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Week 6


Need to update certain general ledger
accounts at the end of the fiscal period.
Reflect “internal” transactions
◦ Supplies used
◦ Prepaid Insurance used

Matching principle: capture expenses in same
fiscal period in which they helped generate
that fiscal period’s revenue.

Business knows how much remains “on hand”
which is subtracted from trial balance amount.

Permanent accounts retain their balance from
fiscal period to fiscal period
◦ Assets, liabilities and owner’s capital (balance sheet)

Temporary accounts have their balances
“closed” to a zero balance at the end of the
fiscal period.
◦ Revenue, expense (income statement) and withdrawals

Recall the temporary accounts were “used up”
when preparing the financial statements so
their balances can’t be carried forward.




Entry to close income statement accounts
with a credit balance (revenue)
Entry to close income statement accounts
with a debit balance (expenses)
Entry to record net income or net loss to
owner’s capital
Entry to close owner’s drawing account to
owner’s capital account

Temporary account used to transfer net
income or net loss to owner’s capital account.
Income Summary
Debit
Total Expenses
Credit
Total Revenue

To close an account with a credit balance, debit it
an equal amount. The matching credit goes to the
income summary account.

To close an account with a debit balance, credit it
an equal amount. The matching debit goes to the
income summary account.

Income Summary has a debit and credit
amount. The difference should be equal to
either net income or net loss calculated on
the worksheet.
Income Summary
Debit
Total Expenses
$5,991
Credit
Total Revenue
$8,772




To close Income Summary with net income
(credit balance), debit it an equal amount.
Where does matching credit go?
Owner’s CAPITAL account is credited
(increased).
This is how the net income actually gets
placed in the owner’s account.
To close Income Summary with net loss (debit
balance), credit it an equal amount. The
matching debit goes to owner’s CAPITAL
account to reduce it.

To close the drawing account (debit balance),
credit it an equal amount then the matching
debit is applied to the owner’s CAPITAL
account.


As with adjusting entries, all closing entries
must be journalized then posted to the
affected ledger accounts to update the
balances.
All temporary accounts MUST have a zero
balance to start the new fiscal period.



Once adjusting and closing entries are
complete a post closing trial balance is
prepared to make sure debits = credits
moving in to the new fiscal period.
Account balances of permanent accounts are
listed. Temporary accounts with a zero
balances are NOT listed.
The ACCOUNTING CYCLE for the fiscal period
is complete.
1.
2.
3.
4.
5.
6.
7.
8.
Analyze transactions (source documents)
Journalize transactions
Post transaction data to ledger
Prepare trial balance/worksheet
Prepare financial statements
Journalize adjusting and closing entries
Post adjusting and closing entries
Prepare post-closing trial balance