1. CHAPTER SIXTEEN
FINANCIAL STATEMENTS AND YEAR-END ACCOUNTING FOR A MERCHANDISING BUSINESS

2. INCOME STATEMENT Purpose: Summarize the results of operations Shows:
The sources of revenue
Types of expenses
Amount of net income or loss for the period
Two forms:
Single-step
Multiple-step

3. For Year Ended December 31, 20-- Let’s look at a Single-Step
Northern Micro Income Statement
For Year Ended December 31, 20--
Let’s look at a Single-Step
Income Statement.

4. For Year Ended December 31, 20-- All the Revenue sources
Northern Micro Income Statement
For Year Ended December 31, 20--
Revenues:
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
All the Revenue sources
are listed and totaled.

5. Cost of Goods Sold is listed with all the other expenses.
Northern Micro Income Statement
For Year Ended December 31, 20--
Revenues:
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
Expenses:
Cost of Goods Sold
$111,500
Cost of Goods Sold is listed
with all the other expenses.

6. For Year Ended December 31, 20--
Northern Micro Income Statement
For Year Ended December 31, 20--
Revenues:
Net Sales
$212,800
Interest Revenue
900
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Revenues
$231,700
Expenses:
Cost of Goods Sold
$111,500
Wages Expense
42,450
Advertising Expense
2,500
Bank Credit Card Expense
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000

7. Expenses are totaled and subtracted from Revenues to determine
Bank Credit Card Expense
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Expense - Building
4,000
Depreciation Expense - Store Equipment
3,000
Miscellaneous Expense
2,250
Interest Expense
3,150
Total Expenses
209,050
Net Income
$ 22,650
Expenses are totaled and subtracted
from Revenues to determine
Net Income or Loss.

8. It is called Single-Step because Expenses
Bank Credit Card Expense
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Expense - Building
4,000
Depreciation Expense - Store Equipment
3,000
Miscellaneous Expense
2,250
Interest Expense
3,150
Total Expenses
209,050
Net Income
$ 22,650
It is called Single-Step because Expenses
(including Cost of Goods Sold) are
subtracted from Revenues in ONE step
to determine Net Income or Loss.

9. For Year Ended December 31, 20--
Northern Micro Income Statement
For Year Ended December 31, 20--
Now let’s look at a
Multi-Step Income
Statement for the
same company.

10. Sales Revenue (less any returns, allowances
Northern Micro Income Statement
For Year Ended December 31, 20--
Revenue from sales:
Sales
$214,000
Less Sales R &A
1,200
Net Sales
$212,800
Sales Revenue (less any returns, allowances
or discounts) is shown first. The other
revenues are listed at the end of
the statement).

11. For Year Ended December 31, 20--
Northern Micro Income Statement
For Year Ended December 31, 20--
Revenue from a sales:
Sales
$214,000
Less Sales R &A
1,200
Net Sales
$212,800
Cost of Goods Sold:
Merch. Inv. Jan. 1, 20--
$ 26,000
Purchases
$105,000
Less: Purchases R&A
$ 800
Purchases Disc.
1,000
1,800
Net Purchases
$103,200
Add Freight-In
300
Cost of Goods Pur.
103,500
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
18,000
Cost of Goods Sold
111,500

12. Cost of Goods Sold is computed and subtracted from Net Sales
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
18,000
Cost of Goods Sold
111,500
Gross Profit
$101,300
Cost of Goods Sold is computed
and subtracted from Net Sales
to arrive at Gross Profit.

13. Operating Expenses are “Income from Operations”
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
18,000
Cost of Goods Sold
111,500
Gross Profit
$101,300
Operating Expenses are
listed, totaled, and
subtracted from
Gross Profit
compute
“Income from Operations”
Operating Expenses:
Wages Expense
$ 42,450
Advertising Expense
2,500
Bank Credit Card Exp.
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Exp.-Bldg.
4,000
Deprec. Exp.-Store Eq.
3,000
Miscellaneous Expense
2,250
Total Oper. Expenses
94,400
Income from Operations
$ 6,900

14. Operating Expenses can
Goods Avail. for Sale
$129,500
Less M. I. Dec. 31, 20--
18,000
Cost of Goods Sold
111,500
Gross Profit
$101,300
Operating Expenses:
Wages Expense
$ 42,450
Advertising Expense
2,500
Operating Expenses can
be divided into
subcategories of
Selling Expenses and
General Expenses.
Bank Credit Card Exp.
1,500
Rent Expense
20,000
Supplies Expense
1,400
Telephone Expense
3,500
Utilities Expense
12,000
Insurance Expense
1,800
Depreciation Exp.-Bldg
4,000
Deprec. Exp-Store Eq.
3,000
Miscellaneous Expense
2,250
Total Oper. Expenses
94,400
Income from Operations
$ 6,900

15. SELLING EXPENSES Expenses directly associated with selling activities
Examples:
Sales Salaries Expense
Sales Commissions Expense
Advertising Expense
Bank Credit Card Expense
Delivery Expense
Depreciation Expense - Store Equipment and Fixtures

16. GENERAL EXPENSES
Expenses associated with administrative, office, or general operating activities
Examples:
Rent Expense
Office Salaries Expense
Office Supplies Expense
Telephone Expense
Utilities Expense
Insurance Expense
Depreciation Expense - Office Equipment

17. Other Revenues are added and Other Expenses are subtracted
Income from Operations
$ 6,900
Other Revenues:
Interest Revenue $
Rent Revenue
8,000
Subscriptions Revenue
10,000
Total Other Rev:
$ 18,900
Other Expenses:
Interest Expense
3,150
15,750
Net Income
$ 22,650
Other Revenues are added and
Other Expenses are subtracted
to arrive at Net Income.

18. STATEMENT OF OWNER’S EQUITY
Purpose: Summarize all changes in the owner’s equity during the period
Sources needed to prepare statement:
Work sheet
General Ledger Capital account
Includes:
Beginning and ending Capital balances
Investments and withdrawals by owner
Net Income or Loss

19. Let’s look at the Statement of Owner’s Equity for Northern Micro.
For Year Ended December 31, 20--
Let’s look at the
Statement of Owner’s Equity
for Northern Micro.

20. Beginning capital and investments are found in the General Ledger
Northern Micro
Statement of Owner’s Equity
For Year Ended December 31, 20--
Gary L. Fishel, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Beginning capital and investments
are found in the General Ledger
Capital account.

21. Net Income is found on the work sheet and on the Income Statement.
Northern Micro
Statement of Owner’s Equity
For Year Ended December 31, 20--
Gary L. Fishel, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Net Income is found on the work sheet
and on the Income Statement.

22. Withdrawals, from the worksheet, are subtracted from Net Income to
Northern Micro
Statement of Owner’s Equity
For Year Ended December 31, 20--
Gary L. Fishel, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Less withdrawals for the year
20,000
Increase in Capital
2,650
Withdrawals, from the worksheet,
are subtracted from Net Income to
determine the increase in capital
this period.

23. The ending capital is computed.
Northern Micro
Statement of Owner’s Equity
For Year Ended December 31, 20--
Gary L. Fishel, capital, January 1, 20--
$104,400
Add additional investments
10,000
Total investment
$114,400
Net Income for the year
$ 22,650
Less withdrawals for the year
20,000
Increase in Capital
2,650
Gary L. Fishel, capital, December 31, 20--
$117,050
The ending capital is computed.

24. Classified Balance Sheet.
Northern Micro Balance Sheet
December 31, 20--
Let’s look at
Northern Micro’s
Classified Balance Sheet.

25. Northern Micro Balance Sheet
December 31, 20--
Assets
Current assets:

26. CURRENT ASSETS Cash and other assets which are: Examples:
Expected to be converted into cash, or
Consumed within one year or the normal operating cycle, whichever is longer
Examples:
Cash, Receivables, merchandise inventory and prepaid expenses
Listed in order of liquidity:
Most liquid shown first

27. OPERATING CYCLE Length of time generally required for a business to:
Buy inventory
Sell it
Collect the cash
Generally, it is less than one year.

28. Merchandise Inventory is a current asset
Northern Micro Balance Sheet
December 31, 20--
Assets
Current assets:
Cash
$20,000
Accounts Receivable
15,000
Merchandise Inventory
18,000
Supplies
400
Prepaid Insurance
600
Total current assets
$54,000
Merchandise Inventory is a current asset
that is unique to merchandising businesses.

29. PROPERTY, PLANT & EQUIPMENT
Assets that are expected to be used:
For more than one year
In the operation of a business
Examples:
Land, Buildings, Office Equipment, Store Equipment, and Delivery Equipment
Assets with the longer lives are listed first.

30. Northern Micro Balance Sheet
December 31, 20--
Assets
Current assets:
Cash
$20,000
Accounts Receivable
15,000
Merchandise Inventory
18,000
Supplies
400
Prepaid Insurance
600
Total current assets
$ 54,000
Property, plant, and equipment:
Land
$10,000
Building
$ 90,000
Less accumulated deprec.
20,000
70,000
Store Equipment
$ 50,000
Less accumulated deprec.
18,000
32,000
Total prop., pt., and equip.
$112,000

31. Total current assets
$ 54,000
Property, plant, and equipment:
Land
$10,000
Building
$90,000
Less accumulated deprec.
20,000
70,000
Store Equipment
$50,000
Less accumulated deprec.
18,000
32,000
Total prop., pt., and equip.
112,000
Total assets
$166,000

32. Total assets
$166,000
Liabilities
Current liabilities:

33. CURRENT LIABILITIES
Obligations that are due within one year or the normal operating cycle, whichever is longer
Require the use of current assets
Examples:
Notes Payable, Accounts Payable, Wages Payable, Utilities Payable, Unearned Subscriptions Revenue, and the current portion of Mortgage Payable

34. Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$19,450

35. LONG-TERM LIABILITIES
Obligations that will extend beyond one year or the normal operation cycle, whichever is longer
Mortgage Payable is a common long-term liability.
Used to reflect an obligation that is secured by a mortgage on certain property

36. Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$19,450
Long-term liabilities:
Mortgage Payable
$30,000
Less current portion
500
29,500
Total liabilities
$ 48,950

37. OWNER’S EQUITY Accounts are determined by type of organization:
Sole Proprietorships:
One capital account

38. Total assets
$166,000
Liabilities
Current liabilities:
Notes Payable
$ 5,000
Accounts Payable
10,000
Wages Payable
450
Utilities Payable
1,500
Unearned subscriptions revenue
2,000
Mortgage Pay. (current portion)
500
Total current liabilities
$ 19,450
Long-term liabilities:
Mortgage Payable
$30,000
Less current portion
500
29,500
Total liabilities
$ 48,950
Owner’s Equity
Gary L. Fishel, capital
117,050
Total liabilities and owner’s equity
$166,000

39. FINANCIAL STATEMENT ANALYSIS
Evaluate the financial condition of a business:
Used by management and creditors
Two types:
Balance Sheet analysis
Interstatement analysis

40. BALANCE SHEET ANALYSIS
Uses only the information on the Balance Sheet
Includes calculating:
Working Capital
Current Ratio
Quick Ratio

41. WORKING CAPITAL CURRENT ASSETS CURRENT LIABILITIES
The amount of capital the business has available for current operations
FORMULA:
CURRENT ASSETS
CURRENT LIABILITIES

42. WORKING CAPITAL $34,550 FORMULA: CURRENT ASSETS CURRENT LIABILITIES
Example: Northern Micro has Current Assets of $54,000 and Current Liabilities of $19,450.
FORMULA:
CURRENT ASSETS
CURRENT LIABILITIES
WORKING CAPITAL
$34,550
$54,000
$19,450

43. CURRENT RATIO
FORMULA:
CURRENT ASSETS
CURRENT LIABILITIES

44. CURRENT RATIO
EXAMPLE: Let’s look at the Current Ratio for Northern Micro.
CURRENT ASSETS
$54,000
2.8 to 1
CURRENT LIABILITIES
$19,450

45. CURRENT RATIO Measures a firm’s ability to pay its current liabilities
“Rule of Thumb” = 2 to 1
Many companies operate successfully with ratio of 1.5 to 1.
Best to compare to industry averages

46. CURRENT RATIO
EXAMPLE: Let’s look at the Current Ratio for Northern Micro.
Northern Micro
has a very good
current ratio!
CURRENT ASSETS
$54,000
2.8 to 1
CURRENT LIABILITIES
$19,450

47. QUICK RATIO
Gives a more defined picture of a firm’s ability to pay its current liabilities
“Rule of Thumb” = 1 to 1
But many businesses operate successfully with a quick ratio of 0.6 to 1.

48. QUICK RATIO
FORMULA:
QUICK ASSETS
CURRENT LIABILITIES

49. QUICK ASSETS
Cash and all other assets that can be converted into cash quickly
Examples:
Accounts Receivable, Temporary Investments
Northern Micro has $35,000 of Quick Assets:
$20,000 in Cash and $15,000 in Accounts Receivable

50. BALANCE SHEET ANALYSIS
QUICK RATIO
Quick assets are
more than adequate
to meet current
obligations.
FORMULA:
QUICK ASSETS
$35,000
1.8 to 1
CURRENT LIABILITIES
$19,450

51. INTERSTATEMENT ANALYSIS
Provides a comparison of the relationships between selected income statement and balance sheet amounts
Includes:
Return on Owner’s Equity
Accounts Receivable Turnover
Average collection period
Inventory Turnover
Average days to sell inventory

52. RETURN ON OWNER’S EQUITY
FORMULA:
NET INCOME
AVERAGE OWNER’S EQUITY

53. RETURN ON OWNER’S EQUITY
EXAMPLE: Let’s compute the return for Northern Micro.
NET INCOME
$ 22,650
AVERAGE OWNER’S EQUITY

54. AVERAGE OWNER’S EQUITY
FORMULA:
Owner’s Equity at the beginning of the year
Owner’s Equity at the end of the year + 2

55. RETURN ON OWNER’S EQUITY
EXAMPLE: Let’s compute the return for Northern Micro.
NET INCOME
$ 22,650
AVERAGE OWNER’S EQUITY
$110,725
($104,400 + $117,050)  2

56. RETURN ON OWNER’S EQUITY
EXAMPLE: Let’s compute the return for Northern Micro.
NET INCOME
$ 22,650
20.5%
AVERAGE OWNER’S EQUITY
$110,725
This should be compared with
prior years and other businesses
of comparable nature and size.

57. ACCOUNTS RECEIVABLE TURNOVER
A measure of the time required to collect cash from customers
FORMULA:
NET CREDIT SALES FOR THE PERIOD
AVERAGE ACCOUNTS RECEIVABLE

58. ACCOUNTS RECEIVABLE TURNOVER
EXAMPLE: Net credit sales for Northern Micro are $110,000 and Accounts Receivable for January 1, and December 31 are $10,000 and $15,000, respectively
NET CREDIT SALES FOR THE PERIOD
$110,000
8.8
AVERAGE ACCOUNTS RECEIVABLE
$ 12,500
($10,000 + $15,000)  2

59. ACCOUNTS RECEIVABLE TURNOVER
EXAMPLE: Net credit sales for Northern Micro are $110,000 and Accounts Receivable for January 1 and December 31 are $10,000 and $15,000 respectively
Indicates the number of
times accounts receivable
were collected in the accounting
period. Higher number indicates
cash is collected more quickly.
NET CREDIT SALES FOR THE PERIOD
$110,000
8.8
AVERAGE ACCOUNTS RECEIVABLE
$ 12,500

60. AVERAGE COLLECTION PERIOD
Number of days credit customers are taking to pay for their purchases
FORMULA:
Number of Days in the year
365
41.5 days
8.8
Rate of turnover
Compared with credit terms to determine
if customers are paying on a timely basis

61. COST OF GOODS SOLD FOR THE PERIOD
INVENTORY TURNOVER
Represents the number of times merchandise inventory was turned over (sold) during the accounting period
FORMULA:
COST OF GOODS SOLD FOR THE PERIOD
AVERAGE INVENTORY

62. COST OF GOODS SOLD FOR THE PERIOD
INVENTORY TURNOVER
EXAMPLE: Northern Micro’s Cost of Goods Sold was $111,500 for the year and inventory balances for the beginning and end of the year were $26,000 and $18,000, respectively.
COST OF GOODS SOLD FOR THE PERIOD
$111,500
5.1
AVERAGE INVENTORY
$22,000
($26,000 + $18,000)  2

63. INVENTORY TURNOVER
The higher the rate of turnover, the smaller the profit required on each dollar of sales to produce a satisfactory gross profit.
Grocery stores have high turnover, low profit per item.
Jewelry stores need higher profit per item to offset the low turnover.

64. AVERAGE DAYS TO SELL INVENTORY
FORMULA:
Just like the
Average Collection
Period formula
Number of Days in the year
Rate of turnover

65. AVERAGE DAYS TO SELL INVENTORY
FORMULA:
Number of Days in the year
365
71.6 days
Rate of turnover
5.1
Needs to be compared with prior years,
other companies or its industry

66. CLOSING ENTRIES Similar to closing entries of a service business:
But additional merchandising accounts that also must be closed
Easiest to use work sheet to prepare closing entries

67. DEBIT - all credit balance Income Statement accounts
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 17
Gary L. Fishel, Capital
114,400 18
Gary L. Fishel, Drawing
20,000 19
Income Summary
26,000
18,000 20
Sales
214,000 21
Sales Returns & Allow.
1,200 22
Interest Revenue
900 23
Rent Revenue
8000 24
Subscriptions Revenue
10,000 25
Purchases
105,000 26
Purchases Ret. & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450
Entry#1
DEBIT - all credit balance
Income Statement accounts
CREDIT - Income Summary 30
Advertising Expense
2,500 31
Bank Credit Card Expense
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800

68. GENERAL JOURNAL Closing Entries Sales 214,000 Subscriptions Revenue
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Closing Entries
20-- 2
Sales
214,000
Dec. 31 3
Subscriptions Revenue
10,000 4
Interest Revenue
900 5
Rent Revenue
8,000 6
Purch. Returns & Allow.
800 7
Purchases Discounts
1,000 8
Income Summary
234,700 9 10 11

69. Entry #2: DEBIT- Income Summary CREDIT- Income Statement debit
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 21
Sales Returns & Allow.
1,200 25
Purchases
105,000 26
Purch. Returns & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300
Entry #2:
DEBIT- Income
Summary
CREDIT- Income
Statement debit
balance accts. 29
Wages Expense
42,450 30
Advertising Expense
2,500 31
Bank Credit Card Exp.
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 30
Telephone Expense
3,500 31
Utilities Expense
12,000 32
Insurance Expense
1,800 33
Depr. Expense -Building
4,000 34
Depr. Expense -Store Eq.
3,000 35
Miscellaneous Expense
2,250 36
Interest Expense
3,150

70. 10 31
Income Summary
204,050 11
Sales Returns & Allow.
1,200 12
Purchases
105,000 13
Freight-In
300 14
Wages Expense
42,450 15
Advertising Expense
2,500 16
Bank Credit Card Exp.
1,500 17
Rent Expense
20,000 18
Supplies Expense
1,400 19
Telephone Expense
3,500 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Depreciation Exp. - Bldg.
4,000 23
Deprec. Exp. - Store Eq.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27

71. CREDIT - Capital account
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 25
Purchases
105,000 26
Purchases Ret. & Allow.
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450
Entry #3
DEBIT - Income Summary
CREDIT - Capital account
for Net Income amount 30
Advertising Expense
2,500 31
Bank Credit Card Exp
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800 37
Depr. Expense Building
4,000 38
Depr. Expense -Store Eq.
3,000 39
Miscellaneous Expense
2,250 40
Interest Expense
3,150 41
230,050
252,700
224,000
201,350 42
Net Income
22,650
22,650 43
252,600
252,700
224,000
224,000 44

72. 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Deprec. Exp. - Building
4,000 23
Deprec. Exp. - Store Equip.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27 31
Income Summary
22,650 28
Gary L. Fishel, Capital
22,650 29 30 31 32 33 34 35 36 37

73. CREDIT to close the Drawing Account
ACCOUNT TITLE
INCOME STMT
BALANCE SHEET
DR.
CR.
DR.
CR. 17
Gary L. Fishel, Capital
114,400 18
Gary L. Fishel, Drawing
20,000 19
Income Summary
26,000
18,000 20
Sales
214,000 21
Sales Returns & Allow.
1,200 22
Interest Revenue
900 23
Rent Revenue
8000 24
Subscriptions Revenue
Entry # 4
DEBIT - Capital
CREDIT to close the Drawing Account
10,000 25
Purchases
105,000 26
Purchases Ret. & Allow
800 27
Purchases Discounts
1,000 28
Freight-In
300 29
Wages Expense
42,450 30
Advertising Expense
2,500 31
Bank Credit Card Expense
1,500 32
Rent Expense
20,000 33
Supplies Expense
1,400 34
Telephone Expense
3,500 35
Utilities Expense
12,000 36
Insurance Expense
1,800

74. 20
Utilities Expense
12,000 21
Insurance Expense
1,800 22
Deprec. Exp. - Building
4,000 23
Deprec. Exp. - Store Equip.
3,000 24
Miscellaneous Expense
2,250 25
Interest Expense
3,150 26 27 31
Income Summary
22,650 28
Gary L. Fishel, Capital
22,650 29 30 31
Gary L. Fishel, Capital
20,000 31
Gary L. Fishel, Drawing
20,000 32 33 34 35 36 37

75. POST-CLOSING TRIAL BALANCE
Trial Balance taken after the temporary owner’s equity accounts have been closed
Purpose: to prove that the general ledger is in balance at the beginning of a new accounting period, before any transactions for the new accounting period are entered

76. Post-Closing Trial Balance
Northern Micro
Post-Closing Trial Balance
December, 31, 20--
Account Title
Acct #
Debit Bal
Credit Bal
Cash
101
20,000
Accounts Receivable
122
15,000
Merchandise Inventory
131
18,000
Supplies
141
400
Prepaid Insurance
145
600
Land
161
10,000
Building
171
90,000
Accumulated Depreciation - Building
171.1
20,000
Store Equipment
181
50,000
Accumulated Depreciation - Store Eq.
181.1
18,000
Notes Payable
201
5,000
Accounts Payable
202
10,000
Wages Payable
219
450
Sales Tax Payable
231
1,500
Unearned Subscriptions Revenue
241
2,000
Mortgage Payable
251
30,000
Gary L. Fishel, Capital
311
117,050
204,000
204,000

77. REVERSING ENTRIES Prepared at the beginning of an accounting period
Reverses adjusting entries
To simplify the recording of transactions in the new accounting period
Except for the first year of operations, only adjustments that INCREASED an ASSET OR LIABILITY account from a zero balance should be reversed.

78. Which of these adjusting entries should be reversed?
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Adjusting Entries
20-- 2
Income Summary
26,000
Dec. 31 3
Merchandise Inventory
26,000 4
Which of these adjusting
entries should be reversed? 5 31
Merchandise Inventory
18,000 6
Income Summary
18,000 7 8
Supplies Expense
1,400 31 9
Supplies
1,400 10
Insurance Expense 11 31
1,800

79. Never reverse adjustments for merchandise inventory.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Adjusting Entries
20-- 2
Income Summary
26,000
Dec. 31 3
Merchandise Inventory
26,000 4 5 31
Merchandise Inventory
18,000 6
Income Summary
18,000 7
Never reverse adjustments
for merchandise inventory. 8
Supplies Expense
1,400 31 9
Supplies
1,400 10
Insurance Expense 11 31
1,800

80. GENERAL JOURNAL No asset or liability with a zero
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Adjusting Entries
20-- 2
Income Summary
26,000
Dec. 31
No asset or liability with a zero
balance has been increased….
No reversing entry is needed. 3
Merchandise Inventory
26,000 4 5 31
Merchandise Inventory
18,000 6
Income Summary
18,000 7 8
Supplies Expense
1,400 31 9
Supplies
1,400 10
Insurance Expense 11 31
1,800

81. No asset or liability with a zero balance has been increased…. 11 31
Insurance Expense
1,800 12
Prepaid Insurance
1,800 13 14 31
Deprec. Exp. -Building
4,000
No asset or liability with a zero
balance has been increased….
No reversing entry is needed. 15
Accum. Depr. - Building
4,000 16 17 31
Deprec. Exp. - Store Equip.
3,000 18
Accum. Depr. - Store Eq.
3,000 19 20 31
Wages Expense
450 21
Wages Payable
450 22 23 31
Unearned Subscrip. Rev.
10,000 24
Subscriptions Revenue
10,000 25 26 27 28

82. Never reverse adjustments11 31
Insurance Expense
1,800 12
Prepaid Insurance
1,800 13 14 31
Deprec. Exp. -Building
4,000 15
Accum. Depr. - Building
4,000 16 17 31
Deprec. Exp. - Store Equip.
3,000 18
Accum. Depr. - Store Eq.
3,000 19 20
Never reverse adjustments
for depreciation. 31
Wages Expense
450 21
Wages Payable
450 22 23 31
Unearned Subscrip. Rev.
10,000 24
Subscriptions Revenue
10,000 25 26 27 28

83. A liability account with a zero balance Reversing entry is needed.11 31
Insurance Expense
1,800 12
Prepaid Insurance
1,800 13 14 31
Deprec. Exp. -Building
4,000 15
Accum. Depr. - Building
4,000 16 17 31
Deprec. Exp. - Store Equip.
3,000 18
Accum. Depr. - Store Eq.
3,000 19 20 31
Wages Expense
450 21
Wages Payable
450 22
A liability account with a zero balance
has been increased!!!
Reversing entry is needed. 23 31
Unearned Subscrip. Rev.
10,000 24
Subscriptions Revenue
10,000 25 26 27 28

84. No asset or liability with a zero balance has been increased…. 11 31
Insurance Expense
1,800 12
Prepaid Insurance
1,800 13 14 31
Deprec. Exp. -Building
4,000 15
Accum. Depr. - Building
4,000 16
No asset or liability with a zero
balance has been increased….
No reversing entry is needed. 17 31
Deprec. Exp. - Store Equip.
3,000 18
Accum. Depr. - Store Eq.
3,000 19 20 31
Wages Expense
450 21
Wages Payable
450 22 23 31
Unearned Subscript. Rev.
10,000 24
Subscriptions Revenue
10,000 25 26 27 28

85. Reversing entries are the reverse or opposite of the adjusting entry.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Reversing Entries
20-- 2
Wages Payable
450
Jan. 1 3
Wages Expense
450 4 5
Reversing entries are the reverse
or opposite of the adjusting entry. 6 7 8 9 10 11