college accounting

1
Chapter
13
Skyline College
2
Classified Financial Statements
At the end of the period, Simpson Antiques
prepares three financial statements

• Income statement
• Statement of owner's equity
• Balance sheet

3
The the balance sheet is arranged in a classified
format.
This makes the financial statement more useful to
the readers.
4
The Multiple-Step Income Statement
5
The Single-Step Income Statement
(Total Revenue Total Expenses Net Income)
6
Single-step Income Statement
The format lists all revenues in one section and
all expenses in another section.
7
Operating Revenue
The first section of the multiple-step income
statement contains the revenue from operations.
This is the revenue earned from normal business
activities. Other income is presented
separately near the bottom of the statement.
8
Operating Revenue
The operating revenue for Simpson Antiques is net
sales of merchandise.
Sales ltSales Returns and Allowancesgt ltSales
Discountsgt
Net Sales
This is an internal calculation which does not
appear on the income statement
9
Operating Revenue
Net sales for Simpson Antiques
10
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

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Net Delivered Cost of Purchases
12
Schedule of Cost of Goods Sold
This is usually footnoted in the financial
statements rather than appearing on the income
statement
13
Cost of Goods Sold
Cost of goods sold
14
Gross Profit on Sales

• For Simpson Antiques net sales is the revenue
  earned from selling clothes.
• Cost of goods sold is what Simpson Antiques paid
  for the clothes that were sold during the fiscal
  period.
• Gross profit is what is left to cover operating
  expenses and provide a profit.

15
Gross profit on sales for Simpson Antiques
16
Operating Expenses
Operating expenses are expenses that arise from
normal business activities.
Simpson Antiques separates operating expenses
into two categories

• Selling Expenses
• General and Administrative Expenses

17
Operating Expenses
Salaries for salespersons and advertising are
examples of selling expenses.
18
Operating Expenses
Rent, utilities, and salaries for office
employees are examples of general and
administrative expenses.
19
Net Income or Net Loss from Operations
The format for determining net income (or net
loss) from operations is
Gross Profit on Sales (Total Operating
Expenses)
Net Income (or Net Loss) from Operations
20
Net income from operations
21
Other Income and Other Expenses

• Income that is earned from sources other than
  normal business activities appears in the Other
  Income section.
• For Simpson Antiques other income includes
  interest on notes receivable and one
  miscellaneous income item.
• Expenses that are not directly connected with
  business operations appear in the Other Expenses
  section.

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Other Income and Other Expenses
23
Net Income or Net Loss

• Net income is all the revenue minus all the
  expenses.
• If there is a net loss, it appears in
  parentheses.
• Net income or net loss is used to prepare the
  statement of owner's equity.

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Net income for Simpson Antiques
25
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.
• The ending capital balance for Patricia Simpson,
  84,792.80, is used to prepare the balance sheet.

26
Current Assets
27
Current Assets
Current assets are listed in the order of
liquidity.
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Current Assets
Current assets for Simpson Antiques
29
Property, Plant Equipment
The balance sheet shows three amounts for each
category of plant and equipment
Asset
(Accumulated depreciation)
Book value
30
Plant and Equipment
Total property, plant and equipment
31
Current Liabilities

• Current liabilities are usually listed in order
  of priority of payment.
• Management must ensure that funds are available
  to pay current liabilities when they become due
  in order to maintain the firm's good credit
  reputation.

32
Current Liabilities
Total current liabilities


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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.

34
Owner's Equity
The ending balance from the statement of owners
equity is transferred to the Owner's Equity
section of the balance sheet.
35
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.

36
Journalizing the Adjusting Entries

• Each adjusting entry shows how the adjustment was
  calculated.
• Supervisors and auditors need to understand,
  without additional explanation, why the
  adjustment was made.

37
Adjusting Entries
Accrued Income
(m n)
Recognizes income earned in the period. The debit
is to an asset account (Interest Receivable) or a
liability account (Sales Tax Payable).
38
GENERAL JOURNAL
PAGE 25 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment a)
Income Summary
52,000.00
Merchandise Inventory
52,000.00
To transfer beginning inventory to Income Summary
(Adjustment b)
Merchandise Inventory
47,000.00
31
Income Summary
47,000.00
To record ending inventory
39
GENERAL JOURNAL
PAGE 25 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment c)
Uncollectible Accounts Expense
800.00
Allowance for Doubtful Accounts
800.00
To record estimated loss from uncollectible
amounts based on 0.8 of net credit sales of
100,000
(Adjustment d)
Depreciation Expense Store Equip.
2,400.00
31
Accum. Depreciation - Store Equip.
2,400.00
To record depreciation for 2007 as shown by
schedule on file.
(Adjustment e)
Depreciation Expense Office Equip.
700.00
31
Accum. Depreciation - Office Equip.
700.00
To record depreciation for 2007 as shown by
schedule on file.
40
GENERAL JOURNAL
PAGE 25 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment f)
Salaries Expense - Sales
1,200.00
Salaries Payable
1,200.00
To record accrued salaries of part-time sales
clerks for Dec. 28-31
(Adjustment g)
Payroll Taxes Expense
91.80
31
Social Security Tax Payable
74.40
Medicare Tax Payable
17.40
To record accrued payroll tax on accrued salaries
for Dec. 28-31
41
GENERAL JOURNAL
PAGE 25 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment h)
Payroll Taxes Expense
74.40
Fed. Unemployment Tax Payable
9.60
State Unemployment Tax Payable
64.80
To record accrued payroll tax on accrued salaries
for Dec. 28-31
(Adjustment i)
Interest Expense
20.00
31
Interest Payable
20.00
To record interest on a 2-month, 2,000, 12
note payable dated Dec. 1, 2007
42
GENERAL JOURNAL
PAGE 26 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment j)
Supplies Expense
4,975.00
Supplies
4,975.00
To record supplies used
(Adjustment k)
Insurance Expense
2,450.00
31
Prepaid Insurance
2,450.00
To record expired insurance on 3-year policy
purchased for 7,350 on Jan. 2, 2007
(Adjustment l)
31
Interest Expense
150.00
Prepaid Interest
150.00
To record transfer of 2/3 of prepaid interest of
225 for a 3-month, 10 note payable issued to
bank on Nov. 1, 2007
43
GENERAL JOURNAL
PAGE 27 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Adjusting Entries
2007 Dec. 31
(Adjustment m)
Interest Receivable
30.00
Interest Income
30.00
To record accrued interest earned on a 4-month,
15 note receivable dated Nov. 1, 2007(1,200 x
0.15 x 2/12)
(Adjustment n)
Sales Tax Payable
216.00
31
Miscellaneous Income
216.00
To record accrued commission earned on sales tax
owed for fourth quarter of 2007Sales Tax
Payable 7,200Commission rate x 0.03
Commission due 216
44
Posting the Adjusting Entries

• After the adjustments have been recorded in the
  general journal, they are promptly posted to the
  general ledger.
• The word Adjusting is entered in the Description
  column of each general ledger account.

45
Journalizing and Posting the Closing Entries

• At the end of the period, the temporary accounts
  are closed.
• The temporary accounts are
• Revenue accounts
• Cost of goods sold accounts
• Expense accounts
• Drawing account

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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 and cost of goods sold
  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.

47
Step 1 Closing the Revenue Accounts and the Cost
of Goods Sold Accounts with credit balances.
Debit each account, except Income Summary, for
its balance. Credit Income Summary for the total.
48
Step 2 Closing the Expense Accounts and the Cost
of Goods Sold Accounts with Debit Balances.
GENERAL JOURNAL
PAGE 28 DATE
DESCRIPTION POST.
DEBIT CREDIT
REF.
Dec. 31
Credit each account, except Income Summary, for
its balance. Debit Income Summary for the total.
49
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 Simpson Antiques, the third closing entry is
  as follows

Income Summary
Adjusting Entries (a-b) 12/31
52,000.00Closing Entries 12/31
512,406.20564,406.20
12/31 47,000.00 12/31 568,578.00
615,578.00 Bal. 51,171.80
50
Step 4 Closing the Drawing account.
This entry closes the drawing account and updates
the capital account.
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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.

52
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.

53
Only the accounts that have balancesthe asset,
liability and owner's capital accountsappear on
the postclosing trial balance.
Asset Accounts
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To verify this, compare the postclosing trial
balance with the balance sheet.
Capital Account
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Preparing a Postclosing Trial Balance
Temporary accounts do not appear on the
postclosing trial balance.
Revenue
Cost of Goods Sold
Expenses
Withdrawals
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Ratios and other measurements are used to analyze
and interpret financial statements.
Two such measurements are used by Simpson
Antiques

• Gross profit percentage
• Current ratio

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Gross Profit Percentage

• The gross profit percentage is calculated by
  dividing gross profit by net sales.
• For Simpson Antiques, for every dollar of net
  sales, gross profit was almost 40 cents.

58
Current Ratio

• Simpson Antiques has 2.15 in current assets for
  every dollar of current liabilities.
• The current ratio is calculated in the following
  manner

59
Journalizing and Posting Reversing Entries
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Reversing Entry
At the beginning of the year, a reversing entry
is made. This will simplify recordkeeping when
the paychecks are issued.
61
On January 3 the payment of 1,700 of salaries is
recorded in the normal manner.
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Reversing Accrued Salaries Expense
Salaries Expense
Salaries Payable
12/31 1,200
Closing 1,200
1/1 1,200
12/31 1,200
1/1 1,200
Bal. 0
Bal. 1,200
The credit balance in Salaries Expense is unusual
because the normal balance of an expense account
is a debit.
63
After this entry is posted, the expense is
properly divided between two periods.
Salaries Expense
Salaries Payable
Cash
12/31 1,200 1/1 1,200
Closing 1,200 1/1 1,200
12/31 1,200
1/3 1,700
1/3 1,700
Bal. 500
December 1,200 last period January 500
this period Total 1,700
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The Accounting Cycle
Step 3 Post the data about transactions
Step 2 Journalize the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions
Step 5Prepare financial statements
Step 6 Journalize and post adjusting entries
Step 9 Interpret the financial information
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance