1. 1 The Accounting Cycle 1 - Journalize transactions. 2 - Post entries to the ledger accounts. 3 - Prepare un- adjusted trial balance. 4 - Make end- of-year adjustments. 5 - Prepare adjusted trial balance. 6 - Prepare financial statements. 8 - Prepare post- closing trial balance. 7 - Journalize and post closing entries.

2. 2 Step 6 – Prepare Financial Statements ä Income Statement ä Statement of Owner’s Equity (Statement of Changes in Equity) ä Balance Sheet ä Statement of Cash Flows ä Notes to the Accounts Governed by IAS 1 – The presentation of finacial statements

3. 3 Net income also appears on the Statement of Owner’s Equity.

4. 4 Statement of Owner’s Equity/Changes in Equity Owner’s Investments Business Earnings Owner’s Withdrawals Business Losses This statement summarizes the increases and decreases in owner’s equity during the period.

5. 5 Now, let’s prepare the Balance Sheet.

6. 6 Statement of Changes in Equity - FYI ä IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.96] l (a) profit or loss for the period; l (b) each item of income and expense for the period that is recognised directly in equity, and the total of those items; l (c) total income and expense for the period (calculated as the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and l (d) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8.

7. 7

8. 8 Presentation of Balance Sheet ä According to IAS1: l An entity must normally present a classified balance sheet, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. l Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the enterprise's normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.57] l Current liabilities are those to be settled within the enterprise's normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.60]

9. 9

10. 10 Cash Flow Statement ä Governed by IAS 7 ä IAS 7 prescribes two methods of presenting the cash flow statement, the indirect method and the direct method. Although we have been using the direct method for illustrative purposes the indirect method is the one most often used in practice.

11. 11 Notes to the Financial Statements ä As per IAS1, the notes must: [IAS 1.103] l present information about the basis of preparation of the financial statements and the specific accounting policies used; l disclose any information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement; and l provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement that is deemed relevant to an understanding of any of them. ä Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.104]

12. 12 Other requirements of IAS 1 IAS 1 reiterates the following assumptions and concepts: l Going Concern l Accrual Basis of Accounting l Consistency of Presentation l Comparative Information and introduces the following: l Materiality and Aggregation Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29] l Offsetting Assets and liabilities, and income and expenses, may not be offset unless required or permitted by a Standard or an Interpretation. [IAS 1.32]

13. 13 Step 7 – Prepare Closing Entries

14. 14 The Closing Process  Real accounts are permanent accounts not closed to a zero balance at the end of the accounting period. These accounts are carried forward to the next period.  Nominal accounts are temporary accounts that are closed to a zero balance at the end of each accounting period.  Closing entries reduce all nominal accounts to a zero balance.

15. 15 Closing the “Temporary” Equity Accounts  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital. The closing process gets the temporary accounts ready for the next accounting period.

16. 16 Closing Entries for Revenue Accounts Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account.

17. 17 Closing Entries for Revenue Accounts

18. 18 Closing Entries for Expense Accounts Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts.

19. 19 Net Income Closing Entries for Expense Accounts

20. 20 Closing the Income Summary Account Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary.

21. 21 Closing the Income Summary Account The balance in Income Summary is now zero.

22. 22 Closing Entries for a corporation ä For a corporation, the Income Summary is closed off to a Retained Earnings Account. (to be revisited later)

23. 23 Closing the Owner’s Drawing Account Since the drawing account has a debit balance, the closing entry requires a credit to Jill Jones, Drawing.

24. 24 Closing the Owner’s Drawing Account

25. 25 Step 8 – Prepare Post-Closing Trial Balance

26. 26 Post-Closing Trial Balance ä Provides a listing of all real account balances at the end of the closing balance. ä The trial balance assures that total debits equal total credits prior to the beginning of the new accounting period. ä Only real accounts will have a balance at this time.

27. 27 After all closing entries are made, JJ’s After-Closing Trial Balance looks like this.

28. 28 The Accounting Cycle 1 - Journalize transactions. 2 - Post entries to the ledger accounts. 3 - Prepare un- adjusted trial balance. 4 - Make end- of-year adjustments. 5 - Prepare adjusted trial balance. 6 - Prepare financial statements. 8 - Prepare post- closing trial balance. 7 - Journalize and post closing entries.

29. 29 End

30. 30 Accounting for Dividends Declared by board of directors. Not legally required. Liability created at declaration.

31. 31 Example of an Accrued Expense: Accounting for Dividends  Declaration date Board of directors declares the dividend. Record a liability. Note - Dividends is not a normal expense that goes in the income statement, it is a distribution to equity patricipants

32. 32 Accounting for Dividends  Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) X

33. 33 Accounting for Dividends  At year end Closing entry for dividend account Closed to the Retained Earnings Account

34. 34 Accounting for Dividends  Date of Payment Record the payment of the dividend to stockholders. (Probably sometime in new year)