CHAPTER THE ACCOUNTING

THREE CYCLE:
Reporting Financial Results
PART III DISCUSSION POINTS:
Adjusted Trial Balance
Financial Statements (IS, SRE, SFP, & SCF)
Drafting Notes to the Financial Statements
Closing the Temporary Equity Accounts
Closing Entries for Revenue Accounts
Closing Entries for Expense Accounts
Closing the Income Summary Account
Closing the Dividends Account
Evaluating the Business
Preparing Financial Statements Covering Different Periods of
Time
Operating Cycle of a Merchandising Firm
 May 31, 2013
This
This is
is the
the
Cash Br. 3,925
Accounts receivable 75 Adjusted
Adjusted Trial
Trial
Tools & equipment 2,650 Balance
Balance for
for AG
AG
Accumulated depr.:
Lawn
Lawn Care
Care
tools & eq. Br. 50
Truck 15,000 Service.
Service.
Accumulated depr.:
truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000 Now,
Now, let’s
let’s
Dividends 200 prepare
Sales revenue 750
prepare the
the
Gasoline expense 50 financial
financial
Depr. exp.: tools & statements
statements forfor
eq. 50
AG
AG Lawn
Lawn Care
Care
Depr. exp.: truck 250
Total Br. 22,200 Br. 22,200 Service
Service for
for May.
May.
 AG Lawn Care Service
Income Statement
For the Month Ending May 31, 2013
Sales revenue Br. 750
Operating expenses:
Gasoline expense Br. 50
Depr. exp.: tools & eq. 50
Depr. exp.: truck 250 350
Net income Br. 400
Net
Net income
income also
also appears
appears on
on the
the
Statement
Statement of
of Owner’s
Owner’s Equity.
Equity.
 Statement
Statement of
of Retained
Retained Earnings
Earnings
This statement summarizes the increases
and decreases in Retained Earnings during
the period.

•Business •Dividends
Earnings •Business
Losses
Now, let’s prepare the Balance Sheet.
 AG Lawn Care Service
Balance Sheet
May 31, 2013

Assets
Cash Br. 3,925
Accounts receivable 75
Tools & equipment Br. 2,650
Next,
Next, let’s
let’s
Less: Accum. depr.: tools & eq. 50 2,600 prepare
prepare the
the
Truck Br. 15,000 Statement
Statement of of
Less: Accum. depr.: truck 250 14,750
Total assets Br. 21,350 Cash
Cash Flows
Flows
Liabilities & Stockholders' Equity for
for AG
AG Lawn
Lawn
Liabilities:
Notes payable Br. 13,000
Care
Care Service
Service
Accounts payable 150 for
for May.
May.
Total liabilities Br. 13,150
Stockholders' equity:
Capital stock Br. 8,000
Retained earnings 200
Total stockholders' equity 8,200
Total liabilities & stockholders' equity Br. 21,350
 AG Lawn mower
Statement of Cash flow
For the Month Ended, May 31, 2013
Cash flows from operating activities:
Cash received from revenue transactions Br. 750
Cash paid for expenses (50)
Net cash provided by operating activities Br. 700
Cash flows from investing activities:
Purchase of lawn mower Br. (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners Br. 8,000
Dividends (200)
Net cash provided by financing activities 7,800
Increase in cash for month Br.3,925
Cash balance May 1, 2013 -
Cash balance May 31, 2013 Br. 3,925
 3.22
3.22 Drafting
Drafting Notes
Notes to
to the
the Financial
Financial
Statements
Statements
Examples
Examplesof
ofItems
ItemsDisclosed
Disclosed

Lawsuits
Lawsuitspending
pending
Notes to the
Financial Statements 
Scheduled
Scheduledplant
plantclosings
closings

Governmental
Governmental investigations
investigations

Significant
Significantevents
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date

Specific
Specificcustomers
customersthat
that
account
accountfor
foraalarge
largeportion
portionof
of
revenue
revenue

Unusual
Unusual transactions
transactionsand
and
related
relatedparty
partytransactions
transactions
 3.23
3.23 Closing
Closing the
the Temporary
Temporary Equity
Equity
Accounts
Accounts
The closing process
Close Revenue accounts
gets the temporary
to Income Summary.
accounts ready for the
Close Expense accounts next accounting
to Income Summary. period.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.
 3.24
3.24 Closing
Closing Entries
Entries for
for Revenue
RevenueAccounts
Accounts
Since
Since Sales
Sales Revenue
Revenue hashas aa credit
credit balance,
balance, the
the
closing
closing entry
entry requires
requires aa debit
debit to
to the
the Sales
Sales Revenue
Revenue
account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Sales Reveune 750
Income Summary 750
To close the revenue account.
Closing
Closing Entries
Entries for
for Revenue
RevenueAccounts
Accounts

Income Summary Sales Revenue

750 750 750

750
 3.25
3.25 Closing
Closing Entries
Entries for
for Expense
ExpenseAccounts
Accounts
Since
Since expense
expense accounts
accounts have
have aa debit
debit balance,
balance, the
the
closing
closing entry
entry requires
requires aa credit
credit to
to the
the expense
expense
accounts.
accounts.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts.
Closing
Closing Entries
Entries for
for Expense
ExpenseAccounts
Accounts
Gasoline Exp.
50 50
-
Income Summary
Depr. Exp.: Tools & 350 750
Equipment
50 50
-

Depr. Exp.: Truck 400

250 250
- Net Income
 3.26
3.26 Closing
Closing the
the Income
Income Summary
Summary
Account
Account
Since
Since Income
Income Summary
Summary has
has aa Br.
Br. 400
400 credit
credit
balance,
balance, the
the closing
closing entry
entry requires
requires aa debit
debit to
to
Income
Income Summary.
Summary.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 400
Retained Earnings 400
To close Income Summary.
Closing
Closing the
the Income
Income Summary
SummaryAccount
Account

Income Summary
350 750
Retained 400
Earnings
-
400
-
400 The balance in Income
Summary is now zero.
 3.27
3.27 Closing
Closing the
the Dividends
DividendsAccount
Account
Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit balance,
balance,
the
the closing
closing entry
entry requires
requires aa credit
credit to
to the
the Dividends
Dividends
account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Retained Earnings 200
Dividends 200
To close the Dividends account.
 Closing
Closing the
the Dividends
DividendsAccount
Account

Dividends Retained
Earnings
200 200
200 -
400

- 200
 AG Lawn Care Service
After
After all
all
After-Closing Trial Balance
closing
closing
May 31, 2013
entries
entries are are
Cash Br. 3,925 made,
made, AG’s
AG’s
Accounts receivable 75 After-Closing
After-Closing
Tools & equipment 2,650 Trial
Trial Balance
Balance
Accumulated depr.: looks
looks like
like
tools & equipment Br. 50 this.
this.
Truck 15,000
Accumulated depr.:
truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Retained earnings 200
Total Br. 21,650 Br. 21,650
 3.28
3.28 Evaluating
Evaluating the
the Business
Business

Evaluating
Evaluating Evaluating
Evaluating
Profitability
Profitability Solvency
Solvency

Did the business earn a Does the business have

profit or loss in the liquid assets available to
current period? pay debts as they are
due?
What is the business’s
future potential for a
profit?
 Evaluating
Evaluating the
the Business
Business

Are product lines

profitable?
Focusing
Focusing
Management’s Are resources being
Management’s
used efficiently?
Attention
Attention
Are production
processes efficient?
 3.29
3.29 Preparing
Preparing Financial
Financial Statements
Statements
Covering
Covering Different
Different Periods
Periods of
of Time
Time
Many
Many companies
companies prepare
prepare financial
financial statements
statements at
at
various
various points
points throughout
throughout the
the year.
year.
Annually

Quarterly
Interim
Financial Monthly
Statements

Jan. 1 Dec. 31
 Review
Review Questions
Questions

Q1. From the following list, identify the accounts that should be
closed to the Income Summary at the end of the fiscal year: (a)
Accounts Payable, (b) Salaries Payable, (c) Capital Stock, (d)
Salaries Expense,(e) Depreciation Expense – Buildings, (f)
office Supplies, (g) Supplies Expense, (h) Equipment, (i)
Retained Earnings, (j) Land, (k) Accumulated Depreciation –
Buildings.

Q2. What type of accounts are closed by transferring their

balances to Income Summary (a) as a debit 9b) as a credit.
 3.30
3.30 Operating
Operating Cycle
Cycle of
of aa Merchandising
Merchandising
Company
Company

3. Collection of
Cash 1. Purchase of
the receivables Merchandise or
Goods

As/Receivable Inventory
2. Sale of
Merchandise on
Account
Manufacturing Activities: Manufacture inventory and have a
longer and more complex operating cycle