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13-1 Skyline College Chapter 13. 13-2 At the end of the period, Simpson Antiques prepares three financial statements: Classified Financial Statements.

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Presentation on theme: "13-1 Skyline College Chapter 13. 13-2 At the end of the period, Simpson Antiques prepares three financial statements: Classified Financial Statements."— Presentation transcript:

1 13-1 Skyline College Chapter 13

2 13-2 At the end of the period, Simpson Antiques prepares three financial statements: Classified Financial Statements Income statement Statement of owner's equity Balance sheet

3 13-3 The the balance sheet is arranged in a classified format. This makes the financial statement more useful to the readers. A classified Balance Sheet is formatted where accounts are divided into groups of similar accounts and a subtotal is given for each group.

4 13-4 The Multiple-Step Income Statement A multiple-step income statement is a type of income statement on which several subtotals are computed before the net income is calculated.

5 13-5 A single-step income statement is a format in which only one computation is needed to determine the net income. (Total Revenue – Total Expenses = Net Income) The Single-Step Income Statement

6 13-6 The format lists all revenues in one section and all expenses in another section. Single-step Income Statement JT Consulting Services Income Statement Month Ended December 31, 2007 Revenue Fees Income 28,000 Expenses Salaries Expense 5,000 Utilities Expense 600 Supplies Expense 500 Rent Expense 3,000 Depreciation Expense - Equipment 583 Total Expenses 9,683 Net Income for the Month 18,317

7 13-7 The first section of the multiple-step income statement contains the revenue from operations. This is the revenue earned from normal business activities. Other income is presented separately near the bottom of the statement. Operating Revenue

8 13-8 The operating revenue for Simpson Antiques is net sales of merchandise. Operating Revenue Sales This is an internal calculation which does not appear on the income statement Net Sales

9 13-9 Operating Revenue Net sales for Simpson Antiques

10 13-10 Three elements are needed to compute the cost of goods sold: The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Cost of Goods Sold Beginning inventory Net delivered cost of purchases Ending inventory

11 13-11 Purchases + Freight In Net Delivered Cost of Purchases

12 13-12 Cost of Goods Sold Schedule of Cost of Goods Sold Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale This is usually footnoted in the financial statements rather than appearing on the income statement

13 13-13 Cost of Goods Sold Cost of goods sold

14 13-14 Gross profit is the difference between net sales and the cost of goods sold. Gross Profit on Sales For Simpson Antiques net sales is the revenue earned from selling clothes. Cost of goods sold is what Simpson Antiques paid for the clothes that were sold during the fiscal period. Gross profit is what is left to cover operating expenses and provide a profit.

15 13-15 Gross profit on sales for Simpson Antiques

16 13-16 Operating expenses are expenses that arise from normal business activities. Operating Expenses Simpson Antiques separates operating expenses into two categories: Selling Expenses General and Administrative Expenses

17 13-17 Salaries for salespersons and advertising are examples of selling expenses. Operating Expenses

18 13-18 Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses.

19 13-19 Net Income or Net Loss from Operations The format for determining net income (or net loss) from operations is: Net Income (or Net Loss) from Operations Gross Profit on Sales (Total Operating Expenses)

20 13-20 Net income from operations

21 13-21 Other Income and Other Expenses Income that is earned from sources other than normal business activities appears in the Other Income section. For Simpson Antiques other income includes interest on notes receivable and one miscellaneous income item. Expenses that are not directly connected with business operations appear in the Other Expenses section.

22 13-22 Other Income and Other Expenses

23 13-23 Net Income or Net Loss Net income is all the revenue minus all the expenses. If there is a net loss, it appears in parentheses. Net income or net loss is used to prepare the statement of owner's equity.

24 13-24 Net income for Simpson Antiques

25 13-25 The Statement of Owner's Equity The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. The ending capital balance for Patricia Simpson, $84,792.80, is used to prepare the balance sheet.

26 13-26 Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year. Current Assets

27 13-27 Current Assets Liquidity is the ease with which an item can be converted into cash. Current assets are listed in the order of liquidity.

28 13-28 Current Assets Current assets for Simpson Antiques

29 13-29 Property, Plant & Equipment Property, Plant & Equipment (PP&E) is property that will be used in the business for longer than one year. The balance sheet shows three amounts for each category of plant and equipment : (Accumulated depreciation) Book value Asset

30 13-30 Plant and Equipment Total property, plant and equipment

31 13-31 Current Liabilities Current liabilities are d ebts that must be paid within one year using current assets.  Current liabilities are usually listed in order of priority of payment.  Management must ensure that funds are available to pay current liabilities when they become due in order to maintain the firm's good credit reputation.

32 13-32 Current Liabilities Total current liabilities

33 13-33 Long-Term Liabilities Long-term liabilities are any debts that are not considered current.  Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly.  Long-term liabilities include mortgages, notes payable, and loans payable.

34 13-34 Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.

35 13-35 Adjusting Entries All adjustments are shown on the worksheet. After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

36 13-36 Journalizing the Adjusting Entries Each adjusting entry shows how the adjustment was calculated. Supervisors and auditors need to understand, without additional explanation, why the adjustment was made.

37 13-37 Adjusting Entries Type of Adjustment Worksheet Reference Purpose Inventory(a – b)Removes beginning inventory and adds ending inventory to the accounting records. Expense(c – e)Matches expense to revenue for the period; the credit is to a contra asset account. Accrued Expense(f – i)Matches expense to revenue for the period; the credit is to a liability account. Prepaid Expense(j – l)Matches expense to revenue for the period; the credit is to an asset account. Accrued Income(m – n)Recognizes income earned in the period. The debit is to an asset account (Interest Receivable) or a liability account (Sales Tax Payable).

38 13-38 GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Income Summary 52, Merchandise Inventory 52, To transfer beginning inventory to Income Summary Merchandise Inventory 47, Income Summary 47, To record ending inventory (Adjustment a) (Adjustment b) 31 Adjusting Entries 2007 Dec. 31

39 13-39 GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Uncollectible Accounts Expense Allowance for Doubtful Accounts To record estimated loss from uncollectible amounts based on 0.8% of net credit sales of $100,000 Depreciation Expense – Store Equip. 2, Accum. Depreciation - Store Equip. 2, To record depreciation for 2007 as shown by schedule on file. (Adjustment c) (Adjustment d) Depreciation Expense – Office Equip Accum. Depreciation - Office Equip To record depreciation for 2007 as shown by schedule on file. (Adjustment e) 31 Adjusting Entries 2007 Dec. 31

40 13-40 GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Salaries Expense - Sales 1, Salaries Payable 1, To record accrued salaries of part- time sales clerks for Dec Payroll Taxes Expense Social Security Tax Payable To record accrued payroll tax on accrued salaries for Dec (Adjustment g) Medicare Tax Payable (Adjustment f) 31 Adjusting Entries 2007 Dec. 31

41 13-41 GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries Interest Expense Interest Payable (Adjustment i) (Adjustment h) Payroll Taxes Expense Fed. Unemployment Tax Payable 9.60 To record accrued payroll tax on accrued salaries for Dec State Unemployment Tax Payable Dec. 31 To record interest on a 2-month, $2,000, 12% note payable dated Dec. 1, 2007

42 13-42 GENERAL JOURNAL PAGE 26 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 31 Supplies Expense 4, Supplies 4, To record supplies used Insurance Expense 2, Prepaid Insurance 2, To record expired insurance on 3-year policy purchased for $7,350 on Jan. 2, 2007 (Adjustment j) (Adjustment k) (Adjustment l) Interest Expense Prepaid Interest To record transfer of 2/3 of prepaid interest of $225 for a 3-month, 10% note payable issued to bank on Nov. 1, Adjusting Entries

43 13-43 GENERAL JOURNAL PAGE 27 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 31 (Adjustment m) Interest Receivable Interest Income To record accrued interest earned on a 4-month, 15% note receivable dated Nov. 1, 2007 ($1,200 x 0.15 x 2/12) Sales Tax Payable Miscellaneous Income To record accrued commission earned on sales tax owed for fourth quarter of 2007: Sales Tax Payable $7,200 Commission rate x 0.03 Commission due $ 216 (Adjustment n) 31 Adjusting Entries

44 13-44 Posting the Adjusting Entries After the adjustments have been recorded in the general journal, they are promptly posted to the general ledger. The word Adjusting is entered in the Description column of each general ledger account.

45 13-45 At the end of the period, the temporary accounts are closed. The temporary accounts are: Revenue accounts Cost of goods sold accounts Expense accounts Drawing account Journalizing and Posting the Closing Entries

46 13-46 There are four steps in the closing process. 1.Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. 2.Close expense accounts and cost of goods sold accounts with debit balances to Income Summary. 3.Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. 4.Close the drawing account to owner's capital.

47 13-47 GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 31 Closing Entries Income Summary 568, Sales 561, Interest Income Miscellaneous Income Purchases Returns and Allowances 3, Purchases Discounts 3, Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances. Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

48 13-48 GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Sales Returns and Allowances 13, Income Summary 512, Purchases 321, Salaries Expense – Sales 79, Advertising Expense 7, Cash Short or Over Supplies Expense 4, Depreciation Expense - Store Equip 2, Rent Expense 27, Freight In 9, Salaries Expense - Office 26, Telephone Expense 1, Uncollectible Accounts Expense Utilities Expense 5, Depreciation Expense - Office Equip Interest Expense Payroll Taxes Expense 7, Insurance Expense 2, Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances. Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.

49 13-49 Income Summary 12/31 47, /31568, , Bal. 51, Adjusting Entries (a-b)12/31 52, Closing Entries 12/31 512, , GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Income Summary 51, Patricia Simpson, Capital 51, The third closing entry transfers the Income Summary balance to the owner's capital account. This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. For Simpson Antiques, the third closing entry is as follows: Step 3: Closing the Income Summary Account.

50 13-50 GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Patricia Simpson, Capital 27, Patricia Simpson, Drawing 27, Step 4: Closing the Drawing account. This entry closes the drawing account and updates the capital account.

51 13-51 Posting the Closing Entries The closing entries are posted from the general journal to the general ledger. This process brings the temporary account balances to zero. The word Closing is entered in the Description column.

52 13-52 Preparing a Postclosing Trial Balance Prepare a postclosing trial balance to confirm that the general ledger is in balance. Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance. The postclosing trial balance matches the amounts reported on the balance sheet. To verify this, compare the postclosing trial balance with the balance sheet.

53 13-53 Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance. Asset Accounts

54 13-54 To verify this, compare the postclosing trial balance with the balance sheet. Capital Account

55 13-55 Revenue Preparing a Postclosing Trial Balance Cost of Goods Sold Expenses Withdrawals Temporary accounts do not appear on the postclosing trial balance.

56 13-56 Gross profit percentage Current ratio Ratios and other measurements are used to analyze and interpret financial statements. Two such measurements are used by Simpson Antiques:

57 13-57 Gross Profit Percentage The gross profit percentage is calculated by dividing gross profit by net sales. For Simpson Antiques, for every dollar of net sales, gross profit was almost 40 cents. Gross profit $219,030 Net sales $549,150 = = = 39.9% The gross profit percentage is the amount of gross profit from each dollar of sales.

58 13-58 Current Ratio Simpson Antiques has $2.15 in current assets for every dollar of current liabilities. The current ratio is calculated in the following manner: = 2.15 to 1 Current assets $98, Current liabilities $45, = The current ratio provides a measure of a firm's liquidity or ability to pay its current debts.

59 13-59 Journalizing and Posting Reversing Entries Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses. Only accruals are reversed.

60 13-60 GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF Dec. 31 Salaries Expense—Sales 602 1, Salaries Payable 229 1, (Adjustment f) Adjusting Entries GENERAL JOURNAL PAGE 29 DATE DESCRIPTION POST. DEBIT CREDIT REF Jan. 1 Salaries Payable 1, Salaries Expense—Sales 1, Reversing Entries Reversing Entry At the beginning of the year, a reversing entry is made. This will simplify recordkeeping when the paychecks are issued.

61 13-61 GENERAL JOURNAL PAGE 30 DATE DESCRIPTION POST. DEBIT CREDIT REF Jan. 3 Salaries Expense 1, Cash 1, On January 3 the payment of $1,700 of salaries is recorded in the normal manner.

62 13-62 The credit balance in Salaries Expense is unusual because the normal balance of an expense account is a debit. Salaries Expense Salaries Payable 12/31 1,200 Closing 1,200 Bal. 1,200 Bal. 0 Reversing Accrued Salaries Expense 1/1 1,200

63 13-63 Salaries Expense Salaries Payable 12/31 1,200 1/1 1,200 Closing 1,200 1/1 1,200 Cash 1/3 1,700 After this entry is posted, the expense is properly divided between two periods. December=$1,200 last period January=$ 500 this period Total=$1,700 1/3 1,700 Bal. 500

64 13-64 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 5 Prepare financial statements Step 4 Prepare a worksheet Step 3 Post the data about transactions Step 2 Journalize the data about transactions Step 1 Analyze transactions Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries


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