix, Inc. Unadjusted Trial Balance At December 31, 2009 Description Cash $ Accounts receivable Inventory Equipment Accumulated depreciation - equip. Furniture and fixtures Accumulated depreciation - furn. & fix. Cost - Accumulated depreciation = Accounts payable Notes payable BOOK VALUE. Common stock C t k Retained earnings, 12/31/08 Sales revenue Cost of goods sold Operating expenses Totals Chapter Four Introduction To Financial Accounting HKUST Debit 3,900 4,985 3,300 4,800 $ 6,600 Credit 1,440 2,200 2,985 4,000 10,000 10 000 1,760 35,000 27,500 6,300 57,385 $ 57,385 Slide 38 $ Introduction To Financial Accounting HKUST Chapter Four Slide 39 Introduction To Financial Accounting HKUST Chapter Four Slide 40 Recording Adjusting Entries E4-6 Introduction To Financial Accounting HKUST Heald's Store is completing the accounting process for the year just ended, Dec 31, 2011. The transactions during 2011 have been journalized and posted. The following data with respect to adjusting entries are available: ti il bl a. Office supplies on hand at Jan 1, 2011, total $350. Office supplies purchased and debited to Office Supplies during the year amounted to $500. The year-end count showed $275 of supplies on hand. b. Wages earned by employees during Dec 2011, unpaid and unrecorded at Dec 31, 2011, amounted to $2,200. c. The basement of the store is rented for $ $1,600 per month to another merchant Dittman Inc. On Nov 1, 2011, the store collected six months' rent in the amount of $9,600 in advance from Dittman; it was credited in full to Unearned Rent Revenue when collected. Chapter Four Slide 41 Recording Adjusting Entries E4-6 Introduction To Financial Accounting HKUST d. The remaining basement is rented to Kathy's Specialty Shop for $480 per month, payable monthly. On Dec 31, 2011, the rent for Nov and Dec had not been collected or recorded. Collection is expected Jan 10, 2012. J 10 2012 e. The store used delivery equipment that cost $30,500; $6,100 was the estimated depreciation for 2011. f. On July 1, 2011, a two-year insurance premium amounting to $2,200 was paid in cash and debited in full to Prepaid Insurance. Coverage began on July 1, 2011. g. Heald's operates a repair shop to meet its own needs. The shop also does repairs f Ditt d i for Dittman. At the end of Dec 31, 2011, Ditt th d f D 31 2011 Dittman h d had not paid $800 for completed repairs. This amount has not been recorded as Repair Shop Revenue. Collection is expected during Jan 2012. Chapter Four Slide 42 Recording Adjusting Entries E4-7 Introduction To Financial Accounting HKUST Johnson's Boat Yard, Inc., is completing the accounting process for the year just ended, Nov 30, 2010. The transactions during 2010 have been journalized and posted. The following data with respect to adjusting entries are available: a. Johnson's winterized (cleaned and covered) three boats for customers at the end of Nov, but did not record the service for $2,100. b. The carter family paid Johnson's $3,000 on Nov 1, 2010, to store their sailboat for the winter until May 1, 2011. Johnson's credited the full amount to Unearned Storage Revenue on Nov 1. c. Wages earned by employees during Nov 2010, unpaid and unrecorded at Nov 30, 2010, amounted to $2,800. Chapter Four Slide 43 Recording Adjusting Entries E4-7 Introduction To Financial Accounting HKUST d. On Oct 1, 2010, Johnson's paid $1,200 to the local newspaper for an advertisement to run every Thursday for 12 weeks. The $1,200 was recorded as Prepaid Advertising. All ads have been run except for three Thursdays in December to complete the 12-week contract. e. Johnson's used boat-lifting equipment that cost $200,000; $20,000 was the estimated depreciation for 2010. f. Boat repair supplies on hand at Dec 1, 2009, totaled $15,500. Repair supplies purchased and debited to Supplies during the year amounted to $46,000. The year-end count showed $12,400 of the supplies on hand. g. Johnson's borrowed $150,000 at a 12 percent annual interest rate on Apr 1, 2010, to expand its boat storage facility. The loan requires Johnson's to pay the interest quarterly until the note is repaid in three years. Johnson's paid quarterly interest on July 1 and Oct 1. Chapter Four Slide 44 Financial Statement Preparation Introduction To Financial Accounting HKUST The next step in the accounting cycle is to prepare the financial statements. . . 0. 1. 2. 3. 4. 4 Update the trial balance Income statement, Statement of stockholders' equity, Balance sheet, and Statement of cash fl S f h flows. Chapter Four Slide 45 Preparing Financial Statements Introduction To Financial Accounting HKUST The next step in the accounting cycle is to prepare the financial statements. . . Income statement, Statement of stockholders' equity, Balance sheet and Balance sheet, Statement of cash flows. Chapter Four Slide 46 Financial Statement Relationships Introduction To Financial Accounting HKUST Net income increases retained earnings, The income statement is created first while a net loss will decrease retained by determining the difference earnings. Dividends decrease retained between revenues and expenses. b t d earnings. Chapter Four Slide 47 Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income Month Ended January 31, 2007 (in thousands of dollars) Revenues: Restaurant sales revenue $ Franchise fees revenue Total revenues Costs and expenses: Cost of sales Salaries expense General & administrative expenses Depreciation expense Total costs and expenses Operating income Other revenues and gains (expenses and losses) Investment income Interest expense Gain on sale of land Income before income taxes Income tax expense Net income $ Earnings per share Chapter Four Introduction To Financial Accounting HKUST 66,000 4,730 70,730 30,000 16,000 14,100 2,500 62,600 8,130 1,070 1 070 (550) 3,000 11,650 3,961 7,689 0.23 The income statement contains revenues and expenses. Earnings Per Share (EPS) must be b reported on t d the income statement. $ Slide 48 Statement of Stockholders' Equity Introduction To Financial Accounting HKUST Net income appears on the statement of stockholders' equity as an increase in Retained Earnings. Papa John's International, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity For the Month Ended January 31, 2007 (in thousands of dollars) Contributed Retained Stockholders' Capital Earnings Equity $ 1,000 $ 147,000 $ 148,000 2,000 2 000 2,000 2 000 7,689 7,689 (3,000) (3,000) $ 3,000 $ 151,689 $ 154,689 Beginning balance Stock Issuance St k I Net income Dividends Ending balance From the Income Statement Chapter Four Slide 49 Balance Sheet - Assets Papa John's International, Inc. & Subsidiaries Consolidated Balance Sheet January 31, 2007 ( (in thousands of dollars) ) Assets Current Assets: Cash Accounts receivable Interest receivable Supplies Prepaid expenses Other current assets Total current assets Long-term investments Property and equipment (net of accumulated depreciation of $191,500) Long-term notes receivable Intangibles Other assets Total assets Introduction To Financial Accounting HKUST $ 43,900 20,030 70 22,000 14,500 14,000 114,500 2,000 204,500 15,000 67,000 17,000 420,000 $396,000 cost $191,500 accumulated depreciation is equal to $204,500. $ Chapter Four Slide 50 Balance Sheet Liabilities & Stockholders' Equity Papa John's International, Inc. & Subsidiaries Consolidated Balance Sheet January 31, 2007 (in thousands of dollars) Liabilities and stockholders' equity Current liabilities Accounts payable Dividends payable Accrued expenses payable Income taxes payable Total current liabilities Unearned franchise fees p y Notes payable Other long-term liabilities Total liabilities Stockholders' equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Introduction To Financial Accounting HKUST $ 39,000 3,000 76,150 3,961 122,111 6,200 110,000 , 27,000 265,311 From the Statement of Stockholders' Equity. 3,000 151,689 154,689 $ 420,000 Chapter Four Slide 51 Statement of Cash Flows Introduction To Financial Accounting HKUST This statement is a categorized list of all transactions of the period that affected the Cash account. The three categories are . . . 1. Operating activities, 2. Investing activities, and 3. Financing activities. a c g act v t es Chapter Four Slide 52 Statement of Cash Flows General Model Introduction To Financial Accounting HKUST Operating activities (from Chapter 3) Investing activities (from Chapter 2) Financing activities (from Chapter 2) Changes in cash + Beginning cash balance = Ending cash balance Effect on Cash Flows +/ +/ +/ Total net cash flows for the period + Total Supplemental Disclosure: (1) Interest paid, (2) income taxes paid, and (3) a listing of the nature and amounts of significant noncash transactions. Chapter Four Slide 53 Prepare Financial Statements E4-18/19 Introduction To Financial Accounting HKUST Seneca Company prepared the following trial balance at the end of its first year of operations ending Dec 31, 2010. To simply the case, the amounts given are in thousands of dollars. Other data not yet recorded at Dec 31, 2010: a. Insurance expired during 2010, $5. b. Depreciation expense for 2010, $7. c. Wages payable, $5. d. Income tax expense, $9. 1. Prepare the adjusting entries for 2010. 2. Complete the trial balance Adjustments and Adjusted Columns. 3. Prepare an income statement, statement of stockholders' equity, and balance sheet for 2010. Chapter Four Slide 54 Cash Accounts receivable Prepaid insurance Machinery Accumulated depreciation Accounts payable Wages payable Income taxes payable Contributed capital Retained R t i d earnings i Revenues (not detailed) Expenses (not detailed) SENECA COMPANY Introduction To Trial Balance Financial Accounting December 31, 2010 HKUST (in thousands of dollars) Unadjusted Adjustments Adjusted Debit Credit Debit Credit Debit Credit 38 9 6 80 9 76 4 84 32 Totals Chapter Four 169 169 Slide 55 Income Statement Introduction To Financial Accounting HKUST SENECA COMPANY Income Statement For the Year Ended December 31 2010 31, (in thousands of dollars) Revenues (not detailed) Expenses Pretax income Income tax expense Net income EPS Chapter Four Slide 56 Statement of Shareholders' Equity SENECA COMPANY Statement of Stockholders' Equity For the Year Ended December 31, 2010 (in thousands of dollars) Contributed Capital $ 0 Retained Earnings $ 0 Introduction To Financial Accounting HKUST Beginning balances, 1/1/2010 Stock issuance Net income Dividends declared Ending balances 12/31/2010 balances, Total Stockholders' Equity $ 0 Chapter Four Slide 57 Balance Sheet SENECA COMPANY Balance Sheet At December 31, 2010 (in thousands of dollars) Assets Current Assets: Cash Accounts receivable Prepaid insurance Total current assets Machinery Accumulated depreciation Introduction To Financial Accounting HKUST Total assets Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Wages payable Income taxes payable Total current liabilities Stockholders Stockholders' Equity: Contributed capital Retained earnings Total liabilities and stockholders' equity Chapter Four Slide 58 Final Step The Closing Process Introduction To Financial Accounting HKUST The following accounts are called temporary or nominal accounts and are closed to zero at the end of the period . . . Revenues, Expenses, Gains, and Losses Chapter Four Slide 59 Final Step The Closing Process Introduction To Financial Accounting HKUST Assets, liabilities, and stockholders' equity are permanent or real accounts and are permanent, accounts, never closed. Assets Liabilities Stockholders' Equity Chapter Four Slide 60 Final Step The Closing Process Introduction To Financial Accounting HKUST Permanent accounts are B/S accounts t Temporary accounts are I/S accounts Even though the B/S account balances carry forward from period to period, the income statement accounts do not. Chapter Four Closing entries: 1. Transfer net income (or loss) to Retained Earnings. 2. Establish a zero balance in each of the temporary p y accounts to start the next accounting period. Slide 61 Closing the Books Introduction To Financial Accounting HKUST Two steps are used in the closing process . . . 1. Close revenues and gains to Retained Earnings. 2. 2 Close expenses and losses to Retained Earnings. Chapter Four Slide 62 Closing the Books Introduction To Financial Accounting HKUST To close Papa John's Restaurant Sales Revenue account, the following entry is required: GENERAL JOURNAL Date Description Jan 31 Restaurant Sales Revenue Retained Earnings Page Debit 66,000 365 Credit 66,000 Retained Earnings 144,000 1/31/07 66,000 Close Chapter Four Restaurant Sales Revenue 66,000 66,000 0 Slide 63 Closing the Books Introduction To Financial Accounting HKUST To close Papa John's Cost of Sales - Restaurants account, the following entry is required: GENERAL JOURNAL Date Description Jan 31 Retained Earnings Cost of Sales - Restaurants Page Debit 30,000 365 Credit 30,000 Close Retained Earnings 30,000 144,000 66,000 Cost of Sales Restaurants 30,000 30,000 0 Slide 64 Chapter Four Closing the Books If we close the other expense and loss accounts i a in similar fashion, the retained earnings account looks like this . . . End. RE = Beg. RE + (Rev Exp + Gains Losses) Dividends Introduction To Financial Accounting HKUST Close Close Close Close Close Close Close Close Close Close Retained Earnings 30,000 144,000 16,000 66,000 7,000 4,730 4,000 1,070 2,000 3,000 500 600 2,500 2 500 550 3,961 67,111 218,800 151,689 1/1/07 Close Close Close Close Ending Bal. Slide 65 Chapter Four Post-Closing Trial Balance Introduction To Financial Accounting HKUST After all temporary accounts have been closed, we prepare a post-closing trial balance. Only assets, liabilities, liabilities and stockholders' equity accounts will eq it acco nts ill appear. All revenue, expense, gain and loss accounts will have a zero balance. Chapter Four Slide 66 P4-8 Introduction To Financial Accounting HKUST St. Denis, Inc., has the following unadjusted trial balance as of the end of the annual accounting period, Dec 31, 2011. Account Titles Cash Accounts Receivable Supplies Prepaid Insurance Service trucks Accumulated depreciation Accounts Payable Other assets Wage payable Income Taxes payable p y Note payable (3 years; 10% interest due each Dec 31) Contributed Capital (5,000 shares outstanding) Retained earnings Service Revenue Remaining expenses (not detailed; excludes income tax) Income tax expense Totals Chapter Four Debit $48,000 $48 000 10,400 640 800 16,000 Credit $9,600 2,400 8,960 16,000 22,560 6,000 61,600 33,360 $118,160 $118,160 Slide 67 P4-8 Introduction To Financial Accounting HKUST Data not yet recorded at Dec 31, 2011: a. The supplies counted on Dec 31, 2011, reflected $240 remaining on hand to be used in 2012. 2012 b. Insurance expired during 2011, $400. c. Depreciation expense for 2011, $3,200 d. Wages earned by employees not yet paid on Dec 31, 2011, $720. e. Income tax expense was $5,880 1. Record the 2011 adjusting entries. 2. Prepare an income statement and a balance sheet including the effects of the preceding five transactions. 3. Record the 2011 closing entries. Chapter Four Slide 68 P4-8 ST. DENIS, INC. Income Statement For the Year Ended December 31, 2011 Operating Revenue: Service revenue Operating Expenses: Supplies expense Insurance expense Depreciation expense Wages expense Remaining expenses (not detailed) Total expenses Operating Income Income tax expense Net income Earnings per share Introduction To Financial Accounting HKUST Chapter Four Slide 69 P4-8 Introduction To Financial Accounting HKUST Assets Current Assets: Cash Accounts receivable Supplies Prepaid insurance Total current assets Service trucks Accumulated depreciation Other assets (not detailed) ST. DENIS, INC. Balance Sheet At December 31, 2011 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Wages payable Income taxes payable Total current liabilities Note payable, long term Total liabilities Stockholders Stockholders' Equity Contributed capital Retained earnings* Total stockholders' equity Total liabilities and stockholders' equity Total assets Chapter Four Slide 70 ...
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This note was uploaded on 02/13/2012 for the course ACCT 101 taught by Professor Na during the Fall '10 term at HKUST.

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