Chapter 5: The annual report and closing accounts

Transcription

1 Chapter 5: The annual report and closing accounts The closure of the accounting cycle and accounting information disclosed to the public Six steps in the accounting cycle: 1. Analyze transactions from the source documents 2. Journalize transactions 3. Post entries to the ledger and prepare a trial balance 4. Make end-of-period adjustments and prepare an adjusted trial balance 5. Prepare financial statements 6. Close the accounts and prepare a post-closing trial balance 1

2 Example A small company named ZiscoSys. The transactions are stated in chronological order: (1) Owner s Investment to start up the business (2) Purchase of equipment for paid in cash (3) Purchase of supplies on credit for 500 (4) 400 payment of a liability (accounts payable resulting from delivery of supplies) (5) revenues earned on credit (6) collection of accounts receivable (7) Incurring expenses of 500 for rent and 200 for utility, resp., and Prepaid Insurance of (8) reception of a down payment of for services to be performed (unearned revenue or deferred revenue), and (9) Owner s withdrawal of

3 Trial ZiscoSys Magdeburg Trial ZiscoSys Magdeburg Trial September 30, 2013 Cash Accounts Receivable Equipment Supplies 500 Prepaid Insurance Accounts Payable 300 Unearned Revenue Owner s Investment Owner s Withdrawal 800 Revenues Expenses

4 Step 1 include all accounts with balances from ledger Trial ZiscoSys Magdeburg Work Sheet For the month ended September 30, 2013 Adjusted Adjustments Trial Income Statement Sheet Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts Receivable Equipment Supplies 500 Prepaid Insurance Accounts Payable 300 Unearned Revenue Owner s Investment Owner s Withdrawal 800 Revenues Rent Expense 500 Uility Expense 200 Totals

5 Step 2 add adjustment data Trial Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts Receivable Equipment Supplies Prepaid Insurance Accounts Payable 300 Unearned Revenue Owner s Investment Owner s Withdrawal 800 Revenues Rent Expense 500 Uility Expense 200 Totals ZiscoSys Magdeburg Work Sheet For the month ended September 30, 2013 Adjusted Adjustments Trial Supplies Expense 200 Insurance Expense 100 Accumulated Depreciation 84 Office Equipment Deprecitation Expense 84 Income Statement Sheet Totals

6 Step 3 combine trial balance amounts with adjustment amounts Trial ZiscoSys Magdeburg Work Sheet For the month ended September 30, 2013 Adjusted Trial Adjustments Income Statement Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Sheet Cash Accounts Receivable Equipment Supplies Prepaid Insurance Accounts Payable Unearned Revenue Owner s Investment Owner s Withdrawal Revenues Rent Expense Uility Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Office Equipment Deprecitation Expense Totals

7 Step 4 transfer adjusted balances to appropriate statement accounts Trial ZiscoSys Magdeburg Work Sheet For the month ended September 30, 2013 Adjusted Trial Adjustments Income Statement Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Sheet Cash Accounts Receivable Equipment Supplies Prepaid Insurance Accounts Payable Unearned Revenue Owner s Investment Owner s Withdrawal Revenues Rent Expense Uility Expense Totals Supplies Expense Insurance Expense Accumulated Depreciation Office Equipment Deprecitation Expense Totals

8 Step 5 total statement accounts and compute net income/loss Trial Account titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash Accounts Receivable Equipment Supplies Prepaid Insurance Accounts Payable Unearned Revenue Owner s Investment Owner s Withdrawal Revenues Rent Expense Uility Expense Totals ZiscoSys Magdeburg Work Sheet For the month ended September 30, 2013 Adjusted Adjustments Trial Income Statement Supplies Expense Insurance Expense Accumulated Depreciation Office Equipment Deprecitation Expense Totals Net Income Totals Sheet 8

9 Closing the books... means making accounts ready for the next accounting period... is done at the end of each accounting period Source: Weygandt/Kieso/Kimmel, p.141 9

10 Purpose of closing entries zero out all nominal accounts transfer net income (loss) and owner s withdrawal into owner s capital account journalizing and posting closing entries is a required step in the accounting process closing entries are journalized in the general journal and then posted 10

11 The closing process Debit each revenue account for its balance, and credit Income Summary for total revenues. Credit each expense account for its balance, and debit Income Summary for total expenses. Closing the Income Summary account balance to the Capital account. Closing the Withdrawals account balance to the Capital account. Alternative: close revenue and expense accounts directly to the capital account 11

12 One example before we go through the whole closing process... let s close the revenue account for ZiscoSys Closing the account on September 30, yields the following 12

13 ZiscoSys accounts before closing Expense Accounts Revenue Withdrawals Capital

14 Closing process for ZiscoSys Expense Accounts Revenue Withdrawals Capital Income Summary 14

15 Step 1: close revenue account Expense Accounts Revenue = Withdrawals Capital Income Summary

16 Step 2: close expense accounts Expense Accounts Revenue 1.084= = Withdrawals Capital Income Summary

17 Step 3: close income summary account Expense Accounts Revenue = = Withdrawals Capital Income Summary = 17

18 Step 4: close withdrawal account Expense Accounts Revenue = = Withdrawals Capital = Income Summary = 18

19 Preparing a Post-Closing Trial Why?... to prove equality of permanent account balances Post Closing Trial ZiscoSys Magdeburg Post Closing Trial September 30, 2013 Cash Accounts Receivable Equipment Supplies 300 Prepaid Insurance Accumulated Depreciation Office Equipment 84 Accounts Payable 300 Unearned Revenue Owner s Capital note that all temporary accounts have zero balances after closing hence, they don t enter the post-closing trial balance 19

20 Summary of the Accounting Cycle 1 - Analyze transactions from source documents 2 - Journalize transactions 3 - Post entries to ledger Start of a new accounting cycle 4 - Prepare trial balance 5 - Make end-of-period adjusting entries 8 - Close accounts and prepare post-closing trial balance 7 Prepare financial statements 6 - Prepare adjusted trial balance 20

21 Reversing entries an example employer has a biweekly payroll of 8.000, salaries are paid on the 10th and 24th each month September 24, initial salary entry : of salaries earned between September 10 and September 24 are paid. September 30, adjusting entry : salaries earned between September 24 and September 30 amount to and will be paid in the October 10 payroll. October 10, subsequent salary entry : salaries paid are Of this amount, accrued in September as salaries payable and was earned in October 21

22 Illustration of reversing entries No Reversing Entry Initial Salary Entry Sept. 24 Salaries Expense Cash Adjusting Entry Sept. 30 Salaries Expense Salaries Payable Closing Entry Sept. 30 Income Summary Salaries Expense Reversing Entry Used Initial Salary Entry Sept. 24 Salaries Expense Cash Adjusting Entry Sept. 30 Salaries Expense Salaries Payable Closing Entry Sept. 30 Income Summary Salaries Expense Oct. 1 Reversing Entry no reversing entry Reversing Entry Oct. 1 Salaries Payable Salaries Expense Subsequent Salary Entry Oct. 10 Salaries Payable Salaries Expense Cash Subsequent Salary Entry Oct. 10 Salaries Expense Cash

23 Correcting entries needed when errors are discovered correcting entries are journalized and posted whenever an error is detected in cash account is reduced to zero by posting the correcting entry. 23