Copyright  2006 Pearson Education Canada Inc. 6-1

Copyright  2006 Pearson Education Canada Inc. 6-2 Outline  The Financial Statement Worksheet  Preparing Formal Financial Statements: Step 6  Closing the Books: Step 7  Closing Entries 1-4  Closing Procedures Applicable to a Corporation  Reversing Entries: An Optional Procedure  Accounting Cycle Flowchart

Copyright  2006 Pearson Education Canada Inc. 6-3 The Financial Statement Worksheet A multi-column form which is used as a “tool” in the preparation of financial statements It has five sets of Dr. and Cr. columns: Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet

Copyright  2006 Pearson Education Canada Inc. 6-4 Neat Restaurant F/S Worksheet Year ended July 31, 2005

Copyright  2006 Pearson Education Canada Inc. 6-5 The Financial Statement Worksheet  Excellent tool for preparing adjusting entries, the adjusted trial balance, financial statements, and closing entries  Does not replace journalizing adjusting entries in the General Journal  Does not replace posting adjusting entries from the General Journal to the General Ledger  Does not replace formal financial statements, but shows all their data on one sheet.

Copyright  2006 Pearson Education Canada Inc. 6-6 Preparing Formal Financial Statements: Step 6  Income Statement  Statement of Owner’s Equity (or Statement of Retained Earnings)  Balance Sheet

Copyright  2006 Pearson Education Canada Inc. 6-7 Closing the Books: Step 7  Entry # 1- Close revenue accounts  Entry # 2- Close expense accounts  Entry # 3- Close income summary account  Entry # 4- Close withdrawals or dividends (if any) to appropriate owner’s equity account

Copyright  2006 Pearson Education Canada Inc. 6-8 Closing entry #1 - Close revenue accounts Debit each of the revenue accounts found on the income statement columns of the financial statement worksheet 2005 July 31 Sales 300 Interest income 18 Other income 20 Income Summary 338 To close revenue accounts

Copyright  2006 Pearson Education Canada Inc. 6-9 Closing entry #2 - Closing expense accounts Credit each of the expense accounts found on the income statement debit column of the financial statement worksheet July 31 Income summary 298 Salaries & Wages 107 Interest Expense 25 Other operating exp. 48 Insurance expense 7 Cost of food sold 89 Depreciation expense 22 To close expense accounts

Copyright  2006 Pearson Education Canada Inc Closing entry # 3-Closing the Income Summary Account To close income summary debit the account for the net income and credit the appropriate owner’s equity account July 31 Income Summary 40 Amy Neat, Capital 40 To close the income summary account

Copyright  2006 Pearson Education Canada Inc Closing entry # 4-Closing owner’s withdrawals (or dividends) Close the withdrawals account to the appropriate Owner’s Equity account, or Dividends account to Retained Earnings July 31 Amy Neat, Capital 50 Amy Neat Withdrawals 50 To close the withdrawals account

Copyright  2006 Pearson Education Canada Inc Closing procedures applicable to corporations  Close revenue and expense accounts to income summary, just as with other types of companies  Close income summary to retained earnings  Close dividends to retained earnings

Copyright  2006 Pearson Education Canada Inc Reversing Entries: An Optional Procedure  Reversing accrual adjustments on the first day of each accounting period  Main purpose: simplify the recording of payments and receipts of accruals

Copyright  2006 Pearson Education Canada Inc Complete Accounting Cycle Flowchart Step 1 Analysis of Business Transactions Step 2 Journalizing Step 3 Posting Step 4 Taking The Trial Balance Step 5 Adjusting The Trial Balance Step 6 Financial Statements Step 7 Closing the Books