THE NEED FOR ACCOUNTING

• Help the users make decisions

• Record and analyze business transactions
• Communicate financial information to all interested
parties
• Answer the following questions:
• How well did the organization perform? (Income
Statement)
• Where does the organization stand? (balance sheet)
 TYPES OF BUSINESS

1. SERVICE BUSINESS = entities that provide services to customers.

2. MERCHANDISING BUSINESS = entities that purchase products from
other businesses and sell them to customers (ex. SM city)
3. MANUFACTURING BUSINESS = entities that convert raw materials into
finished products which are sold to customers (ex. Samsung)
 TYPES OF OWNERSHIP STRUCTURE

1. Sole Proprietorship = owned by one owner

2. Partnership = owned by two or more individuals and is created by
mere agreement.
3. Corporation = capital is divided into shares of stock and is created by
operation of law
4. Cooperative = owned by members and is tax exempt
CHARACTERISTICS OF THE DIFF. FORMS OF BUSINESS
ORGANIZATION
proprietorship Partnership Corporation Cooperative
One owner Two or more Unlimited owners Unlimited owners
owners

Unlimited liability Unlimited liability Limited liability Limited liability

of members for
cooperative’s
debt

Owner manages Mutual agency Management is Management is

the business vested in the vested in the
Although, there board of board of
is a managing directors (BOD) directors (BOD)
partner
THE NEED FOR ACCOUNTING

A transaction is any event that affects the

financial position of an organization
and requires recording.
 FUNDAMENTAL CONCEPTS

Accounting Entity
Concept Stable Monetary Unit
(owner is separate from Concept
the business)

Periodicity
(business life is
Divided into Going Concern
Accounting period)
 GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
OBJECTIVITY PRINCIPLE – Accounting records and
statements are based on the most reliable data
HISTORICAL COST – acquired assets should be recorded at
actual cost

REVENUE RECOGNITION PRINCIPLE – revenue is to be

recognized when earned regardless of when it is received.

EXPENSE RECOGNITION PRINCIPLE – Expense is recognized

when incurred regardless of when it is paid.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

ADEQUATE DISCLOSURE - all relevant information must be

disclosed in the financial statements.

MATERIALITY - practicability to rule over theory in determining

the valuation of an item.

CONSISTENCY – same accounting method from period to period.

 THE ACCOUNTING PROCESS

1. RECORDING – this is more popularly know as BOOKKEEPING, which involves

putting into records the business transactions and events.
2. CLASSIFYING – this involves the grouping of similar items together in order to
make the recording of the different transactions and events more systematic.
3. SUMMARIZING – this involves the preparation of financial statements.
4. INTERPRETING – this involves the analysis of financial statements (by developing
financial ratios and explaining their significance) for the benefit of the readers or
users.
 THE ACCOUNTING CYCLE

Post entries to Complete a

Journalize the ledger work sheet.
Prepare trial
transactions. accounts. balance.

Journalize and Journalize and Prepare financial

Prepare post-closing post adjusting statements.
trial balance. post closing
entries. entries.
 STEPS IN JOURNALIZING

Assets = Liabilities + Equity

Equipment
(3) 26,000

Step 1: Examine
source documents. Step 2: Analyze
transactions.

GENERAL JOURNAL Page 123

Post.
Date Description Ref. Debit Credit

Step 3: Record
transactions in a
journal.
CHART OF ACCOUNTS.docx
 The Accounting Equation
Assets = Liabilities + Owner’s Equity

are the are a business’s represents the

economic present claims of the
resources of a obligations to pay owners of a
company that cash, transfer corporation (the
are expected assets, or provide stockholders) to
to benefit the services to other the assets of the
company’s entities in the business
future future
operations. OE = A-L
 The Owner’s Equity
Revenues are increases in ownership
claims arising from the delivery of goods
or services

Expenses are decreases in ownership

Owner’s
claims arising from delivering goods or
Equity services or using up assets

Drawings are decreases in ownership

claims arising from withdrawal of cash or
other assets from the business by the
owner
 Chart of Accounts
CHART OF ACCOUNTS
A official list of all
the accounts ASSETS: OWNER'S EQUITY:
and their 11 Cash 31 Ang, capital
12 accounts receivable 32 Ang, withdrawals
account numbers 13 allowance for bad debts 33 Income Summary
1. The first digit 14 Supplies
indicates the 15 prepaid rent REVENUE:
16 offi ce equipment 41 Fees Earned
major account 17 accumulated depreciation
classification EXPENSES:
2. The second LIABILITIES: 51 salaries expense
digit indicates 21 accounts payable 52 utilities expense
22 unearned fees 53 supplies expense
financial 23 Utilities payable 54 rent expense
statement 55 depreciation expense
classification 56 bad debts
 Analyzing Business Transactions
Assets = Liabilities + Owner’s Equity
1. + + 0
2. - - 0
3. +/- 0 0
4. 0 +/- 0
5. + 0 +
6. - 0 -
7. 0 + -
8 0 - +
9. 0 0 +/-
 Journalizing
DOUBLE-ENTRY SYSTEM

• total debits always equal the total

credits
• accounting equation always stays in
balance

Assets Liabilities Equity

 EXPANDED BASIC EQUATION
AND DEBIT/CREDIT RULES AND
EFFECTS
Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + Capital - Dividend
s
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expense
s
Dr. Cr. Dr. Cr.
- + + -
 THE JOURNAL

Transactions are initially recorded (journalized) in chronological

order before they are transferred to the ledger accounts.

A journal makes several contributions to recording process:

1 discloses in one place the complete effect of a transaction
2 provides a chronological record of transactions
3 helps to prevent or locate errors as debit and credit amounts
for each entry can be compared
 Assets = Liabilities + Owner’s
Equity
cash Clark, capital
Nov. + 25,000 + 25,000 investment
1

JOURNAL Page 1
Post.
Date Description Debit Credit
2013 Ref.
1 Nov. 1 Cash 25 000 00
2 Chris Clark, Capital 25 000 00
3 Invested cash in NetSolutions.
4
JOURNALIZING MERCHANDISING
TRANSACTIONS
 merchandising
• Buying and selling of merchandise
• Accounting methods:
– PERIODIC INVENTORY SYSTEM - merchandise inventory and cost of goods sold
are not updated continuously
– PERPETUAL INVENTORY SYSTEM - merchandise inventory and cost of goods sold
are updated continuously on each sale and purchase transaction. 
 Account titles for merchandising activities
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY
SYSTEM

Account titles Normal balance

Purchases Debit
Purchase returns and allowances Credit Merchandise
Purchase discount Credit Inventory
Freight in Debit
Sales Credit
Sales returns and allowances Debit Same + cost of
Sales discount Debit sales
Freight out Debit
 Discounts
Trade discount = is given to boost sales.
= not recorded
Cash discount = is given to encourage prompt payment

Buyer Purchase discount (Cr.)

Seller Sales discount (Cr. )

 Discounts
Credit term:
– Cash on delivery (COD) = payment is required at the time the merchandise is
delivered
– 2/10, n/30 = 2% discount of the gross invoice price is allowed if payment is made
within 10 days after the invoice date, and the gross price is due 30 days from the
invoice date.
– 2/EOM, n/60 = 2% discount of the gross invoice price is allowed if payment is made
up to the end of the month and the gross price is due 60 days from the invoice date
– 2/10/EOM, n/60 = 2% discount of the gross invoice price is allowed if payment is
made the 10th of the following month, and the gross price is due 60 days from the
invoice date.
 Transportation costs
Freight term Who should Who actually Who records the shipping
pay the pays the cost
shipping cost? shipping cost?
FOB shipping point, Buyer Buyer Buyer records Freight in
freight collect

FOB shipping point, Buyer Seller Buyer records Freight in

freight prepaid and reimburses the seller

FOB destination, Seller Buyer Seller records Freight out

freight collect and reimburses the
buyer
FOB destination, seller seller Seller records Freight out
freight prepaid
 Journal entries
Periodic inventory system Perpetual inventory system
Purchases on Purchases xx Merchandise inventory xx
account accounts payable xx accounts payable xx
Returns to Accounts payable xx Accounts payable xx
suppliers purch. Ret. & allow. xx Merchandise inventory xx
Shipping cost Freight in xx Merchandise inventory xx
(FOB shipping cash xx cash xx
point)
Payment within Accounts payable xx Accounts payable xx
discount period cash xx cash xx
purchase discount xx merchandise inventory xx
Sales Cash/AR xx Cash/AR xx
sales xx sales xx

Cost of sales xx
Merchandise inventory xx
 Journal entries
Periodic inventory system Perpetual inventory system
Shipping cost Freight out xx Freight out xx
(FOB Destination) cash xx cash xx

Returns Sales ret. & allow xx Sales ret. & allow xx

AR xx AR xx

Merchandise inventory xx
cost of sales xx

Collection within Cash xx Cash xx

discount period sales discount xx sales discount xx
AR xx AR xx
 Posting
involves copying
information from
the journal to the
ledger accounts.
 Posting Journal Entries to the Ledger Acounts

GENERAL JOURNAL
Date Account Titles and Explanation PR Debit Credit
1998
Nov 1 Cash 11 25,000
Clark, capital 31 25,000
Owner invested cash in the business.

CASH 11
          Balance
Date Explanation PR Debit Credit Debit Credit
2013           
Nov. 1   J1 25000  25000 
         
 CASH 11
          Balance
Date Explanation PR Debit Credit Debit Credit
2013           
Nov. 1  J1 25000  25000 
5  J1   20000 5000 
18  J1 4000  9000 
30  J1   3650 5350 
30  J1   950 4400 
30  J1   2000 2400 
30   J1 3500  5900 
             
 Trial Balance
• It is prepared to check the equality of the debits and credits.
• The procedure
– List the account titles in numerical order
– Obtain the account balance of each account from the ledger and enter the debit
balances in the debit column and the credit balances in the credit column
– Add the debit and credit columns
– Compare the totals
 Trial Balance
NET SOLUTIONS
TRIAL BALANCE
JANUARY 31, 2013
DEBIT CREDIT
11CASH 5,900
12ACCOUNTS RECEIVABLE -
13SUPPLIES 1,350
14LAND 20,000
21ACCOUNTS PAYABLE 400
31CLARK, CAPITAL 25,000
32CLARK, WITHDRAWALS 2,000
41FEES EARNED 7,500
51WAGES EXPENSE 2,125
52RENT EXPENSE 800
53UTILITIES EXPENSE 450
54MISCELLANEOUS EXPENSE 275
32,900 32,900
 Trial Balance
• The following errors cannot be detected by the trial balance:
– No entry was made for a given transaction
– A journal entry was not posted to the general ledger
– A journal entry was posted twice
– Incorrect accounts were used to record a given transaction
– Incorrect amounts were recorded for a given transaction
 Trial Balance
• Common errors or mistakes that make the trial balance unbalance
– Error in addition or subtraction in the general ledger or error in
addition in the trial balance itself.
– Error of transposition, which means that digits are incorrectly
interchanged. (e.g. P890 is recorded as P980)
– Slide error or transplacement error, which means error in placing the
decimal point. (e.g. P150.00 is recorded as P15.00)
 Trial Balance
• LOCATING ERRORS IN THE TRIAL BALANCE
– Get the difference between the total debits and total
credits.
– A difference of 10, 100, 1,000 etc. would probably indicate a
simple error in addition either in the trial balance or the
general ledger
– If the difference is divisible by two, the error would probably
be in the posting to the wrong side (i.e. a debit is posted the
credit side or vice versa)
– If the difference is divisible by nine, the error would
probably be an error in transposition or error in
transplacement.
 Trial Balance
Procedure to correct errors in journalizing or posting
1. Draw a straight horizontal line through the error and
insert the correct title or amount if the entry is
incorrect or the posting is incorrect.
2. Make a correcting entry. This will correct the wrong
entry recorded.
COMPLETING THE ACCOUNTING
CYCLE
 The Accounting Cycle

Post entries to Complete a

Journalize the ledger work sheet.
Prepare trial
transactions. accounts. balance.

Journalize and Journalize and Prepare financial

Prepare post-closing post adjusting statements.
trial balance. post closing
entries. entries.
 CASH VS. ACCRUAL BASIS OF
ACCOUNTING
• The revenue recognition and matching principles
are used under the accrual basis of accounting.
• Under cash-basis accounting, revenue is
recorded only when cash is received, and
expenses are recorded only when paid.
• Generally accepted accounting principles require
accrual basis accounting because the cash basis
often causes misleading financial statements.
 REVENUE RECOGNITION
PRINCIPLE
• The revenue recognition principle states
that revenue should be recognized in the
accounting period in which it is earned.
• revenue is considered to be earned at the
time the service is performed.
 THE MATCHING PRINCIPLE
• The practice of expense recognition is referred to as
the matching principle.
• The matching principle dictates that efforts (expenses)
be matched with accomplishments (revenues).
• Expense is recognized when incurred regardless of
when it is paid

Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
 ADJUSTING ENTRIES

Adjusting entries are made in order for:

1 Revenues to be recorded in the period in
which they are earned, and for......
2 Expenses to be recognized in the period in
which they are incurred.
 ADJUSTING ENTRIES

• Adjusting entries are required each time financial

statements are prepared.
• Adjusting entries can be classified as
1 prepayments (prepaid expenses or unearned
revenues) or
2 accruals (accrued revenues or accrued expenses)
3 provision for depreciation of PPE
4 provision for estimated uncollectible accounts
 PREPAID EXPENSES

• Prepaid expenses are expenses paid in

advance and recorded as assets (asset
method) or expense (expense method)
before they are used or consumed.
• Prepaid expenses expire with the passage
of time or through use and consumption.
• An asset-expense account relationship
exists with prepaid expenses.
 Prepaid expense
Type of Journal entries effects if adjustment is adjusting entries
adjustment not made

1. Prepaid      
expense
a. Asset method Asset xx Asset= overstated Expense xx
  Asset xx Expense = understated Asset xx
       
b. Expense Expense xx Asset= understated Asset xx
method Asset xx Expense = overstated Expense xx
 ADJUSTING ENTRIES FOR PREPAYMENTS
SUPPLIES (asset method)
transaction Dec. 31, an inventory count reveals that $1,000 of $2,500 of
adverstiising supplies are still on hand.

Advertising supplies 2,500

(journal entry)
cash 2,500

Analysis at Dec. 31 Asset = overstated Expense = understated

Date Account Titles and Explanation Debit Credit

Dec. 31 Dec. 31 Advertising Supplies Expense
Advertising Supplies
1,500
1,500
(Adjusting (To record supplies used)

Entry)
 ADJUSTING ENTRIES FOR PREPAYMENTS
SUPPLIES (expense method)
transaction Dec. 31, an inventory count reveals that $1,000 of $2,500 of
adverstiising supplies are still on hand.

Advertising supplies expense 2,500

(journal entry) cash 2,500

Analysis at Dec. 31 Asset = understated Expense = overstated

Date Account Titles and Explanation Debit Credit

Dec. 31 Dec.. 31 Advertising Supplies 1,000
(Adjusting Advertising Supplies Expense
(To record supplies used)
1,000

Entry)
 UNEARNED REVENUES

• Unearned revenues are revenues received in

advance and recorded as liabilities (liability
method) or revenue (income method) before
they are earned.
• Unearned revenues are subsequently earned
by rendering a service to a customer.
• A liability-revenue account relationship
exists with unearned revenues.
 Unearned revenue
Type of Journal entries effects if adjustment is adjusting entries
adjustment not made
1. Unearned      
revenue
a. Liability Cash xx Liability = overstated Liability xx
method Liability xx Revenue = understated Revenue xx
       
  Cash xx Liability = understated Revenue xx
b. Income Revenue xx Revenue = overstated Liability xx
method  
UNEARNED REVENUES (liability method)

Adjustment Dec. 31, analysis reveals that, of $1,200 in fees, $400 has been
earned in October.

Cash 1,200
Journal entry
Unearned fees 1,200

Analysis at
Liabilities = overstated Revenue = understated
Dec. 31

Dec. 31 Date Account Titles and Explanation Debit Credit

Adjusting Dec. 31 Unearned Fees 400
Fees Earned 400
Entry (To record fees earned)
UNEARNED REVENUES (Revenue method)

Dec. 31, analysis reveals that of $1,200 in fees, $400 has been
Adjustment earned in October.

Cash 1,200
Journal entry
Fees earned 1,200

Analysis
Liabilities = understated Revenue =overstaed

Adjusting Date Account Titles and Explanation Debit Credit

Entry Dec. 31 Fees earned
Unearned fees
800
800
(To record fees earned)
 ACCRUED REVENUES

• Accrued revenues may accumulate with the

passing of time or through services
performed but not billed or collected.
• An asset-revenue account relationship exists
with accrued revenues.
• Prior to adjustment, assets and revenues are
understated.
• The adjusting entry requires a debit to an
asset account and a credit to a revenue
account.
 ACCRUED REVENUE
Type of adjustment Journal effects if adjustment is adjusting entries
entries not made

4. Accrued revenue none Asset = understated Asset xx

Revenue = understated Revenue xx
 
 ADJUSTING ENTRIES FOR ACCRUALS ACCRUED
REVENUES
Dec. 31, the agency earned $200 in fees for advertising
Adjustment services that were not billed to clients before October 31.

Analysis Asset = understaetd Revenue = understated

Date Account Titles and Explanation Debit Credit

Journal Dec. 31 Accounts Receivable 200
Entry Fees Earned 200
(To accrue fees earned but
not billed or collected)
 ACCRUED EXPENSES

• Accrued expenses are expenses incurred but

not paid yet.
• A liability-expense account relationship
exists
• Prior to adjustment, liabilities and expenses
are understated
• The Adjusting Entry results in a debit to an
expense account and a credit to a liability
account
 ACCRUED EXPENSE
Type of adjustment Journal effects if adjustment is adjusting entries
entries not made

3. Accrued expense none Expense = understated Expense xx

liability = understated liability xx
 
 ADJUSTING ENTRIES FOR ACCRUALS ACCRUED
SALARIES

Adjustment October 31, accrued salaries are calculated to be $1,200.

Expense = understated Liability = understaed

Anaylisis

Date Account Titles and Explanation Debit Credit

Oct. 31 Salaries Expense 1,200
Journal Salaries Payable
(To record accrued salaries)
1,200

Entry
 DEPRECIATION

• Depreciation is the process of allocating

the cost of an asset to expense over its
useful life in a rational and systematic
manner.
• The purchase of equipment or a building
is viewed as a long-term prepayment of
services and, therefore, is allocated in the
same manner as other prepaid expenses.
 DEPRECIATION

• In the balance sheet, Accumulated

Depreciation is offset against the asset
account.
• The difference between the cost of the asset
and its related accumulated depreciation is
referred to as the book value of the asset.
Equipment 100,000
Less: accumulated depreciation 30,000
book value 70,000
 DEPRECIATION

• Depreciation is an estimate rather than a factual

measurement of the cost that has expired.
• In recording depreciation, Depreciation Expense is
debited and a contra asset account, Accumulated
Depreciation, is credited

ACCU. DEPRECIATION
DEPRECIATION EXPENSE

XXX
XXX
 DEPRECIATION
Type of adjustment Journal entries effects if adjustment is adjusting entries
not made

5. depreciation   Expense = understated Expense xx

Asset = overstated Contra asset xx
 
 ADJUSTING ENTRIES FOR PREPAYMENTS
DEPRECIATION

Dec. 31, depreciation on the office equipment is estimated to

Adjustment be $480 a year, or $40 per month.

Analysis Asset = overstated Expense = understated

Date Account Titles and Explanation Debit Credit

Journal Dec 31 Depreciation Expense 40
Accumulated Depreciation - Office Equipment 40
Entry (To record monthly depreciation)
 Bad debts
 Bad Debts expense is an anticipated loss that may be
incurred arising from doubtful or hopeless accounts.
 In recording bad debts, Bad Debts Expense is debited
and a contra asset account, Allowance for Bad Debts, is
credited

ALLOW. FOR BAD DEBTS

BAD DEBTS EXPENSE

XXX
XXX
 BAD DEBTS
Type of adjustment Journal entries effects if adjustment is adjusting entries
not made

6. bad debts   Expense = understated Expense xx

Asset = overstated Contra asset xx
 
 Adjusting entry- bad debts

P100 of the accounts receivable is estimated to be uncollectible

Adjustment at Dec. 31.

Analysis Asset = overstated Expense = understated

Date Account Titles and Explanation Debit Credit

Journal Dec 31 Bad debts Expense
Accumulated depreciation
100
100
Entry (To record monthly depreciation)
 Financial Statements
The Income Statement
The Balance Sheet
The Statement of Owner’s Equity
Statement of Cash Flows

The purpose of these statements is

to help users make better decisions.
 Income Statement
• The first statement prepared is the Income
Statement.
• The Income Statement reports a business’
performance for the period.
 Income Statement
Service Entity

Fees Earned xx
- Less: Expenses xx
Net income xx
 Income Statement
Merchandising Entity

Sales revenue xx
- Less: Cost of goods soldxx
Gross profit xx
- Less: Operating expenses xx
Net Income xx
 Income Statement
• Cost of goods sold represents the expense a business incurred
to buy or make a product for resale.
Merchandise inventory beg. xx
Add: Purchases xx
Freight in xx
Total xx
Less: Purchase returns and allowances xx
Purchase discounts xx xx
Total goods available for sale xx
Less: Merchandise inventory beg.
end xx
Cost of goods sold xx
 NetSolutions
Statement of Owner’s Equity
For the Two Months Ended December 31, 2005

Chris Clark, Capital, November 1, 2005 $ 0

Investment on November 1, 2005 $25,000
Net income for November and December 7,205
$32,205
Less withdrawals 4,000
Increase in owner’s equity 28,205
Chris Clark, Capital, December 31, 2005 $28,205
 Balance Sheet

The balance sheet (also called statement of

financial position or statement of financial
condition) is a snapshot of the financial
status of an organization at a point in time.
 Balance Sheet
• The purpose of the balance sheet is to report the financial
position of an accounting entity at a particular point in time.

The basic format for the balance sheet

is:
Assets = Liabilities + Equity
 Balance sheet
Account classifications
• Current assets = are cash and those assets that can be used up,
sold or converted into cash within one year through normal
operations of the business. (ex. Cash, accounts receivable,
notes receivable, inventory, prepaid rent)
• Non current assets = assets that do not fall under current
assets (ex. Property plant and equipment, long term
investments, intangible assets)
 Balance sheet
Account classifications
• Current liabilities = are business obligations that must be paid
within one year or liabilities that are to be paid out of current
assets. (ex. Accounts payable, salaries payable)
• Non current liabilities= are debts that are not required to be
paid within the next accounting period. (ex. Mortgage
payable)
 Balance sheet
Account classifications
• Owner’s equity = the owners’ right or claim to the assets of the
business.
 NetSolutions
Balance Sheet
December 31, 2005
Assets Liabilities
Current assets: Current liabilities:
Cash & cash equiv. $ 2,065 Accounts payable $900
Receivables 2,720 Wages payable 250
Inventories 760 Unearned rent 240
Prepaid items 2,300 Total liabilities
$ 1,390
Total current assets $ 7,845
Property, plant, and
equipment:
Land $20,000
Office equip. $1,800
Less accum.
depreciation 50 1,750 Owner’s Equity
Total property, plant Chris Clark, Capital
28,205
and equipment 21,750 Total liabilities and
 Purpose of the Statement of Cash Flows

Are cash flows Why is there a

sufficient to support difference
ongoing between net
Can we meet our income and net
operations?
obligations to cash flow?
creditors?

Will the company have

to borrow money to Can we pay
make needed dividends?
investments?
Format of the Statement of Cash Flows
 Statement of Cash Flows
Description
Operating activities those activities that enter into the
determination of net income.
Investing activities relate to transactions involving the • Acquiring or selling property, plant and equipment
acquiring or disposing of
noncurrent assets
Financing activities relate to transactions involving
borrowing from creditors or
repaying creditors and engaging in
transactions with the
company’s owners.
items
• Transactions affecting current assets
• Transactions affecting current liabilities
• Changes in noncurrent balance sheet accounts that
directly affect net income
• Acquiring or selling securities
• Lending money to another entity and subsequently
collecting on the loan
• Issuing stock and purchasing treasury stock
• Issuing long-term debt and repayment of debt.
• Payment of dividends (note that interest on debt is
classified as an operating activity)
 Direct Method vs. Indirect Method

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the cash Starts with accrual

effects of each net income and
operating activity converts to cash
basis

No matter which format is used, the same amount of net cash flows
from operating activities is generated.
STATEMENT OF CASH FLOWS- DIRECT METHOD
ABC Enterprise
Statement of Cash Flows
for the year ended Dec. 31, 2017

Cash flows from operating activities:

Cash received from customers 60,400
payments to suppliers (10,000)
payment to employees (13,800)
payments for insurance (8,000)
payment for utilities (14,400)
Net cash provided by (used in) operating activities 14,200

Cash flows from Investing Activities

proceeds from sale of offi ce equipment 15,000
payments to acquired service vehicle (410,000)
Net cash provided by (used in ) investing activities (395,000)

Cash flows from Financing Activities

Cash received as investments by owner 250,000
Cash received from borrowings 210,000
payments fro withdrawals by owner (14,000)
Net cash provided by (used in) financing activities 446,000
Net Increase (Decrease) in cash 65,200
Add: cash balance beg. 10,000
Cash balance , end 75,200
 The Closing Process
Income Summary
Expenses are Revenues are
2 transferred to
Income Summary 1 transferred to
Income Summary

3 Net Income or Net Loss is

transferred to Owner’s Drawings

OWNER’S CAPITAL

4
Drawings are transferred to
Owner’s Capital
 After the closing entries
are posted, all of the
temporary accounts have
zero balances.
 Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash 2 065 00
Accounts Receivable 2 720 00
Merchandise inventory 760 00
Prepaid Insurance 2 300 00
Land 20 000 00
Office Equipment 1 800 00
Accumulated Depreciation 50 00
Accounts Payable 900 00
Wages Payable 250 00
Accrued expense payable 240 00
Chris Clark, Capital 28 205 00
29 645 00 29 645 00
Thank you very much!!!