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The Accounting Period Cycle & Concepts

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Ashley Boltz

on 8 January 2014

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Transcript of The Accounting Period Cycle & Concepts

Step 6
Eleven commonly accepted concepts are used in the finance profession as a guideline for reporting and interpreting accounting information.
~Overview~
The
Accounting Period Cycle
&
Concepts

Importance: Adjusting entries are used to update the journal and closing entries close out temporary accounts for the start of a new fiscal period (Gilbertson 206).
Driving Question:
How does the Accounting Period Cycle and GAAP Concepts impact Accounting?
Discussed Concepts
Accounting Period Cycle
Adequate Disclosure
Business Entity
Consistent Reporting
Going Concern
Historical cost

Unit of Measurement
Matching Expenses w/ Revenue
Objective Evidence
Realization of Revenue
Materiality
Steps Involved
1- Analyze Transactions
2- Journalize
3- Post
4- Prepare Worksheet
5- Prepare Financial Statements
6- Journalizing Adjusting & Closing Entries
7- Post Adjusting & Closing Entries
8- Prepare Post-Closing Trial Balance

Objectives of Presentation
Goals
Identify and describe how the accounting principles impact financial statements.
Order and describe each accounting step.
Integrate the above two concepts into one overall presentation in an easily understood manor.
Accounting Period Cycle:
changes in financial information are reported for a specific period of time in the form of financial statements
Adequate Disclosure:
financial statements contain all information necessary to understand a business' financial condition
Business Entity:
financial information is recorded and reported separately from the owner's personal financial information
Consistent Reporting:
the same accounting procedures must be followed in the same way each time
Going Concern:
financial statements are prepared with the expectation that a business will remain in operation indefinitely
Historical Cost:
The actual amount paid for merchandise or other items bought is recorded
Matching Expenses with Revenue:
the revenue from business activities and the expenses associated with earning that revenue are recorded in the same accounting period
Objective Evidence:
A source document is prepared for each transaction
Realization of Revenue:
Revenue is recorded at the time goods or services are sold
Materiality: business activities creating dollar amounts large enough to affect business decisions should be recorded and reported as separate items in accounting items in accounting records and financial statements
Unit of Measurement:
business transactions are reported in numbers that have common values - that is, using a common unit of measurement
Step 1
Analyze Transactions
(Gilbertson A1-A3)
Unit of Measurement & Business Entity
To begin, a transaction must occur to change a business's asset, liability and/or owners equity account. These transactions are stated in common values. For example, in the United States, business transactions occur via dollar amounts [Concept: Unit of Measurement]. The concept is followed so that
the financial reports of a business can be clearly stated and understood in numbers that have comparable values
(Gilbertson 10)
.
Additionally, in a business, these transactions should not include personal records of the owner(s) (Gilbertson 10). [Concept: Business Entity]
Personal Records
Common Source Documents
Checks: o
rders cash from a bank account
Sales Invoice:
a sale which cash is to be received at a later date
Receipt:
written acknowledgment for cash received
Memorandum:
brief message describing a transaction
Calculator Tapes:
total of daily cash received from customers



Memorandum
(Gilbertson 58-59)
Steps to Analyzing Transactions
Steps to Analyzing Transactions
Assets = Liabilities + Owners Equity
(A = L + OE)
Assets(A):
anything of value that is owned

Liability(L):
an amount owed by a business

Owners Equity(OE): t
he amount remaining after all values of liabilities is subtracted from the value of all assets
the equation must be in balance
i.e 5A = 2L + 3OE; 5=5
Before a business starts the equation is: 0A= 0L + 0OE; 0=0

(Gilbertson 8)
Key Terms
T Account: a
n accounting device used to analyze transactions
Debit:
an amount recorded on the left side
Credit:
an amount recorded on the right side
Normal Balance(NB):
the side that is increased
Chart of Accounts:
a list of accounts used by a business
Any Asset
NB
Any Liability
NB
Owner's Equity T-Accounts:
"Any" Expense
NB
"Name" Drawing
NB
"Name" Capital
NB
Sales (Revenue)
NB
2. Then, identify the account associated with the transaction. There will always be two accounts affected in every transaction. These two accounts can be a combination of an asset and an asset, a liability and an asset, an expense and an asset, etc... Every account has a t-account showing debits, credits and a normal balance. Depending on the account, the debit will increase and the credit will decrease and vice versa.
*All T-Accounts
Left side= Debit
Right side=Credit
NB= Normal Balance
NB side always increases
Example: Analyzing a Transaction
(Gilbertson 28-32)
Received cash from owner (Kelly) as an investment, $500.
Accounts used: Cash (an asset) and Kelly, Capital (owner's equity)
Cash
NB
Kelly, Capital
NB
Assets = Liabilities + Owners Equity
Any Liability
NB
How the accounts are affected- Cash is increased; Kelly, capital is decreased
Cash
Any Liability
Kelly, Capital
500 0
0 0
0 500
500 + 0 = 500
500 = 500
^
These must equal!
Importance: By correctly analyzing transactions into their proper debit/credit parts, you have completed the first step in the accounting cycle. This step is critical to start journalyzing.
Step 2

Key Terms
Journal:
a form for recording transactions in chronological order
Journalizing:
the act of recording transactions in a journal
Special Amount Column:
a journal amount column headed with an account title
General Amount Column:
a journal amount column not headed with an account title
Entry:
information for each transaction recorded in a journal
Double-E
ntry Accounting: the recording of debit/credit parts of a transaction
Source Document:
a business paper which information is obtained for a journal entry
(Gilbertson 56-57)
Recording Document Numbers (Abbreviations):
Check- C{check #} ex. check 367= C367
Memorandum- M{memo #} i.e. Memorandum 36= M36
Calculator Tape- T{date #} ex. Aug. 12 Tape #12= T12
Sales Invoice- S{invoice #} ex. Sales invoice #1= S1
Receipt- R{receipt #} ex. Receipt #9= R9
Steps to Journalizing
1. Determine which journal you will use for each entry.
(Reminder: entries are to be done chronologically)
3. Record the year directly under the column heading
Date
and the month/day in the first entry spot.
Journal Possibilities
Each business uses the kind of journal that best fits the needs of that business. The nature of a business and the number of transactions to be recorded determine the kind of journal to be used
(Gilbertson 56).
***Go to next slide for more information on the different types of journals.
Specific to larger businesses (ex. merchandising business):
Special Journal:
a journal used to record only one kind of transaction
Cash payments Journal:
for all cash payments
Purchases Journal:
for all purchases of merchandise on account
Sales Journal:
for all sales of merchandise on account
Cash Receipts Journal:
for all cash receipts
General Journal:
for all other transactions
(Gilbertson 235)
Specific to a smaller businesses (ex. a proprietorship):
Smaller businesses often use a multicolumn journal that have five amount columns:
General
debit/credit,
Sales
credit, and
Cash
debit/credit. All entries are made in a single journal.

(Gilbertson 57)
4. Record the debit amount under an appropriate column heading. If the debit amount does not belong to a special amount column, then the amount is to be recorded in the general amount column along with its account title. In addition, the name of the account should be written under the
Account Title
column in it's corresponding entry row.
Steps to
Journalizing Cont.
5. Record the credit amount under the a proper column heading. If the amount does not belong to a special amount column. Then, place the amount under the general amount column along with it's corresponding account title (similar to that in step 3)
6. Record the source document from which you obtained the information under the column row titled
Doc. No.
.
2. Record the journal page number in the top right hand corner (always).
[Concept: Objective Evidence]
**Reminders:
Debits must be recorded first!
If a transaction contains a general column amount and a special column amount then, the entry can be combined in one row.
If a transaction contains two special amount columns (ex. received cash from sales), then the entry can be combined in one row. In addition, a check mark is placed in the general account title and post reference columns. The check mark will be explained in a later step.
If a transaction contains two general column amounts, then the entry must be created on two separate rows.

Steps to
Journalizing Cont.
**Reminder: Once the year and month is recorded once, you do not need to continuously record it unless a change in month occurs. The day is recorded with each new entry
Example (Proprietorship)
2013
Dec.
1
December 1. Received cash from owner (Kelly) as an investment, $100.00.
Receipt No. 1.
2. Bough supplies on account from Walmart, $20.00.
Memorandum No. 1
3. Received cash from sales, $500.00.
Tape No. 3.
4. Paid cash on account to Walmart, $5.00.
Check No. 7.
Rule and prove page
Kelly, Capital
R1
10000
10000
2
Supplies
Accounts Payable- Walmart
2000
2000
M1
3
T3
50000
50000
Date
Journal Page #
Source Document
Single & Double Rule
4
Accounts Payable- Walmart
C7
2000
500
500
120 00
500 00
600 00
-----
Proving Page 2
Debit Credit
Gen.: $25.00 120.00
Sales: 500.00
Cash: $600.00 5.00
Totals $625.00 = 625.00
Carried Forward
3
3
2013
Dec.
Brought Forward
-----
600 00
500 00
1 20 00
2000
2500
12000
50000
60000
500
Single & Double Rule
31
Totals
Proving Page 1
Debit Credit
Gen.: $20.00 120.00
Sales: 500.00
Cash: $600.00 0.00
Totals $620.00 = 620.00
General Account Title
Special Amount Column: Sales Credit
General Amount Column n Debit/Credit
Cash Debit/Credit
Steps to Journalizing Cont.
7. Proving and Ruling a Journal Page
i. Begin by drawing a single line directly below the last entry of the
journal. This line indicates that the columns are to be totaled.
ii. On the next available row, write the date in the date column (reference
below).
(Situation A) If it's the last line of a particular page, but there are still other journal entries to be recorded, then use the date in the last entry
(Situation B) If there are no more journal entries needed to be recorded, then the date should be the last day of the most recent month.
iii. To total or carry forward?
If you're in situation A, write "Carried Forward" in the account title column and place a check mark in the Post. Ref. column.
If you're in situation B, write "Totals" in the account title column
iv. Regardless if you're in situation A or B, your next step is to add up each
column, and write the column totals underneath the single line rule in it's corresponding column

Journal Page #
Column Totals
Column Totals
General Amount Column n Debit/Credit
Special Amount Column: Sales Credit
Cash Debit/Credit
Post Reference
(Gilbertson 74-75)
Importance: Journalizing is a permanent record of the debit/credit parts of every transaction within a business in chronological order.
Step 3
Journalizing
Posting
Importance: Posting enables an accountant to see all the changes occurring in a single account.
Basic Key Terms
Ledger:
a group of accounts
Types of ledgers include..
General ledgers
Subsidiary ledgers
Accounts payable ledgers
Accounts receivable ledgers
Account Number:
the number assigned to an account
Posting:
transferring information from a journal entry to a ledger account
Chart of Accounts:
a list of account titles and numbers showing the location of each account in a general ledge

Creating a Chart of Accounts
( Gilbertson 91-96)
{Account Name}
{# of selected account}
{Year}
{Month}
{Day}
{Notes}
Journal Type & Page #
How the account is affected;
Debit/Credit
The result of the transaction on the overall account
An Account Form
Accounts in a general ledger are arranged in the same order as they appear on financial statements
(Gilbertson 92).
assets-> liabilities-> owner's equity-> revenue-> and expenses
The most common number system is:
Asset accounts: 1,000 to 1,999
Liability accounts: 2,000 to 2,999
Equity accounts: 3,000 to 3,999
Revenue: 4,000 to 4,999
Expense accounts: 5,000 to 6,999
When assigning numbers to your accounts, it's important to assign in increments (ex. 1000, 1100, 1200). This allows room for more accounts to be added in the future if need be.
When an account is no longer needed, it is removed from the ledger and the chart of accounts (Gilbertson 93).
(How)
Example of Chart
Notes:
When setting up a chart of accounts, asset, liability, and owners equity accounts are always to the left, and any revenue or expense accounts are always to the right.
Each section is labeled prior to the accounts associated with each.
ex. (100) Assets, (200) Liabilities), (300) Owner's Equity, (400) Revenue, and (500) Expenses
Assets, Liabilities & Owner Equity Accounts (Right)
Revenue & Expense Accounts (Left)
Steps to Posting
*Note
If you have multiple types of journal pages, be sure to post in the following order: sales journal, purchases journal, general journal, cash receipts journal, and finally, cash payments journal.
The check marks you placed while journalizing means the amounts are NOT to be posted individually. You can skip these.
Requirements
1. Identify the steps of the accounting cycle.
2. Explain and report the significance of each step.
3. Identify and explain the accounting concepts involved at each step.
4. Show examples of each step.
5. Use MLA format when presenting information.
Example:
1. Begin by opening a ledger for each individual account. To open an
account, write the account title and it's associated number (from chart of accounts) on the blank ledger.
2. Place any previous balances associated with the account in its
appropriate ledger account. Be sure to record this number in the balance column under the debit/credit normal balance. Then, place a check mark in the
Post. Ref.
column.
3. With your pages in the order mentioned above, begin with the first
journal entry. Look at the account title and then, find the ledger that has the same title.
4. On the ledger, record he date (month/day/year) in the
Date

column.
5. Write the journal type and page number in the Post. Ref. column
of the ledger.
6. Record any debit/credit amounts associated with the journal entry
your posting in the debit/credit columns prior to the balance columns.
7. Record the new account balance in the balance column debit/credit
normal balance.
a debit on a debit or a credit on a credit; add.
a debit on a credit or a credit on a debit; subtract.
8. Go back to the journal and write the account number (found on top
right of ledger) in the Post. Ref. column of the journal.
9. Repeat until all general accounts are posted from all journals.
10. Place a check mark under the general debit and credit columns totals
of the journal. This check mark indicates that the column totals are not to be posted individually. (Gilbertson 100).
11. Following the same order of pages as posting entries individually
begin with the first special amount column total. Find the ledger associated with the special amount column title.
12. Follow the same steps as posting individually, recording only the
column totals.
13. Once a special amount column is recorded, place the ledger account
number underneath the column total in a parenthesis.
**remember to update debit/credit balance columns as you go!
Steps to Posting Cont.
Step 4
Preparing a Worksheet
Importance:
1. to summarize general ledger account
balances to prove that debits equal credits
2. to plan needed changes to general
ledger accounts to bring account balances up to date
3. separate general ledger account
balances acording to the financial statements to be prepared
4. to calculate the amount of net income
or net loss
(Gilbertson 96-105)
(Gilbertson 152)
Example of Posting:
Kelly, Capital
2013
Dec. 1
1
100 00
100 00
Supplies
2013
Dec. 2
1
20 00
2000
Accounts Payable - Walmart
2013
Dec. 2
20 00
20 00
1
Sales
4
2
500
1 5 00
2013
Dec. 31
2
500 00
500 00
Cash
2013
Dec. 31
2
31
2
600 00
600 00
500
59500
110
120
210
410
310
310
120
210
210
(410)
(110) (110)
Steps in Preparing a worksheet
1. To begin, complete the heading of the worksheet highlighted above.
2. Enter the account balances in the trial balance column.
This is done by directly copying the account titles and ending balance from previous ledgers.
3. Enter any adjustments in the adjustment columns (excluding federal income tax expense and federal income tax payable at this point).
A letter corresponds with each debit/credit entry and is placed in parenthesis to the left of each value.
4. Extend up-to-date accounts to the balance sheet column.
Assets and liabilities, as well as capital and drawings accounts, are extended to the balance sheet columns (with the exception of the federal income tax payable account).
5. Extend all up-to-date income statement account balances
(Excluding the federal income tax expense).
The resulting accounts that do not go to the balance sheet columns go to the income statement columns.
{Company's Name}
Worksheet
For Month Ended, {Month day, year}
Steps in Preparing a Worksheet Cont.
6. At this point in time, you can now calculate the federal income tax expense adjustment.
Steps in Preparing a Worksheet Cont.
Begin by adding the
Income Statement Debit
and
Credit
columns and then find the difference between the two.
Income Statement Credit column total
-
Income Statement Debit column
total =
Net Income before Federal Income Tax
Example: $130,000(
Income Statement Credit
column total) - $20,000(
Income Statement Debit column
total) = $110,000(
Net Income before Federal Income Tax
)
Using the chart illustrated below, calculate the actual amount owed.
Ex. The figures come from the example above. Given information: Trial Balance Federal Income Tax Expense= $20,000
Federal Income Tax
First $50,000.00.......................................................
Next, 25,000.00.........................................................
Next, $25,000.00.......................................................
___________ - $100,000.00=__________......
Total Federal Income Tax
Rate
15%
25%
34%
39%
Tax
___________
___________
___________
___________
___________
$7,500.00
$6,250.00
$8,500.00
Calculation for adjustment:
$110,000.00
$10,000.00
$3,900.00
+
$26,150.00
This amount is the difference between income statement credit and debit (calculated above).
Actual amount owed (calculated using chart) -
Trial Balance Federal Income Tax Expense
= Adjustment
$26,150.00- $20,000 =
$6,150.00 <--adjustment
Treat this adjustment as you would with any other adjustment; debit
Federal Income Tax Expense
and credit
Federal Income Tax Payable
.
Now, you can transfer these two accounts to their corresponding columns after adjustment calculations have been made. The
Federal Income Statement Payable
account will extend to the balance sheet column, and the
Federal Income Tax Expense
will extend to the
Income Statement
column.
6 (Cont.) Place a single rule under the
Trial Balance Debit
and
Credit
columns and add these
columns separately. (The
Debit
and
Credit
column totals must equal!) Place these totals under their corresponding debit and credit column. If they are equal, place a double rule under each total.
8. Calculate and record the net income or net loss.
Place a single rule under the
Income Statement
and
Balance Sheet
columns and add up each
Debit
and
Credit
column. Then, place these totals under the single rule line under each column title respectfully. These four totals will not equal!
In the
Income Summary
column, subtract the smaller total from the larger total and place the difference under the smaller total. Do the same for the
Balance Sheet Debit
and
Credit columns
.
In the occurrence of a net income, these differences will lye on the outer portions of the four columns. Meanwhile, the differences in a net loss will lye in the middle two columns. Regardless where these differences are put, they must equal!
The, label the row (in the
Account Title
column) as a
Net Income
or a
Net Loss
varying on your situation
9. Place a single line below the
Net Income
or
Net Loss
amounts. Add the
Net Income
or
Net
Loss
amounts to the column totals above. Place totals under the Net Income or Net Loss amounts. These totals must match! Once the
Balance Sheet Debits
and
Credits
match, rule double lines underneath the final totals. The same is done for the
Income Statement Debit
and
Credit
column totals.
(Gilbertson 428)
Key Vocab
Worksheet:
a columnar accounting form used to summarize the general ledger information needed to prepare financial statements
Trial Balance:
a proof of the equality of debits and credits in a general ledger
Adjustments:
changes recorded on a worksheet to update general ledger accounts at the end of a fiscal period
Balance Sheet:
a financial statement that reports assets, liabilities and owner's equity on a specific date
Income Statement: a financial statement showing the revenue and expenses for a fiscal period
Net Income:
the differences between total revenue and total expenses when total revenue is greater(net loss is the opposite)
Fiscal period:
the length of time for which a business summarizes and reports financial information
(Gilbertson 152-165)
Concepts Involved
Consistent Reporting:
Recording information each fiscal period the same way. For example, a company that reports the number of deliveries made one year and then reports the revenue made from those deliveries the next year is not being consistent about deliveries (Gilbertson 152). The adjustments have to be recorded the same way as the trial balance.
Matching Expenses with Revenue:
Through the use of adjustments, the expenses used to earn revenue are reported in the same fiscal period as the revenue earned and reported (Gilbertson 157).
Adequate Disclosure:
Information to understand a company's financial position is updated in the adjustment columns of a worksheet (Gilbertson 423).

Example: A Completed Worksheet
(Gilbertson 153)
Step 5
Prepare Financial Statements
Key Vocab
Component Percentage:
the percentage relationship between one financial statement item and that total that includes that item
Percent should be rounded to the nearest tenth
Concepts Involved
Adequate Disclosure: Financial statements are prepared from information on the worksheet (Gilbertson 202).

Going Concern: The statements are prepared with the expectation that the business will remain in business.

Matching Expenses with Revenue: The revenue and the expenses associated with that revenue are recorded in the same fiscal period and are represented on an income statement (Gilbertson 182).

Materiality: According to Accounting Explained, materiality is helpful in determining which figures are to be reported on income statement and balance sheet and which one in the notes. It is also helpful in helping decide which items should appear as line items and which ones are aggregated with others (Materiality).
Creating an Income Statement
1. Begin by writing out the heading:

2.Then, write the section heading, Revenue:, on the first available row.
3. Below the section heading, write
Sales
, and find the amount of sales and
place it in the correct amount column. This amount can be found on the worksheet income statement columns. In the % of sales column, write
100
.
4. Write out any other account related to revenue and there corresponding
amounts and place in the correct amount column.
5. After all of the revenue accounts, write the section heading
Expenses:
on the
next available row.
6. Write out all expense account names in the wider section of the income
statement (indented) and their corresponding balances in the proper amount column.
7. Under all expenses, write
Total Expenses
, and add up all the expense
amounts and place total in the proper amount column.
8. Lastly, on the last three lines, write the following and their amounts in the
proper amount columns:
Net Income before Federal Income Tax (
Sales
/Gross Profit on Sales -
Total Expenses
)
Less Federal Income Tax Expense
(This is found on the worksheet.)
Net Income after Federal Income Tax
. (
Net Income before Federal Income Tax
-
Federal Income Tax Expense
)

{Company Name}
Income Statement
For {Fiscal Period) Ended, {mm/dd/yyyy
*An income statement consists of a company's revenue and expenses.
Example: Proprietorship
+
Total Expenses % of Sales:
Total Expenses/SalesX100
1466.00/3565.00X100=41.1
Net Income:
Sales-Total ExpensesX100
3565.00-1466=2099.00
Net Income % of Sales:
Net Income/SalesX100
2099.00/3565.00X100=58.9
(Gilbertson 184)
*Note: Look at amount column placement for each account, singe/double rules, and calculations.
*Note: Look at amount column placement for each account, singe/double rules, and calculations.
+
-
+
-
+
-
-
+
**Other Calculations:
Net Sales % Net of Sales
:
Always=100

Cost of Mdse Sold % Net of Sales
:
C
ost of Mdse. Sold/Net Sales
X100
22066.90/49117.24X100=44.9

Gross Profit On Sales % Net of Sales
:
Gross Profit On Sales/Net Sales
X100
271067.34/491173.24X100=55.1

T
otal Expenses % Net of Sales
:
Total Expenses/Net Sales
X100
166864.15/491173.24x100=33.9

Net Income before Federal Income Tax % of Net Sales
:
Net Income before Federal Income Tax/Net Sales
X100
104203.19/4922773.24X100=21.2
-
(Gilbertson 452)
Example: Merchandising Business
Creating a Balance Sheet
(Gilbertson 82-184 & 449-452)
1. Begin by writing out the heading.
2. Label the first row
Assets
.
3. List any asset account titles and their amounts in the proper amount column.
Some companies will further divide assets into the following sub categories:
Current Assets
Assets exchanged for cash or consumed within a year.
Examples: Cash, Petty Cash, Accounts Receivable, etc...
Plant Assets
Assets that will be used for a number of years in the operation of a business
Examples: Office Equipment and Store Equipment
4. Total the asset amounts. A total should be calculated for both sub categories and a calculation
including everything together. Single rule the full total.
5. Write the title
Liabilities
on the next available row.
6. List any liability account and their amounts in the proper amount column. (A merchandising
business will have the subtitle
Current Liabilities
.
7. Single rule and total the liability amounts. Again, remember to use the single rule.
8. Write the title Owner's Equity (proprietorship) or Stockholder's Equity (merchandising business)
on the next row.
{Name of Company}
Balance Sheet
{Date}
*A balance sheet reports information about the elements of the accounting equation (Assets= Liabilities + Owner's Equity).
Example Balance Sheet: Proprietorship
Example Balance Sheet: Merchandising Business
(Gilbertson 469)
(Gilbertson 189)
(Gilbertson 182-189 and 465-468)
Steps to create a Statement of Stockholder's Equity
Statement of Stockholder's Equity:
a financial statement that shows changes in a corporation's ownership for a fiscal period
1. Write the following heading: --------------->

2. Then, write the the following titles in the wider section and their amounts in the correct
amount column:
a. Capital Stock: This is the heading and has no amount.
b. {$} Par Value:
This will be given to you in the instructions
.
c. January 1, 2013, {#} Shares Issued: Th
e number of shares issued will be in the
instructions however, this is not the amount to be recorded. To figure out the amount to be recorded, multiply the par value by the number of shares.
d. Issued during Current Year {#} Shares:
The number of shares issued during the current
year will be in the instructions. To find the amount to be record, multiply the number of shares issued during the current year by the par value. Place a single rule under this amount.
e.
Balance, December 31, {yyyy}, {#} of Shares Issued
: The number of shares issued is the
total of shares given to you in the instructions. The amount to be recorded is the total of both amounts previously recorded.
{Company Name}
Statement of Stockholder's Equity
For Year Ended December 31, 2013
Importance: Financial statements are used to evaluate a company’s financial performance (What).
(Gilbertson 461)
Journalizing Adjusting & Closing Entries
Key Vocab
Adjusting Entries: j
ournal entries recorded to update general ledger accounts at the end of a fiscal period
Closing Entries:
journal entries used to prepare temporary accounts for a new fiscal period
Permanent Account: a
ccounts used to accumulate information from one fiscal period to the next
Temporary Accounts:
accounts used to accumulate information until it is transferred to the owner's capital account
Concepts Involved
Accounting Period Cycle- Adjustments are updated to a journal before the end of every fiscal period.
Matching Expenses with Revenue- At the end of a fiscal period, the temporary accounts are closed to prepare the general ledger for the next fiscal period (Gilbertson 487).
Steps to Record Adjusting Entries
1. Write the heading,
Adjusting Entries
, in the middle of the account titles column
of a new journal page. (If you're using special journals, do the same procedure in the general journal.)
2. Write the date in the date column.
3. Scan down the
Adjustments
column of the worksheet and find both (a)
amounts.
4. Write the debited account in the journal first followed by the credited
account. The credited amount should be indented compared to the debited amount. *There is no source document for these entries.
5. Record the adjustment amounts for each account.
6. Repeat these steps until all adjustments are recorded.
Example:
Adjusting Entry for Supplies
Worksheet
Journal
(Gilbertson 202)
Steps to Creating Closing Entries
(Gilbertson 202 & 206)
**The income summary account, unlike other accounts, does not have a normal balance. When the account has a credit balance, then you have a net income. Meanwhile, if the account has a debit balance, then you have a net loss.

Debit
Total Expenses
Income Summary
Credit
Revenue
1. Write the heading,
Closing Entries
, in the middle of the journal page's Account Title column
on a new page. For these entries, there are no document numbers.
2. Identify the income statement accounts on the trial balance that have a credit balance.
Write the date and these account titles on the journal page following Closing Entries.
These accounts include
Sales
, and contra cost accounts like
Purchases Discount
and
Purchases Returns and Allowances
.
3. Because you want these account to have a balance of zero for the next fiscal period, each
account is to be debited for the amount of their balance.

Steps to Creating Closing Entries Cont.
9. The next step is to record net income/loss and close
Income Summary for the next fiscal period. Begin by writing out the date on the journal.
On the worksheet, look for the net income/loss debit/credit amount. This amount is used to close Income Summary.
Net Income- debit
Income Summary
Net loss- credit
Income Summary
The account used to close
Income Summary
is the account,
{Name}, Capital
.
10. Record Account titles and the net income/loss amount
to close Income Summary. The account debited will be first!
11. The last entry is to close the
Owner's Drawing
account.
On the worksheet, look for the account {Name}, Drawing and make note of the amount associated with it.
12. Write the date in the date column and the acounts
{Name}, Capital
and
{Name}, Drawing
under Account Title on the journal page
13. Because the drawing account has a debit balance and is
a temporary account, you will want to credit the account to reduce it to zero.
14. The money is transferred over to the
{Name}, Capital

account, so on the journal page the account is to be debited.
(Gilbertson 208-209 and 288-289)
Steps 1-8 are the same for both a Proprietorship and a Merchandising Business
**The remaining steps vary depending if the business is a Proprietorship or a Merchandising Business.
Remaining Steps of a Proprietorship:
Remaining Steps of a Merchandising Business:
9. The next step is to calculate the balance of the
Income
Summary
account.
Debit balance = Net loss
Credit balance = net income
**Because
Income Summary
is a temporary account, the amount is to be reduced to zero. The account associated with this action is
Retained Earnings
.
10. Begin by writing the date on the next row of the journal.
11. Debit/credit the accounts
Income Summary
and
Retained
Earnings
with the
Income Summary
account balance calculated in step 9. Write account title first and the account's amount in the debit/credit amount columns. (debited accounts always come first!)
*In the case you have a net income: debit
Income Summary & c
redit
Retained Earnings
*In the case you have a net loss: debit
Retained Earnings & c
redit
Income Summary
12. Cl
ose the account
Dividends
by transferring the money to
the account
Retained Earnings.
13. Begin by writing the date and the account titles Retained
Earnings and Dividends in the account title column of the journal.
14. Lastly, debit
Retained Earnings
with the amount of
Dividends

(found on worksheet), and credit
Dividends
. This will reduce
Dividends
to zero and is ready for the next fiscal period.
(Gilbertson 491)
(Gilbertson 210 & 211)
Sample of Journalizing Entries
Accounts used: Expense Accounts and Income Summary
Because the expense accounts are debits on the worksheet, in order to reduce their accounts to zero, you credit them.
+
Then, you add all of the expense accounts together and transfer this amount to the Income Summary Debit. This zeros out the expense accounts.
2013
Dec.
Date
Step 7
Post Adjusting & Closing Entries
Steps to Posting Adjusting & Closing Entries
1. Beginning with the first entry, locate the entry's ledger by looking at the account title.
2. Write the date of the entry on the ledger under the date column.
3. Write the journal page number and type in the Post. Ref. column of the ledger.
4. Take the amount journalized to the account and place into the debit or credit amounts
respectfully.
5. Write the new account balance in the balance sheet column. The balance debit/credit depends
on the normal balance of the account.
a debit and a debit/credit and a credit; you add
a debit and a credit/credit and a debit; you subtract
If an account has a zero balance, draw a line through the Balance Debit and Credit columns
6. Return to the journal and write the account number associated with the ledger in the Post Ref. column of the journal.
Repeat until all adjusting and closing entries are posted.
The following accounts will close- recall from earlier that these are temporary accounts:
(Gilbertson 97)
In a proprietorship:
{Name}, Drawing
Income Summary
Sales
All expenses
(Gilbertson 214-215)
In a merchandising business:
Dividends
Income Summary
Sales
Sales Discount
Sales Ret. & Allow
Purchases

(Gilbertson 495)
Example of Posting Adjusting & Closing Entries
Closing:
Adjusting:
Income Summary
3140
Retained Earnings
3120
10761.29
80313.95
31
General Journal <------Page 16
G16
31
80313.95
------
80313.95
G16
91075.24
Dec.
Date Account Title
Doc.#
Post. Ref.
Debit Credit
3140
3120
Supplies- Office
1145
Supplies Expense-Office
6155
Date Account Title
Doc.#
Post. Ref.
Debit Credit
General Journal <------Page 16
200.00
31
G16
G16
31
2730.00
2730.00
100.00
2830.00
3930.00
6155
1145
Concepts Involved
Matching Expenses with Revenue- Adjusting amounts and closing temporary accounts avoids combining amounts from the last fiscal period with the next.
------
Purch. Discount
Purch. Ret.& Allow.
All Expenses
Importance- To update ledger accounts and to close temporary accounts for the next fiscal period.
Step 8
Prepare Post-Closing Trial Balance
Importance: Verifies that debits equal credits in the general ledger accounts (Gilbertson 216)
Key Vocab
Post-Closing Trial Balance:
a trial prepared after the closing entries are posted
Steps to Create a Post-Closing Trial Balance
1. Write the heading:---->

2. List all general ledger accounts that have balances in the Account
Title Column.
3. Based off the general ledger accounts, write the debit/credit
account balances in the debit/credit columns of the post-closing trial balance respectively with their account titles.
4. Rule a single line under the last account's amount.
5. Add each debit/credit column.
6. On the next available line, write the word
Totals
.
7. Write the totals to each debit/credit columns.
8. Compare totals from step 5, these totals must be the same.
9. If the totals you calculated are equal, rule double lines across
both amount columns to show that the totals are verified as correct.


{Company Name}
Post-Closing Trial Balance
{Date}
Example of a Completed Post-Closing Trial Balance
**Note: Ledger accounts that have a zero balance do not appear on a post-closing trial balance.
(Gilbertson 216)
(Gilbertson 216)
Ashley Boltz
Accounting 1
Period 2
Due: 8 Dec. 2014

Importance:
Accountants must analyze each transaction to determine how it affects owner's equity and the different types of assets and liabilities before recording the transaction (Analyzing).
Concepts
1. Understand the accounting equation
Steps to Analyzing Transactions Cont.
Asset accounts include things like cash, prepaid insurance, account receivable, and supplies.
Liability accounts include any account payable.
Asset & Liability T-Accounts:
3. Given the amount in the transaction, determine how the amount is treated in each account- if it increases or decreases the account. Lastly, place this value into the corresponding debit and credit parts of each t-account.
4. Verify that your accounting equation is still balanced.
v. Once added, one should add up debits and credits on a separate sheet of
paper. The sum of the totals for each debit and credit MUST equal! If they're equal place a double line below the totals. By doing so, your indicating that the amounts are totals and the the sum of debits equals the sum of credits. (This is the last step of situation B.)
vi. To continue a page, as needed in situation A, open a new page by writing
the next page number in the upper right hand corner. Then, using the date from the last entry, write out the date in the
Date
column (dd/mm/yyyy).
vii. In the first row where you just wrote the date, copy over the totals from
the previous page into their corresponding columns and write
Brought Forward
for the account title. There should also be a check mark placed in the
Post. Ref.
column.
viii. Continue to journalize entries until all transactions are recorded. Once
you have no more transactions to be written down, reference step ii and follow through with the final steps.
7. Proving and Ruling a Journal Page Cont.
-----------------------------------------------------
(Gilbertson 160C)
subtract
subtract
equals
equals
add


add
equals
equals
Must Equal
Must Equal
Must Equal
Must Equal
Must Equal
extended to the
Balance Sheet
column
extended to the
Income Statement
column
{Company Name}
Income Statement
For {Fiscal Period} Ended, {mm/dd/yyy}
9. Record titles and amounts associated with each in the proper amount column.
Under
Owner's Equity
, record and title the amount for {Name}, Capital.
Under
Stockholder's Equity
, record and title the amount for
Capital Stock
and
Retained Earning
s.
Single rule and total these two amounts together and write
Total Stockholder's Equity
in the wider column.
10. Single rule and
Total Liabilities
and
Total Owner's Equity/Stockholder's Equity

amounts together. Label the next available row Total Liabilities and Owner's Equity/Total Liabilities and Stockholder's Equity and place this total in the proper amount column
11. Lastly, compare the
Total Liabilities and Owner's Equity/Total Liabilities and
Stockholder's Equity
with
Total Assets
. These two accounts must match! Once matched, double rule both of these accounts.

Creating a Balance Sheet Cont.
must match
must match
Steps to create a Statement of Stockholder's Equity Cont.
Shares X Value=------->
Shares X Par Value-->
+
The Capital Stock Section
The Retained Earnings Section
*b-e titles are to be indented
Write the following titles in the wider section of the financial statement along with their amounts in the proper amount column.
1.
Retained Earnings
: no amount is to be recorded for this
2.
Balance, January 1, 2013
: the amount is from the
Balance Sheet Credit
column
3.
Net Income After Federal Income Tax for {yyyy}
: This is from the
Income Statement Debit
column.
4.
Less Dividends Declared during {yyyy}
: This is found under the account title
Dividends
in the
Balance
Sheet Debit
column. Draw a single rule under this account.
5.
Net Increase during {yyyy}
: This is the difference between step 3 and 4. Draw another single rule under
this difference.
6.
Balance, December 31, {yyyy}
: This is the total of step 2 and step 5. Place a single rule underneath this
sum.
7.
Total Stockholder's Equity, December 31, {yyyy}
: This is the total from
Balance, December 31, {yyyy} #
Shares Issued
(found under the capital stock section) and the total from step 6.
8. Draw a double rule across all three amount columns under the amount written from step 7.
*2-6: titles are to be indented
(Gilbertson 462)
4. The account that the amount is transferred to is known as Income Summary.
This account is to be credited the total amount of the revenue accounts credited.
5. The next step is to identify the income statement accounts on the trial balance
that have a debit balance. These accounts include expense accounts, Purchases, and contra revenue accounts like Sales Discount and Sales Returns and Allowances.
6. On the journal, write the date and Income Summary in the Account Title
column, followed by the income statement accounts identified in step 5.
7. Once again, you want these income statement accounts to have a balance of
zero. To do this, you want to credit their account amounts on the journal since they have a debit balance.
8. The money is transferred to the Income Summary account. Find the total of the
credited income statement accounts and debit this amount to the Income Summary account.

Steps to Creating Closing Entries
Cont.
Concepts Involved
Realization of Revenue: When goods and services are sold, a journal entry is recorded regardless if money is received (Gilbertson 271).
Historical Cost: The actual amount paid for an item is recorded instead of the items value (Gilbertson 236). For example, a car could be valued at $25,000 but be sold for only $20,000. The historical cost of the car is what it was sold for- $20,000.
Objective Evidence: The source document number is placed in the Post. Ref. column of a journal. This shows where the amounts originated from and, it also
proves that the transaction did occur
(Gilbertson 57).
Full transcript