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Copyright 2006 Pearson Education Canada Inc. 6-1 Outline The Financial Statement Worksheet Preparing Formal Financial Statements: Step 6 Closing the Books: Step 7 Closing Entries 1-4 Closing Procedures Applicable to a Corporation Reversing Entries: An Optional Procedure Accounting Cycle Flowchart Copyright 2006 Pearson Education Canada Inc. 6-2 The Financial Statement Worksheet A multi-column form which is used as a “tool” in the preparation of financial statements It has five sets of Dr. and Cr. columns: Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet Copyright 2006 Pearson Education Canada Inc. 6-3 Trial Balance Account Name Debits Adj Trial Bal Adjustments Credits Debits Credits Debits Income Statement Credits Debits Credits Balance Sheet Debits Cash 100 100 100 Accounts Receivable 200 200 200 Notes Receivable 300 300 300 Food Inventory 110 (b)89 21 21 12 (a)7 5 5 220 220 Prepaid Insurance Furniture and Equipment 220 Accumulated Depreciation 110 110 Accounts Payable 150 150 150 Notes Payable 100 100 100 Amy Neat, Capital 502 502 Amy Neat , Withdrawals 88 50 Sales Other Income Salaries & Wages 100 Interest Expense 20 Other Operating Expenses 48 1160 Insurance Expense ©22 Credits 300 300 20 20 20 (e)7 (d)5 107 107 25 25 48 48 1,160 (b)89 Depreciation Expense 50 300 (a)7 Cost of Food Sold ©22 Accrued Interest Payable 7 7 89 89 22 (d)5 22 5 Accrued Salaries Payable (e)7 7 Interest Income (f)18 18 Accrued Interest Receivable (f) 18 148 5 7 18 18 148 NET INCOME Copyright 2006 502 50 Neat Restaurant F/S Worksheet Pearson Education Canada Inc.ended July 31, 2005 Year 1212 18 1,212 298 338 914 874 40 40 6-4 The Financial Statement Worksheet Excellent tool for preparing adjusting entries, the adjusted trial balance, financial statements, and closing entries Does not replace journalizing adjusting entries in the General Journal Does not replace posting adjusting entries from the General Journal to the General Ledger Does not replace formal financial statements, but shows all their data on one sheet. Copyright 2006 Pearson Education Canada Inc. 6-5 Preparing Formal Financial Statements: Step 6 Income Statement Statement of Owner’s Equity (or Statement of Retained Earnings) Balance Sheet Copyright 2006 Pearson Education Canada Inc. 6-6 Closing the Books: Step 7 Entry # 1- Close revenue accounts Entry # 2- Close expense accounts Entry # 3- Close income summary account Entry # 4- Close withdrawals or dividends (if any) to appropriate owner’s equity account Copyright 2006 Pearson Education Canada Inc. 6-7 Closing entry #1 - Close revenue accounts Debit each of the revenue accounts found on the income statement columns of the financial statement worksheet 2005 July 31 Sales Interest income 300 18 Other income 20 Income Summary To close revenue accounts Copyright 2006 Pearson Education Canada Inc. 6-8 338 Closing entry #2 - Closing expense accounts 2005 July 31 Income summary 298 Salaries & Wages Interest Expense Other operating exp. Insurance expense Cost of food sold Depreciation expense To close expense accounts Copyright 2006 Pearson Education Canada Inc. 107 25 48 7 89 22 Credit each of the expense accounts found on the income statement debit column of the financial statement worksheet. 6-9 Closing entry # 3-Closing the Income Summary Account To close income summary debit the account for the net income and credit the appropriate owner’s equity account Copyright 2006 Pearson Education Canada Inc. July 31 Income Summary 40 Amy Neat, Capital 40 To close the income summary account 6-10 Closing entry # 4-Closing owner’s withdrawals (or dividends) July 31 Amy Neat, Capital 50 Amy Neat Withdrawals To close the withdrawals account Copyright 2006 Pearson Education Canada Inc. 50 Close the withdrawals account to the appropriate Owner’s Equity account, or Dividends account to Retained Earnings 6-11 Closing procedures applicable to corporations Close revenue and expense accounts to income summary, just as with other types of companies Close income summary to retained earnings Close dividends to retained earnings Copyright 2006 Pearson Education Canada Inc. 6-12 Reversing Entries: An Optional Procedure Reversing accrual adjustments on the first day of each accounting period Main purpose: simplify the recording of payments and receipts of accruals Copyright 2006 Pearson Education Canada Inc. 6-13 Complete Accounting Cycle Flowchart Step 1 Analysis of Business Transactions Step 6 Financial Statements Step 7 Closing the Books Copyright 2006 Pearson Education Canada Inc. Step 2 Journalizing Step 5 Adjusting The Trial Balance Step 3 Posting Step 4 Taking The Trial Balance 6-14