Class 7 Chapter 4 The adjustment processPlanThe Accounting CycleFinancial Statement PreparationPowerPoint PresentationThe Closing ProcessSlide 7Closing EntriesSlide 9Closing EntriesClosing entriesSlide 12Slide 13Slide 14Final StepEnd of periodPP 1 – Trial BalancePP 1Slide 19Slide 20Slide 21Slide 22Slide 23Slide 241Class 7Chapter 4 The adjustment processAccounting 2610Xiumin Martin2/5/20132PlanPrepare financial statementsClosing entry3The Accounting CycleEnd of the Accounting PeriodStart of the Accounting Period Perform transaction analysis. Record journal entries. Post amounts to general ledger. Perform transaction analysis. Record journal entries. Post amounts to general ledger.Phase 1:During theAccountingPeriod. Prepare a trial balance. Record and post adjusting entries. Prepare financial statements. Record and post closing entries. Prepare a trial balance. Record and post adjusting entries. Prepare financial statements. Record and post closing entries.Phase 2:End of theAccountingPeriod.4Financial Statement PreparationThe next step in the accounting cycle is to prepare the financial statements1. Income Statement 2. Statement of Retained Earnings3. Balance Sheet4. Statement of Cash Flows(Chapter 13)PreparedfromT-accountbalancesPrepared from information provided in balance sheet,statement of retained earningsand income statement56Why do we need to close? Balance Sheet account balances carry forward from period to period Income Statement accounts do not carry forwardWhat do we do in the process?Transfer net income (or loss) to Retained Earnings.Establish a zero balance in each of the temporary accounts to start the next accounting period.The Closing Process7Temporary8Closing EntriesTemporary (or nominal) accounts that are closed to retained earnings at the end of the period--• Revenues.Revenues.• Expenses.Expenses.• Gains.Gains.• Losses.Losses.• Dividends declared.Dividends declared.• Revenues.Revenues.• Expenses.Expenses.• Gains.Gains.• Losses.Losses.• Dividends declared.Dividends declared.9Closing EntriesPermanent (or real) accounts and are never closed at the end of the periodAssetsLiabilitiesStockholders’ Equity- Contributed capital- Retained earnings10 Closing EntriesSteps in the closing process1. Transfer balance in revenues and gains to retained earningsDr: Revenues 1,000Dr: Gains 100Cr: Retained Earnings 1,10011Closing entriesAfter we post the entry to the T-accounts, the account balances look like this:After we post the entry to the T-accounts, the account balances look like this:12/31 1,000Revenues 1,000 EndBal. 0Retained earnings1,000 12/31Revenues can have multiple accounts. The above is a summation of all of them.12 Closing EntriesSteps in the closing process2. Transfer balance in expenses and losses to retained earningsDr: Retained Earnings 500Cr: Expenses 450Cr: Losses 5013Closing entriesAfter we post the entry to the T-accounts, the account balances look like this:After we post the entry to the T-accounts, the account balances look like this: 450 12/31Expenses End 450Bal. 0Retained earnings1,000 12/3112/31 500500 Bal.14Closing EntriesRetained EarningsBeginning BalanceRevenuesGainsExpensesLossesDividendsNetIncomeor Net LossEnding Balance15Final StepWe prepare for the beginning of a new accounting periodPrepare a post-closing trial balance to verify mathematical accuracy prior to starting a new accounting cycleTemporary accounts should have a balance of zero.16End of periodTBBefore AJE TBAfter AJE AJEFinancialStatementsTB after CEClosing Entry17PP 1 – Trial Balance18PP 1Record the effects of the following transactions that occurred during July 2002.Construct a Balance Sheet and an Income statement as of the end of July 2002. 1. Sold merchandise on account for $85,000.2. Purchased merchandise inventory on account from various suppliers for $46,300.19PP 13. Paid rent for July $11,750.4. Paid salaries for July of $20,600.20PP 15. Collected accounts receivable of $34,150.6. Paid accounts payable of $38,950.21PP 17. Paid Miscellaneous expenses of $3,200.22PP 1Adjusting entries required at the end of July:8. Paid the premium on a one-year insurance policy on March 1, 2002, with coverage beginning on that date. This is the only insurance policy in force as of June 30, 2002.9. The firm depreciates its equipment over a 10-year life. Salvage value is 0.23PP 110. Employees earned salaries of $1,600 during the last two days of July but were not paid. These are the only unpaid salaries at the end of July. 11. The note payable is a 90-day, 12 percent note issued on June 30, 2002.24PP 112. Merchandise inventory on hand on July 31, 2002 totals $77,950.Note: In #1, we were not given the direct cost of the goods sold. We will need to find it in a different way. The information in 12 is
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