Transcript Chapter 7-Financial Statements for a Proprietorship

Accounting Theory
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Accounting Period Cycle
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Adjusting Entries
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Matching Expenses with Revenue
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Adjustments are analyzed and planned on a
worksheet
◦ Preparing financial statements at the end of each fiscal
period
◦ Journal entries recorded to update general ledger
accounts at the end of the fiscal period
◦ Recorded on the next journal page following the page on
which the last daily transaction for the month are
recorded
◦ The revenue earned and the expenses incurred to earn
that revenue are reported in the same fiscal period
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Supplies and Supplies Expense are adjusted
for the amount of supplies used during the
period
◦ Supplies Expense debit shows the supplies used
◦ Supplies credit shows supplies used
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Prepaid Insurance and Insurance Expense are
adjusted for the amount of insurance used
during the period
◦ Insurance Expense debit shows the insurance used
◦ Prepaid Insurance credit shows insurance used
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Accounts used to accumulate information
from one fiscal period to the next
◦ Assets, Liabilities and Capital
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Listed on the post-closing trial balance
Ending balances are the beginning balances
for the next accounting period cycle
The capital account’s new balance after all
closing entries are posted is verified by
checking it with the amount of capital shown
on the balance sheet at the end of the fiscal
period
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Accounts used to accumulate information until it
is transferred to the owner’s capital account
◦ Sales, Expenses, Income Summary, and Drawing
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Balances are summarized and transferred to the
owner’s capital account
Must start each fiscal period with a zero balance
by making closing entries
◦ To close a temporary account, an amount equal to its
balance is recorded in the account on the side opposite
its balance
◦ Information needed for closing entries is found in the
work sheet income statement and balance sheet
columns
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Sales, Expenses, Income Summary and Drawing
◦ Debit Sales, Credit Income Summary
◦ Debit Income Summary, Credit Expenses
◦ Depending on the balance of income summary
 When expenses are greater than revenue, income summary
has a debit balance
 Debit Capital, Credit Income Summary
 When expenses are less than revenue, income summary has
a credit balance
 Debit Income Summary, Credit Capital
◦ Debit Capital, Credit Drawing
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There is not a source document for closing
entries
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Analyzing Transactions
Journalize the Transactions to the General
Journal
Post the Transaction to the Ledger
Prepare a Worksheet
Prepare Financial Statements
Journalize Adjusting and Closing Entries
Post Adjusting and Closing Entries
Prepare Post-Closing Trial Balance
Verifies debits and credits
Only ledger accounts with balances are included
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Assets, Liabilities and Capital
Numbers come from ledgers not the worksheet