kap 1 6th chapter 6
Chapter 6: The Accounting Cycle - Statements and Closing Entries
Key Learning Objectives
LO 6-1: Prepare financial statements using the adjusted trial balance.
LO 6-2: Prepare closing journal entries and post them to the general ledger.
LO 6-3: Prepare the post-closing trial balance to complete the accounting cycle.
LO 6-4: Prepare the classified balance sheet.
LO 6-5: Describe the benefits of a computerized accounting system over a manual system.
Appendix 6A, LO 6-6: Prepare a 10-column worksheet.
Preparing Financial Statements
After completing the adjusted trial balance, proceed to complete the final three steps of the accounting cycle (Steps 7, 8, and 9).
Step 7: Prepare the financial statements.
Note: Steps 1, 2, and 3 are repeated many times during the accounting period, while Steps 4 to 9 are completed at the end.
Using the Adjusted Trial Balance
Financial statements are compiled from the accounts and amounts in the adjusted trial balance.
A worksheet is an internal tool for accountants, not meant for external users.
Example: MP Consulting's adjusted trial balance shows various accounts and their balances.
Income Statement
The income statement aggregates values from the adjusted trial balance into a formal format to indicate net income or loss for the period.
Example:
Service Revenue: $4,500
Total Expenses: (1,325)
Net Income: (3,175)
Statement of Owner’s Equity
Reports changes in owner’s equity during the reporting period.
Formula:
Owner’s Equity = Beginning Owner’s Capital + Additional Owner Investments + Net Income (Loss) - Owner’s Withdrawals
Example Calculation using MP Consulting:
Beginning Capital: $5,300
Net Income: $3,175
Withdrawals: $2,000
Ending Capital: $11,475
Balance Sheet
A snapshot of the company’s financial position at a specific date.
Organized as:
Assets (left side)
Liabilities and Equity (right side)
Showcases total assets = total liabilities + owner’s equity.
Example Values:
Total Assets: $17,050
Total Liabilities: $5,575
Owner’s Equity: $11,475
Closing Entries: Temporary vs. Permanent Accounts
Temporary Accounts:
Include revenues, expenses, and withdrawals. Reset to zero at the end of the period.
Permanent Accounts:
Include assets, liabilities, and owner’s capital. Balance is carried forward to the next period.
Purpose of Closing Entries
Necessary at the end of an accounting period to zero out temporary accounts, preparing them for the next period's income statement.
The process involves updating owner’s capital with revenues, expenses, and withdrawals.
Closing Entries Methods
Direct Method: Closes accounts directly to owner’s capital.
Example:
Debit revenue accounts to zero it out; credit owner’s capital.
Income Summary Method: Uses an intermediary account to first close revenues and expenses, then calculate net income or loss to transfer to owner’s capital.
Post-Closing Trial Balance
Prepared after closing entries to verify balances for the upcoming period.
Only contains permanent accounts (assets, liabilities, owner’s equity), all temporary accounts should show zero balances.
Example:
Total of Post-Closing Trial Balance: $17,200
Classified Balance Sheet
Groups similar assets and liabilities for better analysis.
Current Assets: Expect to be liquidated or used within 12 months (e.g., cash, accounts receivable, inventory).
Long-term Assets: Not expected to liquidate within the next year (e.g., equipment).
Current Liabilities: Due within a year (e.g., accounts payable).
Long-term Liabilities: Due after one year (e.g., bank loans).
Benefits of a Computerized Accounting System
Automates posting to the general ledger and preparing financial statements.
Allows easy retrieval of data and error analysis compared to manual systems.
The 10-Column Worksheet
Shows unadjusted trial balances, adjustments, and adjusted trial balances.
Useful for summarizing income statement and balance sheet accounts.
Key for checking reported net income or loss against balance sheet differences.
Summary
Effective financial reporting involves accurate preparation of the income statement, statement of owner’s equity, balance sheet, and closing entries, all highlighted throughout the chapter.
Chapter 6: The Accounting Cycle - Statements and Closing Entries
Key Learning Objectives:
Prepare financial statements from adjusted trial balance.
Prepare closing journal entries and post to the general ledger.
Prepare post-closing trial balance to complete accounting cycle.
Prepare classified balance sheet.
Understand benefits of computerized accounting system.
Financial Statements:
Financial statements compiled from adjusted trial balance.
Income Statement shows net income/loss.
Statement of Owner’s Equity details changes in owner's equity.
Balance Sheet gives a snapshot of financial position.
Closing Entries:
Temporary accounts reset to zero; permanent accounts carried forward.
Closing entries necessary to prepare for next period's income statement.
Direct Method vs. Income Summary Method for closing entries.
Post-Closing Trial Balance:
Verifies balances of permanent accounts after closing entries.
Classified Balance Sheet:
Groups assets and liabilities for analysis (current vs. long-term).
Benefits of Computerized System:
Automates financial processes, improving error analysis.
10-Column Worksheet:
Summarizes trial balances and adjustments."