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4. Chapter 12 Accruals, 12 Chapter
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over.
Atef Abuelaish

5. Accruals, Deferrals, and
Chapter
Chapter 12 12
Accruals, Deferrals, and
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over.
Atef Abuelaish

6. Accruals, Deferrals, and the Worksheet
Chapter
Chapter 12 12
Accruals, Deferrals, and the Worksheet
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over.
Atef Abuelaish

7. Accruals, Deferrals, and the Worksheet
Chapter 12
Accruals, Deferrals, and the Worksheet
Section 1: Calculating
and Recording Adjustments
Section Objectives
Chapter 11 discussed employer payroll taxes and insurance premiums for workers’ compensation, as well as how and when to file the required tax returns and reports. In Chapter 12, we will study accrual accounting, including accrued and deferred income and expense, and how these adjustments are recorded on the worksheet. This first section describes how to compute adjustments for a merchandiser and how to enter the adjustments on a worksheet. In objective one we will determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet.
12-1 Determine the adjustment for merchandise inventory, and enter the adjustment on the worksheet.
12-2 Compute adjustments for accrued and prepaid expense items, and enter the adjustments on the worksheet.
12-3 Compute adjustments for accrued and deferred income items, and enter the adjustments on the worksheet.

8. Accrual Basis of Accounting
Revenue is recognized when earned, not necessarily when the cash is received
Revenue is recognized when the sale is complete.
A sale is complete when title to the goods passes to the customer or when the service is provided.
For sales on account, revenue is recognized when the sale occurs even though the cash is not collected immediately.
We are studying the accrual basis of accounting. The accrual basis of accounting is different than the cash basis of accounting. In accrual basis accounting, Revenues are recognized when earned, not when paid. Financial statements are prepared using accrual basis accounting.

9. Expenses are recognized when incurred or used, not necessarily when cash is paid
Each expense is assigned to the accounting period in which it helped to earn revenue for the business, even if cash is not paid at that time.
This is often referred to as matching revenues and expenses.
In accrual basis accounting, expenses are recognized when incurred or used, not necessarily when cash is paid.

10. Determine the adjustment for Merchandise Inventory.
An asset account for merchandise inventory is maintained in the general ledger.
Inventory
All purchases of merchandise are debited to the Purchases account.
Purchases
Objective 1 is to determine the adjustment for Merchandise Inventory and place it on the worksheet. The Merchandise Inventory account is an asset that appears on the Balance Sheet. The amount in the account is the beginning balance at the start of the period. However, the journal entry to record the purchase of inventory for cash (assuming a periodic inventory system) is to debit Purchases and credit Cash. At the end of the period, Merchandise Inventory still contains the beginning balance and it must be adjusted to show the ending merchandise on hand.
All sales of merchandise are credited to the revenue account Sales.
Sales

11. Merchandise Inventory
Notice that no entries are made directly to the Merchandise Inventory account during the accounting period.
Consequently, when the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period.
When the trial balance is prepared at the end of the period, the Merchandise Inventory account still shows the beginning inventory for the period, because no entries have been made directly to the account during the year.
Merchandise Inventory
Purchases
Sales

12. The adjustment is made in two steps.
Based on a physical count taken on December 31, merchandise inventory for Whiteside Antiques totaled $47,000.
Whiteside Antiques needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year.
The adjustment is made in two steps.
Each step needs two general ledger accounts:
At the end of the period, a merchandiser takes a physical inventory count to determine how much inventory is still on hand.
Whiteside Antiques needs to adjust the Merchandise Inventory account to reflect the balance at the end of the year.
The adjustment is made in two steps:
1) The beginning inventory is removed from the books by transferring the account balance to the Income Summary account. This removes the beginning inventory from the books.
2) The ending inventory is placed on the books by debiting Merchandise Inventory and crediting Income Summary. This second step records the amount of ending inventory on the books.
Merchandise Inventory
Income Summary

13. What is the amount of the first
The first step is to remove beginning inventory from the books. Whiteside Antiques began the year with $52,000 in inventory.
QUESTION:
What is the amount of the first
inventory adjustment?
Beginning
Inventory
ANSWER:
Let’s try removing the old balance of Whiteside Antiques.
$52,000

14. Adjustment for Beginning Inventory Merchandise Inventory
Income Summary
Merchandise Inventory
52,000
Bal. 52,000
52,000
To remove the old balance, we need to credit Merchandise Inventory for $52,000 and debit Income Summary for the same amount.
Here is the entry in T account form.

15. What is the amount of the next
The next step is to place ending inventory on the books. Whiteside Antiques ended the year with $47,000 in inventory.
QUESTION:
What is the amount of the next
inventory adjustment?
Ending
Inventory
ANSWER:
Next, we need to put the new ending inventory balance into the Merchandise Inventory account.
$47,000

16. Adjustment for Ending Inventory Merchandise Inventory
Income Summary
47,000
47,000
Let’s debit Merchandise Inventory for $47,000 and credit Income Summary for the same amount.
This is what the T accounts would look like.

17. Compute adjustments for accrued and prepaid expense
Objective 12-2
Compute adjustments for
accrued and prepaid expense
Items and enter the adjustments on the worksheet.
Whiteside Antiques has other adjustments which need to be made.

18. Losses from Uncollectible Accounts
Under accrual accounting, the expense for uncollectible accounts is recorded in the same period as the related sale.
The expense is estimated because the actual amount of uncollectible accounts is not known until later periods.
The estimated expense is debited to an account named Uncollectible Accounts Expense.
Credit sales are made with the expectation that the customers will pay the amount due later. Sometimes the account receivable is never collected. Losses from uncollectible accounts are classified as operating expenses.
The business wants to match the expense for uncollectible accounts with the sales revenue for the same period.

19. Whiteside Antiques uses the percentage of net credit sales method.
Several methods exist for estimating the expense for uncollectible accounts.
Whiteside Antiques uses the percentage of net credit sales method.
The rate used is based on the company's past experience with uncollectible accounts and management's assessment of current business conditions.
There are several ways to estimate the expense for uncollectible accounts. Whiteside Antiques uses percentage of net credit sales.

20. Net credit sales for the year were $100,000.
Whiteside Antiques estimates that 0.80 percent of net credit sales will be uncollectible.
Net credit sales for the year were $100,000.
The estimated expense for uncollectible accounts is $800 ($100,000 x ).
If .8 percent of net credit sales are estimated to be uncollectible then the business needs to record $800 of expense.

21. Adjustment for Uncollectible Accounts
Uncollectible Accounts Expense
Allowance for Doubtful Accounts
800
250 Beg Bal
800
We will debit Uncollectible Accounts Expense for $800 and credit Allowance for Doubtful Accounts for the same amount.

22. This account appears on the balance sheet as follows.
The entry to record the expense for uncollectible accounts includes a credit to a contra asset account, Allowance for Doubtful Accounts.
This account appears on the balance sheet as follows.
Accounts Receivable $32,000
Allowance for Doubtful Accounts (1,050)
Net Accounts Receivable $30,950
When the adjustment is made, Uncollectible Accounts Expense is debited and a contra-asset account Allowance for Doubtful Accounts is credited.

23. Adjustment for Depreciation
QUESTION:
What is Property, Plant, and Equipment?
Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation.
ANSWER:
Property, plant, and equipment are long-term assets that are used in the operation of a business and that are subject to depreciation. We will use the straight-line method to depreciate the store’s equipment. Remember, land is not depreciated. We record a portion of the asset’s cost to a depreciation expense account each period. The offsetting entry is to accumulated depreciation. As discussed in Chapter 5, Accumulated Depreciation is a contra asset account. It has a normal credit balance, which is opposite the normal balance for an asset account. The general formula to calculate depreciation (using the straight line method) is cost less the salvage value divided by the asset’s estimated useful life.

24. Accrued Expenses
Whiteside Antiques makes adjustments for three types of accrued expenses:
Accrued salaries
Accrued payroll taxes
Accrued interest on notes payable
Because accrued expenses involve amounts that must be paid in the future, the adjustment for each item is a debit to an expense account and a credit to a liability account.
We are ready to make some more adjustments involving accrued expenses. Accrued expenses are expense items that relate to the current period but have not yet been paid and do not yet appear in the accounting records. We will be making end of period adjustments to accrue salaries expenses, payroll tax expenses and interest expense on a note payable.

25. Adjustment for Accrued Salaries Salaries Expense – Sales
Salaries Payable
1,200
1,200
Salaries owed to employees but not due to be paid until the following month are $1,200 for our company. This represents the amount of the payroll that occurred in the current year. We need to debit Salaries Expense for $1,200 and credit Salaries Payable for the same amount.
And here are the T account postings.

26. Accrued Payroll Taxes The accrued employer's payroll taxes are:
Social security tax $1,200 x = $ 74.40
Medicare tax ,200 x =
Total accrued payroll taxes $91.80
Businesses must match revenue and expenses in the appropriate period, and so must make adjustments to accrue the employer's payroll taxes; they are payable sometime in the next accounting period.
Assuming that there is $1,200 of accrued wages, and that all of them are subject to the FICA tax, the accrual for the payroll taxes would be $74.40 of social security tax and $17.40 of Medicare tax. Both of these will be accrued in our adjusting entry.

27. Adjustment for Accrued Payroll Taxes
Expense
Social Security
Tax Payable
Medicare
Tax Payable
91.80
74.40
17.40
Social Security Tax Payable will be credited for $74.40 and Medicare Tax Payable will be credited for $ Payroll Tax Expense will be debited for the total amount of $ Here is how the adjustment would look in the T accounts.

28. Accrued Unemployment Taxes
The entire $1,200 is also subject to unemployment taxes.
The accrued unemployment taxes are:
Federal unemployment tax $1,200 x = $ 7.20
State unemployment tax $1,200 x =
Total accrued unemployment taxes for federal and state are $74.40.
Total accrued taxes $

29. Adjustment for Accrued Payroll Taxes
Federal Unemp.
Tax Payable
Payroll Taxes
Expense
State Unemp.
Tax Payable
72.00
7.20
64.80
We would debit Payroll Tax Expense for $74.40 and credit Federal Unemployment Tax Payable for $7.20 and credit State Unemployment Tax Payable for $ Here we see the adjustment.

30. Accrued Interest on Notes Payable
On December 1, 2016, Whiteside Antiques issued a two-month note for $2,000, with annual interest of 12 percent.
Whiteside Antiques will pay the interest when the note matures on February 1, 2017.
However, the interest expense is incurred day by day and should be allocated to each fiscal period involved in order to obtain a complete and accurate picture of expenses.
We need to accrue one month of interest expense on the note payable.

31. The accrued interest expense amount is determined by using the interest formula:
Principal x Rate x Time
$2, x x 1/ = $20
The fraction 1/12 represents one month, which is 1/12 of a year.
Using our interest formula, we calculate $20 of interest has accrued on the note.
Date of note: December 1, 2016
Expense for 2016 = 1 month (Dec )

32. Adjustment for Accrued Interest on Notes Payable
Interest Expense
Interest Payable 20 20
We need to debit interest expense for $20 and credit interest payable for the same amount.
Here we see the adjustment.

33. Prepaid Expenses
Whiteside Antiques makes adjustments for three types of prepaid expenses:
Prepaid supplies
Prepaid insurance
Prepaid interest on notes payable
Prepaid expenses, also called deferred expenses, are expenses that are paid for and recorded before they are used, such as rent or insurance.
We will make adjustments for several prepaid expenses. We adjust for supplies used, for insurance expired, and for any interest that has expired. In all cases, we debit the expense, and credit the related asset account. The adjusting entries for supplies used and insurance expired were introduced in chapter 5. The adjusting entry for prepaid interest on notes payable is new to this chapter.

34. Compute adjustments for accrued and deferred income items.
QUESTION:
What is accrued income?
Accrued income is income that has been earned but not yet received and recorded.
ANSWER:
Accrued income is income that has been earned, but not yet received and recorded. We need to record interest earned on the note receivable

35. Accrued Interest on Notes Receivable
On November 1, 2016, Whiteside Antiques accepted from a customer a four-month, 15 percent note for $1,200.
The interest income is recorded when it is received, which is normally when the note matures.
However, interest income is earned day by day.
At the end of the period, an adjustment is made to recognize interest income earned but not yet received or recorded.
Whiteside will record 2 months of interest earned on the note receivable. The collection of the note is recorded when the proceeds are received, which is normally when the note matures. The adjustment for accrued interest income records the income in the proper period.

36. The amount of earned interest income is determined by using the interest formula:
Principal x Rate x Time
$1, x x 2/ = $30
The fraction 1/12 represents one month, which is 1/12 of a year. 2/12 is used for two months.
Two months of interest is $30.
Date of note: November 1, 2016
Income for 2016 = 2 months (Nov.1 – Dec. 31)

37. Adjustment for Accrued Interest on Notes Receivable
Which account is debited?
Which account is credited?
For what amount?
For what amount?
Whiteside will debit Interest Receivable for $30 and credit Interest Income for $30.

38. Adjustment for Accrued Interest on Notes Receivable
Interest Receivable
Interest Income 30
Bal 30
Whiteside will debit Interest Receivable for $30 and credit Interest Income for $30. Here is the adjustment in the T accounts.

39. Adjustment for unearned or deferred income
Unearned or deferred income exists when cash is received before income is earned and would include such items as :
Subscription income
Management fees
Rental income
Legal fees
Architectural fees
Construction fees
Advertising income
These are examples of unearned income items which may exist in a firm. Unearned or deferred income exists when cash is received before income is earned. Our firm has no unearned income items.

40. Accruals, Deferrals, and the Worksheet
Chapter 12
Accruals, Deferrals, and the Worksheet
Section 2: Completing the
Worksheet
Section 1 taught us why and how to make an adjusting entry. Section 2 and Objective 4 of the chapter involve completing a ten-column worksheet.
Section Objectives
12-4 Complete a 10-column worksheet.

41. Complete a ten-column worksheet.
The Adjusted Trial Balance section of the worksheet is completed as follows.
1. Combine the amount in the Trial Balance section and the Adjustments section for each account.
2. Enter the results in the Adjusted Trial Balance section.
(The accounts that do not have adjustments are simply extended from the Trial Balance section to the Adjusted Trial Balance section.)
3. The accounts that are affected by adjustments are recomputed. Follow these rules to combine amounts on the worksheet.
It is now time to enter our adjustments on the worksheet. Let’s review how to prepare the adjusted trial balance on the worksheet. After entering the Trial balance on the worksheet, the adjustments are entered in the adjustments columns, then it is time to carry over the balances to the adjusted trial balance columns.

42. Partial Worksheet
Notice that the debit and credit amounts in Income Summary are not combined in the Adjusted Trial Balance section. Refer to page in your text for a larger view.
Both the beginning and ending balances in the Merchandise Inventory accounts need to be seen in the Income Summary account on the adjusted trial balance. Do not combine the two numbers. They will both be needed when we prepare the income statement. On all of the other accounts, extend the proper balance across to the adjusted trial balance columns.

43. Also include the owner’s drawing account in the Balance Sheet section.
Balance Sheet Columns
Identify the accounts that appear on the balance sheet (assets, liability, owner’s capital).
Also include the owner’s drawing account in the Balance Sheet section.
Assets, liability, owner’s capital and the owner’s drawing account are carried to the balance sheet section.

44. Income Statement Columns
For accounts that appear on the income statement, Sales through Interest Expense, enter the amounts in the appropriate Debit or Credit column of the Income Statement section.
Extend all revenues and expense accounts to the income statement section. Also, extend BOTH the debit and credit adjustment to Income Summary across to the Income Statement columns.

45. Financial Statements and
Chapter
Chapter 13 13
Financial Statements and
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over.
Atef Abuelaish

46. Financial Statements and Closing Procedures
Chapter
Chapter 13 13
Financial Statements and Closing Procedures
Chapter 8 discussed the relationship of a control account to its subsidiary accounts. Chapter 9 illustrates how there will be a cash short or over. It also discusses the petty cash fund and bank reconciliation. The first objective of the chapter is to illustrate, how to compute cash short or over.
Atef Abuelaish

47. Financial Statements and Closing Procedures
Chapter 13
Financial Statements and Closing Procedures
Section 1: Preparing the Financial Statements
Section Objectives
Chapter 12 discussed accrual accounting and completion of a worksheet for a merchandising business. Chapter 13 explains how to use worksheets to prepare and record adjusting and closing entries, to prepare a post-closing trial balance, and to prepare financial statements. In this first section, we use the worksheet to prepare the financial statements. Objective 1 is to prepare the income statement from the worksheet.
13-1 Prepare a classified income statement from the worksheet.
13-2 Prepare a statement of owner’s equity from the worksheet.
13-3 Prepare a classified balance sheet from the worksheet.

48. The Classified Income Statement
Prepare a classified income statement from the worksheet.
The Classified Income Statement
A classified income statement is sometimes called a multiple-step income statement. Items are divided into groups of similar accounts.
There are subtotals within groups.
The classification and order of information depends on the type of business and the expected use of the statement.
At the end of the period, the three financial statements must be prepared. A newspaper’s classified section is similar to a business’s classified financial statements. Classifying like information together on financial statements makes them easier to interpret.
This type of income statement contains several subtotals which are computed before the net income is calculated.

49. What is a single-step income statement?
QUESTION:
What is a single-step income statement?
A single-step income statement is a format in which only one computation is needed to determine the net income.
ANSWER:
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)

50. Operating Revenue Net sales for Whiteside Antiques
Operating Revenue is the first section of the income statement and it shows the revenues earned from normal business activities.
The operating revenue for Whiteside Antiques is net sales of merchandise.
Net sales for Whiteside Antiques is $549,150.
Net sales for Whiteside Antiques

51. Cost of Goods Sold
The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.
Three elements are needed to compute the cost of goods sold:
Beginning inventory
Net delivered cost of purchases
Ending inventory
Cost of goods sold is the next section on a multiple step income statement. It is usually the most challenging section to compute.
Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: Beginning inventory, Net delivered cost of purchases and Ending inventory.

52. Net Delivered Cost of Purchases
Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
To calculate the net delivered cost of purchases, one would add purchases and freight in, and then deduct purchases returns and allowances and deduct purchases discounts.

53. Total Merchandise Available for Sale
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
To figure the total merchandise available for sale, a business would start with beginning merchandise inventory and add in the net delivered cost of purchases.

54. Cost of Goods Sold Beginning Merchandise Inventory
Plus Net Delivered Cost of Purchases
Cost of Goods Available for Sale
Less Ending Inventory
Cost of Goods Sold
Remember, the Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.

55. Merchandise Inventory Account
Merchandise Inventory is the one account that appears on both the income statement and the balance sheet.
Beginning and ending merchandise inventory balances appear on the income statement.
Ending merchandise inventory also appears on the balance sheet in the Assets section.
Merchandise Inventory is the one account that appears on both the income statement as well as the balance sheet. Ending inventory appears on the Balance sheet and both beginning and ending Merchandise Inventory balances are needed to figure cost of goods sold.

56. Cost of Goods Sold Merchandise available for sale Cost of goods sold
The net delivered cost of purchases was $325,120. When we add the beginning inventory to these purchases, we get total available inventory for sale of $377,120. After subtracting out the ending inventory still on hand, we get cost of goods sold of $330,120.
Merchandise available for sale
Cost of goods sold

57. Gross Profit on Sales
For Whiteside Antiques, net sales is the revenue earned from selling antique items.
Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period.
Gross profit is what is left to cover operating expenses and provide a profit.
Gross profit is the difference between the net sales and the cost of goods sold.
Gross profit is what is left to cover operating expenses and provide a profit. For Whiteside Antiques, gross profit is equal to net sales less cost of goods sold.

58. Gross profit on sales for Whiteside Antiques
Net sales were $549,150. When we subtract the cost of goods sold of $330,120, Whiteside Antiques will report gross profit of $219,030.

59. Operating Expenses
Operating expenses are separated into two categories:
(1) Selling Expenses and (2) General and Administrative Expenses.
Selling expenses include salesperson salaries and advertising expenses.
Salaries for salespersons and advertising are examples of selling expenses

60. Operating Expenses
General and Administrative Expenses include Rent Expense and office employees salaries.
Rent, utilities, and salaries for office employees are examples of general and administrative expenses

61. Net income from operations
Finally, after subtracting total operating expenses from our gross profit figure, the business can determine its net income or net loss for operations. Whiteside Antiques is reporting $51, net income from operations. (Note that the Cost of Goods Sold section has been collapsed to a single total for space considerations in presenting the partial Income Statement.)

62. Other Income and Other Expenses
Keeping operating and non-operating income separate helps financial statement users learn about the operating efficiency of the firm. Our last section on the multiple step income statement is the Other Income and Other Expenses section. Income that is earned from sources unrelated to the normal business activity is classified as “other income” and would appear in the Other Income section. Expenses which are incurred but not directly connected with business operations appear in the Other Expenses section. (ex. Interest expense).
Total other income was equal to $532 and other expenses totaled $770. The difference was net nonoperating expense of $238.

63. Net income from operations
Finally, after subtracting the net nonoperating expenses from our net income from operations figure, the business can determine its net income or net loss for the period – in this case the year. Whiteside Antiques is reporting $50, of net income for the year.

64. Prepare a statement of owner’s equity from the worksheet.
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 Bill Whiteside, $84,576.80, is used to prepare the balance sheet.
After we complete the income statement, we prepare 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. At the end of the period, Bill Whiteside, Capital had a balance of $84, The statement of owner’s equity analyzes the owner’s capital account for the period. The ending capital balance is used to prepare the Balance Sheet.

65. Prepare a classified balance sheet from the worksheet
QUESTION:
What are current assets?
Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year.
ANSWER:
Our next financial statement is the Classified Balance Sheet. Again, we use the worksheet to help us prepare this financial statement. A Classified Balance Sheet is very similar to the Balance Sheets we have already prepared in the past except the assets and liabilities are classified into separate categories. The first section on the classified balance sheet is the current assets section.

66. Current Assets Current assets for Whiteside Antiques
Current assets consist of cash, items that will normally be converted into cash within one year, and items that will be used within one year (cash, accounts receivables, merchandise inventory, supplies etc.). Current assets are usually listed in order of liquidity. Current assets are vital to the survival of a business, because they provide the funds needed to pay bills and meet expenses. Liquidity is the ease with which an item can be converted into cash. Cash is a highly liquid asset, so it is listed first in the current asset section. Total current assets for Whiteside Antiques is $98,
Current assets for Whiteside Antiques

67. Plant and Equipment Noncurrent assets are called long-term assets.
An important category of long-term assets is plant and equipment.
For many businesses plant and equipment represents a sizable investment.
Plant and Equipment is our next asset classification appearing on the classified balance sheet. Plant and equipment is property that will be used in the business for longer than one year. These would include buildings, equipment, and land.
Non-current assets are called long-term assets because they have a life greater than one year. For many businesses plant and equipment represents a sizable investment.
Any accumulated depreciation accounts are shown below their respective accounts. Total plant and equipment for Whiteside Antiques is $31,900.

68. Total current liabilities
Whiteside Antiques
Partial Balance Sheet
December 31, 2016
Assets
Prepaid Interest
75.00
6,300.00
Total Current Assets
98,716.00
Total Plant and Equipment
31,900.00
Total Assets
Total current liabilities
130,616.00
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
2,000.00
Notes Payable-Bank
9,000.00
The liabilities section comes next on the classified balance sheet. Liabilities are classified into two sections: current and long term.
Current liabilities are debts that must be paid within one year. Current liabilities are usually listed in order of priority of payment.
Total current liabilities for Whiteside Antiques is $46,
Accounts Payable
24,129.00
Interest Payable
20.00
Social Security Tax Payable
1,158.40
Medicare Tax Payable
267.40
Employee Income Tax Payable
990.00
Fed. Unemployment Tax Pay.
7.20
State Unemployment Tax Pay.
64.80
Salaries Payable
1,200.00
Sales Tax Payable
7,200.00
Total Current Liabilities
46,036.80

69. Long-Term Liabilities
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.
After current liabilities comes long-term liabilities. Long-term liabilities are debts of a business that are due more than one year in the future.
Long-term liabilities include mortgages, notes payable, and loans payable. There were no long term liabilities for Whiteside Antiques as of December 31, 2013.

70. Owner's Equity
The last section on a classified balance sheet is the owner’s equity. We will use the owner’s capital ending balance off of the statement of owner’s equity prepared earlier.
After transferring the capital account balance from the statement of owner’s equity, we can complete the balance sheet. Total liabilities and owner’s equity is $130, Note that this total must equal the total assets.
The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.

71. Financial Statements and Closing Procedures
Chapter 13
Financial Statements and Closing Procedures
Section 2: Completing the Accounting Cycle
Section Objectives
In section 2 we will complete the accounting cycle for a merchandising business. Objective 4 has us journalizing and posting the adjusting entries.
13-4 Journalize and post the adjusting entries.
13-5 Journalize and post the closing entries.
13-6 Prepare a postclosing trial balance.
13-7 Journalize and post reversing entries.

72. Journalize and post the 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.
It is time to journalize the adjustments entered on the worksheet and post them to the general ledger accounts.
The adjustments shown on the worksheet need to be recorded in the general journal as adjusting journal entries. They are then posted to the general ledger.

73. 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.
Here is a recap of the adjusting entries that were previously discussed. Each one of them would need to be journalized and then posted. Remember to write the word “Adjusting” before you journalize them. Also write the word “Adjusting” in the description column of the general ledger.
Recognizes interest earned in the period. The debit is to an asset account, (interest receivable) and the credit is to a revenue account.
Accrued Interest
(m)

74. Journalize and Post the Closing Entries.
At the end of the period, the temporary accounts are closed.
The temporary accounts are:
Revenue accounts
Cost of goods sold
Expense accounts
Drawing account
The temporary accounts are: Revenue accounts, Cost of goods sold, all expense accounts and the Drawing account.

75. There are four steps in the closing process:
Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary.
Close expense accounts, cost of goods sold accounts with debit balances, and any contra revenue accounts with debit balances to Income Summary.
Close Income Summary, which now reflects the net income or loss for the period, to owner's capital.
Close the drawing account to owner's capital.
During this closing process, changes in the temporary owner equity accounts are transferred to the permanent owner’s capital account.
We will use the same four steps in the merchandiser’s closing process: close revenue accounts and cost of goods sold accounts with credit balances to Income Summary, close expense accounts cost of goods sold accounts with debit balances, and any contra revenue accounts with debit balances to Income Summary, close Income Summary, which now reflects the net income or loss for the period, to owner's capital, and close the drawing account to owner's capital.

76. Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
2016
Dec
Closing Entries
Income Summary ,362.00
Sales ,650.00
Interest Income
Miscellaneous Income
Purchases Returns and Allowances ,050.00
Purchases Discounts ,130.00
Step 1: Close the Revenue Accounts and the Cost of Goods Sold Accounts that have credit balances. Make a credit to the Income Summary account.
When viewing the work sheet, debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

77. Step 2: When looking at the worksheet, close the expense accounts and the Cost of Goods Sold Accounts with debit Balances, as well as any contra revenue accounts with debit balances, to Income Summary.
Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.
Step 2: When looking at the worksheet, close the Expense Accounts and the Cost of Goods Sold Accounts with debit balances as well as any contra revenue accounts with debit balances to Income Summary. Make a corresponding debit to the Income Summary account.

78. Step 3: Closing the Income Summary Account
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 Whiteside Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b) 12/ , Closing Entries 12/ , ,406.20
12/ ,000.00
12/31 568, , Bal. 50,958.20
Step 3: Closing the Income Summary Account. Close the balance into the owner’s capital account.
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Income Summary ,958.20
Bill Whiteside, Capital ,958.20

79. Step 4: Closing the Drawing account
This entry closes the drawing account and updates the capital account
GENERAL JOURNAL PAGE
DATE DESCRIPTION POST DEBIT CREDIT
REF.
Dec
Bill Whiteside, Capital ,600.00
Bill Whiteside, Drawing ,600.00
Step 4: Closing the Drawing account. Close the balance into the owner’s capital account.

80. 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.
This process brings the temporary account balances to zero. Remember to write the word Closing in the Description column.

81. 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.
We 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. Remember that the TOTALS for the Postclosing Trial Balance and the Balance Sheet will be different, since on the Balance Sheet, certain credit account balances are subtracted from certain debit account balances; on the Postclosing Trial Balance, all debit and credit balances are shown on either the left side (debit) or right side (credit) of that report.

82. Revenue Cost of Goods Sold Expenses Withdrawals
Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance
Temporary accounts do not appear on the postclosing trial balance
Revenue
Cost of Goods Sold
Only the accounts that have balances – the asset, liability and owner’s capital accounts – appear on the postclosing trial balance. Temporary accounts including revenues, cost of goods sold, expenses and withdrawals do not appear on the postclosing trial balance.
Expenses
Withdrawals

83. Preparing a Postclosing Trial Balance
The Postclosing trial balance is presented in the slide. Notice that the only account types that are not closed out are the assets, liabilities, and the owner’s capital account. See the text for a larger printout of the Postclosing trial balance.

84. Journalize and post reversing entries
QUESTION:
What are reversing entries?
Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses.
ANSWER:
The last step in the accounting cycle which is actually an optional step is to prepare reversing journal entries. Reversing entries are journal entries made at the beginning of an accounting period that are the opposite of certain adjusting entries, particularly those for accrued expenses and accrued income.
Reversing entries are made to reverse the effect of certain adjustments . This helps prevent errors in recording certain cash payments or cash receipts in the new accounting period.

85. 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 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 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Let’s do a quick review of the accounting cycle for a merchandiser.
Here are the nine steps. Since reversing entries are optional, they are not included as a formal step in the cycle.
Step 9 Interpret the financial information
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance

86. Flow of Financial Data through an Accounting System
Take a moment to review the flow of Financial Data through an Accounting System.

87. Happiness is having all homework up to date
Homework assignment
Using Connect – 3 Questions for 50 Points for Chapter 13.
Last day of the Homework for Chapters 7, 8, 9, , 12, and 13 is 12/07 at 11:59 PM.
Dec 6th, general revision on the course.
Final Exam on Dec. 8th at 8:00 AM till 11 AM.
Happiness is having all homework up to date
Atef Abuelaish

88. END OF THE COURSE
THANK YOU