Financial Reporting and Analysis

-Session 2-

Professor Raluca Ratiu, PhD

Accrual Accounting,
Adjustments and
The Accounting Cycle
-Chapters 2 and 3-
 Accrual Accounting

Accrual accounting is required by

U.S. GAAP and by IFRS, and states that . . .

Revenues should be Expenses are matched

recognized when against revenue when
earned (even if not incurred (even if not
received in cash). paid in cash).

Tied Together
 Accrual Accounting for Revenues
Revenue recognition requires that revenue be recognized
(recorded) only when earned

Example 1: Target purchases inventories during May for

$80,000, and sells half during May for $140,000 cash.
How much revenue will Target recognize during May?
Revenue for May = $140,000

Example 2: If Target collected $130,000 during May and

customers promised to pay the $10,000 balance during
June, how much revenue will Target recognize during May?
Revenue for May = $140,000

Revenue is earned when delivered to the customer.

 Accrual Accounting for Expenses
Expenses are matched when incurred against the related
revenue amounts.
Example: Target purchased inventories during May for
$80,000. It sold $70,000 of the inventory for $120,000
during May. How much cost of goods sold expense should
Target recognized during May?
Expenses for May = $70,000

If Target had paid for $65,000 of the $80,000 inventory

purchase, and planned to pay the $15,000 balance during
June, how much expense will Target recognize during May?
Expenses for May = $70,000

Cost of goods sold expenses are matched against the

revenue they helped to earn.
 Abbreviated Accounting Cycle

 A sequence of activities to accumulate and report financial statements

 Steps performed daily, monthly, quarterly, or end of fiscal year; not all
at the same time
 Steps in the accounting cycle

Continuously Monthly or Annually (End of

Quarterly Accounting Period)
 Review of Accounting Documents

 General journal
• Tabular, chronological record where business activities are
captured in debits and credits

 General ledger
• Listing of all accounts and their balances
• Accounts are grouped in 5 elements
oAssets
oLiabilities
oEquity
oRevenues
oExpenses
 Journalizing and Posting

 Journalize
• Recording a transaction in a journal
 Posting
• Occurs after transactions are journalized
• Debits and credits in each journal entry are transferred
to their related general ledger accounts
Record in Post to the
Journal Ledger
 The Account
 What is an ‘account’?
• A record of increases and decreases for each asset,
liability, equity, revenue, or expense
• Chart of accounts: Listing of account titles and
identification codes

 The role of the ‘account’ in transaction analysis

• What accounts are affected by the transaction?
• Must affect at least two accounts to maintain equality
• What is the direction and amount of each effect?
• Increase or decrease
 Charts of Accounts

Lists the titles and numbers of all accounts found in the general ledger
 T-Accounts

Accountants use a graphic representation of an

account called a T-account.

Always Always
on the on the
Left Right

One side of the T-account is used to

record increases to the account and
the other side is used to record
decreases.
 Posting to T-Accounts

T-accounts are labeled by letter abbreviations for type

Increases
in the
Cash
account

Ending Cash Decreases in

balance the Cash
account
 T-Accounts

Increases and decreases are described as debits and

credits. Double-entry accounting requires that
debits = credits

Accounts that increase Accounts that increase

on the debit side have on the credit side have
a normal debit balance. a normal credit
balance.
 Expanded Accounting Equation

The equity section is expanded to reflect increases from

common stock and revenues and decreases from
dividends and expenses.
Summary of Debits and Credits
 Journalize and Post to T-Accounts:
Stock Issuance
T-Accounts -example-
• An abbreviated representation of a ledger, which is a
listing of all accounts and their dollar balances
Amounts are posted to T-accounts from the journal entry.

  Cash (A)     Common Stock (SE)  

(1) 10,000   10,000 (1)

   

(1) Cash (+A) 10,000  

  Common stock (+SE)   10,000

Each posting is accompanied by the

number (or letter) of the transaction for
easier tracking.
 Journalize and Post: Issue Stock

(1) On April 1, investors contributed $10,000 cash to start

Jana Juice which sells energy drinks to retailers and
individuals, in exchange for 500 shares of stock.

(1) Cash (+A) 10,000  

  Common stock (+SE)   10,000

Credit account Record Debit Credit

names are indented debits first. amounts go amounts go in
from the left margin. in the left the right
column column

  Cash (A)     Common Stock (SE)  

(1) 10,000   10,000 (1)

   
 Journalize and Post: Bank Loan

(2) On May 1, Jana Juice borrowed $4,000 cash by signing

a note to be repaid on May 31 plus interest of $40.

(2) Cash (+A) 4,000  

  Notes payable (+L)   4,000

  Cash (A)     Notes Payable (L)  

(2) 4,000   4,000 (2)
   
 Journalize and Post: Rental Agreement

(3) Jana Juice signed a rental agreement for its store

location and paid $1,800 as a security deposit.

(3) Security deposit (+A) 1,800  

  Cash (–A)   1,800

  Security Deposit (A)     Cash (A)  

(3) 1,800   1,800 (3)
   
 Journalize and Post: Purchase Inventory

(4) Jana Juice purchased $2,000 of inventory on account,

consisting of energy drinks

(4) Inventory (+A) 2,000  

  Accounts payable (+L)   2,000

  Inventory (A)     Accounts Payable (L)  

(4) 2,000   2,000 (4)
   
 Journalize and Post: Payment of Advertising

(5) Jana Juice paid $900 to advertise in the local

newspaper during May.

(5) Advertising expense (+E, ‒SE) 900  

  Cash (–A)   900

  Advertising Expense (E)     Cash (A)  

(5) 900   900 (5)
   
 Journalize and Post: Pay Amounts Due

(6) Jana Juice paid $1,500 for inventory previously

purchased on account.

(6) Accounts payable (‒L) 1,500  

  Cash (‒A)   1,500

  Accounts Payable (L)     Cash (A)  

(6) 1,500   1,500 (6)
   
 Journalize and Post:
Sell to Customers for Cash
(7) Jana Juice sold $600 of energy drinks to customers for
$2,400 cash during May.

(7) Cash (+A) 2,400

  Sales revenue (+R, +SE)   2,400

(7) Cost of goods sold (+E, ‒SE) 600  

  Inventory (–A)   600

Cash (A)     Sales Revenue (R)  

(7) 2,400   2,400 (7)
   
COGS (E)     Inventory (A)  
(7) 600   600 (7)
   
 Journalize and Post:
Sell to Customers on Account
(8) Jana Juice sold $700 of energy drinks on account for
$2,900 to a convenience store during May.

(8) Account receivable (+A) 2,900

  Sales revenue (+R, +SE)   2,900

(8) Cost of goods sold (+E, ‒SE) 700  

  Inventory (–A)   700

Accounts receivable (A)     Sales Revenue (R)  

(8) 2,900   2,900 (8)
   
COGS (E)     Inventory (A)  
(8) 700   700 (8)
   
 Journalize and Post: Pay Wages
(9) Jana Juice paid wages totaling $1,300 to employees
during May.

(9) Wage expense (+E, ‒SE) 1,300  

  Cash (–A)   1,300

  Wage Expense (E)     Cash (A)  

(9) 1,300   1,300 (9)
   
 Journalize and Post: Sell Gift Cards

(10) Jana Juice sold $300 of gift cards to customers during

May.

(10) Cash (+A) 300

  Unearned revenue (+L)   300

  Cash (A)     Unearned Revenue (L)  

(10) 300   300 (10)
   
 Journalize and Post: Customer Collections

(11) Jana Juice collected $1,200 of the amount owed by

customers during May.

(11) Cash (+A) 1,200

  Accounts Receivable (-A)   1,200

Accounts Receivable
  Cash (A)     (A)  
(11) 1,200   1,200 (11)
   
 Journalize and Post: Paid Principal
and Interest
(12) Jana Juice paid $40 for interest and repaid the $4,000
note payable.

(12) Note payable (‒L) 4,000  

Interest expense (+E, ‒SE) 40
  Cash (–A)   4,040

  Interest Expense (E)  

(12) 40
 

  Cash (A)     Note Payable (L)  

4,040 (12) (12)  4,000
   
 Journalize and Post:
Paid for Insurance in Advance
(13) Jana Juice paid $800 for a one-year insurance policy.

(13) Prepaid insurance (+A) 800  

  Cash (–A)   800

  Prepaid Insurance (A)     Cash (A)  

(13) 800   800 (13)
   
 Journalize and Post: Paid Rent

(14) Jana Juice paid $700 for rent for May.

(14) Rent expense (+E, ‒SE) 700  

  Cash (–A)   700

  Rent Expense (E)     Cash (A)  

(14) 700   700 (14)
   
 Journalize and Post: Pay Dividends

(15) Jana Juice paid $400 for dividends to shareholders

during May.

(15) Retained earnings (‒SE) 400  

  Cash (‒A)   400

  Retained Earnings (SE)     Cash (A)  

(15) 400   400 (15)
   
 General Ledger After May Transactions
Cash (A) Accounts Payable (L) Common Stock (SE)
(1) 1,800 (3) (6) 10,000 (1)
10,000 1,500 2,000 (4)
(2) 10,000 Bal
4,000 900 (5) 500 Bal
(7) 2,400 1,500 (6) Retained Earnings (SE)
Equity
(10) 300 1,300 (9) Unearned Revenue (L) (15) 400
(11) 1,200 4,040 (12) Bal
300 (10) 400
800 (13) 300 Bal
Assets  Sales Revenue (R ) 
700 (14) 2,400 (7)
400 (15) Note Payable (L) 2,900 (8)
Bal 6,460 5,300 Bal
(12) 4,000 4,000 (2)
Cost of Goods Sold (E)
0 Bal
Accounts Receivable (A) (7) 600
(8) (8)
2,900 1,200 (11) 700
Bal 1,700
Liabilities Bal 1,300
Wages Expense (E)
(9) 1,300
Inventory (A)
Bal 1,300
(4) 2,000 600 (7)
Rent Expense (E)
700 (8)
Bal
Income (14) 700
700
statement Bal 700

Prepaid Insurance (A) accounts Advertising Expense (E)

(5) 900
(13) 800 Bal 900
Bal 800
Interest Expense ( E)
(12) 40
Security Deposit (A)
Bal 40
(3) 1,800
Bal 1,800
Reporting Performance on Jana Juice’s
Income Statement
Jana Juice
Income Statement
For Month Ended May 31, 2019
Sales revenue $5,300
Cost of goods sold 1,300
Gross profit 4,000
Operating Expenses
Wages expense 1,300
Rent expense 700
Advertising expense 900
Operating income 1,100
Interest expense 40
Net income $1,060

Jana Juice reported profit of $1,060 in its

first month of operations.
 Reporting Stockholders’ Equity

The statement of stockholders’ equity is a reconciliation of the

beginning and ending balances of stockholders’ equity
accounts.
Jana Juice
Statement of Stockholders’ Equity
For Month Ended May 31, 2019
Contributed Earned Total
  Capital Capital Equity
Balance, April 30, 2019 $ - $ - $ -
Net income - 1,060 1,060
10,000
Common stock issued - 10,000
Cash dividends - (400) (400)
Balance, May 31, 2019 $ 10,000 $ 660 $ 10,660
 Jana Juice’s New Balance Sheet

Retained Earnings began with a zero balance on May 1. Net

income of $1,060 is added and dividends of $400 are subtracted
to give a new balance of $660 at May 31.

Assets Liabilities
Cash $6,460 Accounts payable $ 500

Accounts receivable 1,700 Unearned revenue 300

Inventory 700 Total current liabilities 800

Prepaid insurance 800
Security deposit 1,800 Equity

Total current assets 11,460 Common stock 10,000

Retained earnings 660

Total assets $11,460 Total liabilities & equity $11,460

 Record a Note Signed

(1) On June 1, Jana Juice signed a 2-year note to borrow

$12,000 and agrees to pay 12% interest on the first day of
each month with the principal due at the end of 2 years.
 Record Purchase of Long-Term Assets

(2) On June 1, Jana Juice purchases and installs new fixtures and
equipment for $10,200.
 Record Advertising Expense

(3) On June 8, Jana Juice paid $800 to advertise in the local

newspaper for June.
 Paid Suppliers for Inventory
(4) On June 10, Jana Juice paid $500 in cash to its suppliers
for inventory delivered during May.
 Purchasing Inventories

(5) On June 15, Jana Juice purchased inventory on account

for $2,600.
 Record Sale of Products

(6a) During June, Jana Juice sold energy drinks costing $600
to retail customers for $3,100 cash.
 Record Cost of Sales

(6b) During June, Jana Juice recorded the cost of expense for
the sale of the inventory in (6a).
 Sell Product on Account
(7a) During June, Jana Juice sold $1,100 of energy
drinks on account for $4,400.
 Record Cost of Sales

(7b) During June, Jana Juice recorded the $1,100 cost of

sales for inventory sold in transaction (7a).
 Sold Membership to Online Health
Program
(8) During June, Jana Juice received an additional $600 from
customers in exchange for a three month membership (July,
Aug and Sept) to an online health program
 Record Wages Paid

(9) During June, Jana Juice paid wages of $1,400 to

employees.
 Received Cash from Customers

(10) During June, Jana Juice received $2,000 cash from

customers who purchased on credit.
 Paying Rent

(11) On June 30, Jana Juice paid $700 in rent expense for
June.
 Paying Dividends to Shareholders

(12) On June 30, Jana Juice paid $100 in cash dividends to

shareholders.
 General Ledger for June before Adjustments
  Cash (A)   Accounts Payable (L) Common Stock (SE)
Bal. 6,460       500 Bal.     10,000 Bal.
(1) 12,000 10,200 (2) (4) 500 2,600 (5)   10,000 Bal.
(6a) 3,100 800 (3)     2,600 Bal.
(8) 600 500 (4) Retained Earnings (SE)
(10) 2,000 1,400 (9) Unearned Revenue (L) (12) 100 660 Bal.
  700 (11)   300 Bal.     560 Bal.
  100 (12)     600 (8)
10,460     900 Bal.  Sales Revenue (R ) 
  3,100 (6a)
  Accounts Receivable (A)   Note Payable (L)     4,400 (7a)
Bal. 1,700      12,000 (1)     7,500 Bal.
(7a) 4,400 2,000 (10)       
Bal. 4,100     12,000 Bal.   Cost of Goods Sold (E)
(6b) 600   
  Inventory (A)   (7b) 1,100 
Bal. 700    Bal. 1,700   
(5) 2,600 600 (6b)
    1,100 (7b)   Wages Expense (E)
Bal. 1,600  (9) 1,400   
Bal. 1,400   
Prepaid Insurance (A)
Bal. 800       Rent Expense (E)
Bal. 800 (11) 700   
Bal. 700   
Security Deposit (A)
Bal. 1,800     Advertising Expense (E)
Bal. 1,800    (3) 800   
Bal. 800   
Fixtures and Equipment (A)
(2) 10,200    
  10,200   
 The Adjusting Process

 Account balances must be reviewed to determine if

adjustments are required
 Caused by accrual accounting
 Adjusting occurs before the financial statements are
prepared
• After all regular transactions have been recorded and posted

•Almost never affect cash, and

Adjusting •Usually affect at least 1 balance sheet
Entries…. and 1 income statement account
 Unadjusted Trial Balance –
First Step in Adjusting Process

 What is a trial balance?

• A list of all general ledger accounts with their
respective balances
 Unadjusted means prior to completing the
adjusting entries
 Purpose
• To be sure the general ledger is in balance before
adjusting the accounts
Listing all accounts in one place eases the review
of accounts in determining which need
adjustment
Preparing an Unadjusted Trial Balance
Jana Juice
Unadjusted Trial Balance
30-June-16
  Debit Credit
Cash $10,460  
Accounts Receivable 4,100
Inventory 1,600
Prepaid Insurance 800
Security Deposit 1,800
Fixtures and Equipment 10,200
Accounts Payable $ 2,600
Unearned Revenue 900
Long-term Notes Payable 12,000
Common Stock 10,000
Retained Earnings 560
Sales Revenue 7,500
Cost of Goods Sold 1,700
Wages Expense 1,400
Rent Expense 700
Advertising Expense 800  
Totals $33,560 $33,560
 Types of Adjustments

Deferrals Accruals
 Deals with an amount  Deals with an amount
previously recorded in a NOT previously recorded
balance sheet account in a balance sheet account
• Decreases a balance • Increases both a balance
sheet account and sheet account and an
increases an income income statement
statement account account

Both types allow a period’s revenues and

expenses to be measured properly
 Four Types of Adjustments

Deferrals

Accruals
 Deferred (Unearned) Revenue
The process of allocating unearned revenue to
revenue

 Amounts received in advance are recorded as

liabilities
• Because an obligation exists to provide future
services or assets
 Situations requiring adjusting entries:
• Gift cards are redeemed
• Airline miles are redeemed
• Subscriptions to newspaper and magazines
received in advance are earned
 Allocating Unearned Revenue
to Revenue Example
(a) In May, customers prepaid $300 for a three month membership
(June, July and Aug) to an online health program. One month of
this prepaid membership was earned in June.
 Deferred (Prepaid) Expenses and
Allocating Assets to Expenses (1)

1. Prepaid expenses: the process of allocating

prepaid assets to expenses
 Amounts paid for in advance of using assets that
benefit more than one period
 Situations requiring adjusting entries
• Prepayment of advertising, insurance, or rent
becomes used up over time
• Supplies are used over time
• Insurance premiums paid become used up over
time
 Allocating Assets to Expense Example-
Prepaid Insurance
(b) One month of Jana Juice’s insurance expired during June.
The original payment was $800 covering June through
September. ($800 ÷ 4 = $200)
 Deferred (Prepaid) Expenses and
Allocating Assets to Expenses (2)
2. Depreciation: the process of allocating assets-
equipment, buildings, and vehicles- to expenses
 The asset cost must be allocated to accounting periods
that the cost benefits
 Annual straight-line depreciation

Depreciation expense= Asset cost / Estimated

useful life
 Accumulated depreciation
• Special account used instead of reducing the asset account
directly
• Considered a contra asset account
 Depreciation and Related Assets
on the Balance Sheet
Long-term Assets at June 30, 2019
Fixtures and Equipment $10,200
Less: Accumulated depreciation 170
Fixtures and Equipment, net$10,030

Accumulated depreciation increases and the book

value declines over the life of the equipment.
 Allocating Assets to Expense
Example- Depreciation
(c) Jana Juice’s equipment originally cost $10,200 and was
expected to benefit the company for 5 years.

Depreciation expense = $10,200 ÷ 5 years ÷ 12 = $170

 Accrued Revenues
The process of recognizing amounts earned
before the cash is received

 Amounts earned from providing services or selling

products must be recognized in the period earned
 Creates an increase in an asset and an increase in
revenues
 Examples requiring adjusting entries
• A customer acquired goods on the last day of the
month and agreed to pay during the following month
• A company earned interest revenue from the bank on
its checking account and had not yet recorded it
 Accrued Revenues Example
(d) At the end of June, Jana Juice learned that its bank has decided to provide
interest on checking accounts for small businesses. The interest is paid into
the checking account on the 5 day of the following month. Jana Juice
th

earned $60 interest in June.

 Accruing Expenses
The process of recognizing expenses before the
cash is paid

Examples requiring adjusting entries

 Utility bill received in the mail for the month
just completed
 Employees earned wages before the month
ended, to be paid in the following month
 Amounts borrowed from a bank have interest
that is not due until the note is paid off
 Income taxes are paid quarterly and the
company earned a profit during the first
month of the quarter
 Accruing Expenses Example -
Wages
(e)Jana Juice’s employees earned $550 during the last week
of June that will be paid on July 6.
 Accruing Expenses Example -
Interest
(f)The $12,000 loan borrowed by Jana Juice on June 1
carries a 12% annual interest rate.

Interest expense = $12,000 × 12% × 1/12 = $120

 Calculating Income Before Taxes

Revenue and expense account balances prior to accruing

income taxes:
 
Sales Revenue (R )   Cost of Goods Sold (E)   Wages Expense (E)
    7,500 Bal. Bal. 1,700     Bal. 1,400    
  100 (a)   (e) 550 
    7,600 Adj.Bal Adj. Bal 1,700    Adj.Bal 1,950   

 Rent Expense (E)  Advertising Expense (E) Insurance Expense (E)

Bal. 700    Bal. 800    (b) 200   
Adj.Bal 700    Adj. Bal 800    Adj.Bal 200   

Depreciation Expense (E) Interest Income (R) Interest Expense (E)

(c) 170     60 (d)  (f) 120
Adj.Bal 170     60 Adj. Bal  Adj. Bal 120

Income before taxes:

$7,600 ‒ $1,700 ‒ $1,950 ‒ $700 ‒ $800 ‒ $200 ‒ $170 + 60 ‒ $120 = $2,020
 Calculating Income Tax Expense

To determine income tax expense:

 Step 1: Journalize all adjusting entries (except for
income taxes) and post to T-accounts
 Step 2: Calculate income before taxes based on the
balances of the revenue and expense accounts

Income before taxes = $2,020

From the revenue and expense T-accounts (on the previous slide):

 Step 3: Multiple income before taxes by the income

tax rate, in this case, 30%:
$2,020 × 30%* = $606
Net Income= $2,020- $606= $1,414
s
 Accruing Expenses Example –
Income Taxes
(g) Income taxes are paid during the month after accrual, and
have not been paid for June.
 Preparing an Adjusted Trial Balance
Lists all ledger   Unadjusted Balances Adjustments
Adjusted Trial
Balance
balances after  Cash Debit
10,460
Credit
   
Debit
   
Credit
 
Debit
10,460
Credit
 
adjustments Accounts Receivable 4,100 4,100
Inventory 1,600 1,600
Prepared Prepaid Insurance 800 (b) 200 600
from the Interest Receivable
Security Deposit 1,800
(d) 60 60
1,800
balances in Fixtures and Equipment 10,200 10,200
Accum. Depr - Fixt. & equip. ( c) 170 170
the general Accounts Payable 2,600 2,600
ledger Unearned Revenue
Wages Payable
900 (a) 100
(e) 550
800
550
accounts Interest Payable (f) 120 120
Income Tax Payable (g) 606 606
Long-Term Notes Payable 12,000 12,000
Common Stock 10,000 10,000
Retained Earnings 560 560
Sales Revenue 7,500 (a) 100 7,600
T-Accounts Interest Income (d) 60 60
supporting the Cost of Goods Sold 1,700 1,700
Wages Expense 1,400 (e) 550 1,950
balances are Rent Expense 700 700
found on the Advertising Expense 800 800
Insurance Expense (b) 200 200
next three Depreciation Expense ( c) 170 170
slides. Interest Expense (f) 120 120
Income Tax Expense     (g) 606     606  
Totals $33,560 $33,560   $1,806   $1,806 $35,066 $35,066
Summary of Adjustments
 Summary of T-Accounts
Assets
  Cash (A)     Inventory (A)  
Bal. 6,460 Bal. 700 600 (6b)
(1) 12,000 10,200 (2) (5) 2,600 1,100 (7b)
(6a) 3,100 800 (3) Adj. Bal 1,600
(8) 600 500 (4)
Security Deposit (A)
(10)  2,000 1,400 (9) Bal. 1,800
700 (11) Adj. Bal 1,800
100 (12)
Adj Bal 10,460 Fixtures and Equipment (A)
(2) 10,200    
  Accounts Receivable (A)   Adj. Bal 10,200
Bal. 4,100
Accumulated Depreciation (XA)
Adj.Bal 4,100     170 (c)
  170 Adj.Bal

Prepaid Insurance (A) Interest Receivable (A)

Bal. 800 200 (b) (d) 60

Adj. Bal 600
Adj. Bal 60
 Summary of T-Accounts
Liabilities and Equities

  Accounts Payable (L)     Income Tax Payable (L)  

(4) 500 500 Bal.     606 (g)
2,600 (5)   606 Adj.Bal
  2,600 Adj.Bal   Notes Payable (L)  

  Unearned Revenue (L)       12,000 (1)

300 Bal.   12,000 Adj.Bal
(a) 100 600 (8)
  800 Adj.Bal
  Common Stock (SE)  
  Wages Payable (L)  
    10,000 Bal.
    550 (e)
  550 Adj.Bal   10,000 Adj.Bal

  Interest Payable (L)   Retained Earnings (SE)

    120 (f) (12) 100   660   Bal.
  120 Adj.bal 560
 Summary of T-Accounts
Revenues and expenses
 Sales Revenue (R )  Cost of Goods Sold (E) Wages Expense (E)

    7,500 Bal. Bal. 1,700      1,400    

  100 (a)   (e) 550 
              

    7,600 Adj.Bal Adj. Bal 1,700    Adj.Bal 1,950   

 Rent Expense (E)  Advertising Expense (E) Insurance Expense (E)

Bal. 700    Bal. 800    (b) 200   
Adj.Bal 700    Adj. Bal 800    Adj.Bal 200   

Depreciation Expense (E) Interest Expense (E)

(c) 170    (f) 120   
Adj.Bal 170    Adj. Bal 120   

Interest Income (R)

 60  (d)
60 Adj. Bal
Preparing Financial Statements
 Income Statement
Jana Juice
Income Statement
For Month Ended June 30, 2019
Revenues
Sales revenue $7,600
Expenses
Cost of goods sold $1,700
Wages expense 1,950
Jana Juice reported Rent expense 700
net income of $1,414 Advertising expense 800
for the month ending Insurance expense 200
June 30, 2019. Depreciation expense 170
Operating expenses 5,520
Income from operations 2,080
Interest expense (120)
Interest income 60
Income before taxes 2,020
Income tax expense 606
Net income $1,414
 Statement of Stockholders’ Equity

  Contributed Capital Earned Capital Total Equity

Balance, June 1, 2019 $10,000 $ 660 $10,660
Net income 1,414 1,414
Common stock issued -
Cash dividends (100) (100)
Balance, June 30, 2019 $10,000 $1,974 $11,974
 Balance Sheet
Jana Juice
Balance Sheet
June 30, 2019
Assets Liabilities
Cash $10,460 Accounts payable $ 2,600
Accounts receivable 4,100 Unearned revenue 800
Interest receivable 60 Wages payable 550

Inventory 1,600 Interest payable 120

Prepaid insurance 600 Income tax payable 606

Security deposit 1,800 Current liabilities 4,676

Current assets 18,620 Notes payable 12,000
Fixtures and equipment $10,200 Total liabilities 16,676
Less: Accumulated
depreciation-Fixt./equipment (170) Equity

Equipment, net 10,030 Common stock 10,000

Total assets $28,650 Retained earnings 1,974
Total liabilities & equity $28,650
 Statement of Cash Flows
Jana Juice 3
Statement of Cash Flows
For Month Ended June 30, 2019
Cash Flows from Operating Activities
Cash received from customers $ 5,700
Cash paid for inventory (500)
Cash paid for wages (1,400)
The amount of
Cash paid for rent (700)
cash at June 30 is Cash paid for advertising (800)
linked to the Net cash provided by operating activities 2,300

balance sheet. Cash Flows from Investing Activities

Cash paid for fixtures and equipment (10,200)
Net cash used by investing activities (10,200)

Cash Flows from Financing Activities

Cash received from loans 12,000

Cash paid for dividends (100)
Net cash provided by financing activities 11,900
Net change in cash 4,000
Cash balance, June 1, 2019 6,460
Cash balance, June 30, 2019 $ 10,460
 Closing Temporary Accounts

 Closing process occurs at the end of the

accounting period

 Balances in temporary accounts are transferred

to permanently update Retained Earnings

 Permanent accounts: Assets, Liabilities, Equity

(Contributed Capital and Retained Earnings)

 Temporary accounts: Revenues and Expenses

accounts
 Closing Temporary Accounts

Two transactions close temporary accounts:

1. Close revenue accounts

Debit each revenue account for an amount equal to its
balance, and credit Retained Earnings for the total of
revenues.

2. Close expense accounts

Credit each expense account for an amount equal to its
balance, and debit Retained Earnings for the total of
expenses.
Closing Process
 Closing Jana Juice’s Accounts
Sales Revenue (R )  June
30 Sales revenue (–R) 7,600
7,600 7,600 Adj.Bal Interest income (-R) 60
Retained earnings (+SE) 7,660
 Interest Income (R )  June
30 Retained earnings (–SE) 6,246
60 60 Adj.Bal
Cost of goods sold (–E) 1,700
Cost of Goods Sold (E) Wages expense (–E) 1,950
Adj.Bal 1,700 1,700 Rent expense (–E) 700
Advertising expense (–E) 800
  Wages Expense (E) Insurance expense (–E) 200
Adj.Bal 1,950 1,950 Depreciation expense (–E) 170
Interest expense (–E) 120
Rent Expense (E) Income tax expense (–E) 606
Adj.Bal 700 700
Interest Expense (E) Retained Earnings (SE)
Advertising Expense (E)
Adj.Bal 800 800 Adj.Bal 120 120 (12) 100 660 Beg.Bal
  6,246 7,660  
Insurance Expense (E) Income Tax Expense (E)
Adj.Bal 200 200   1,974
Adj.Bal 606 606

Depreciation Expense (E)

Adj.Bal 170 170
Preparing a Post-Closing Trial Balance
Jana Juice
Post-Closing Trial Balance
June 30, 2019
  Debit Credit
Cash $10,460
Accounts Receivable 4,100
Inventory 1,600
Prepaid Insurance 600
Interest Receivable 60
Security Deposit 1,800
Fixtures and Equipment 10,200
Accum. Depreciation-Fixtures &
equip. $ 170
Accounts Payable 2,600
Unearned Revenue 800
Wages Payable 550
Interest Payable 120
Income Tax Payable 606
Notes Payable 12,000
Common Stock 10,000
Retained Earnings   1,974
Totals $28,820 $28,820
 Summarizing the Accounting Cycle

 Occurs each fiscal year (period)

 Represents a systematic process for accumulating and
reporting a company’s financial data
 Summary
 the major steps in accounting cycle are: Analyze, Record, Adjust, Report, Close
 transactions are initially recorded in a journal and then posted to the general ledger
accounts
 adjusting entries achieve the proper recognition of revenues and the proper matching of
expenses to those revenues;
 Adjusting deferred (unearned) revenues: decrease liability & increase revenue
 Adjusting deferred (prepaid) expenses: increase expense & decrease asset
 Accruing revenues: increase asset & increase revenue
 Accruing expenses: increase expense & increase liability
 an income statement, statement of changes in equity, balance sheet and statement of
cash flows are prepared from an adjusted trial balance
 closing the books means closing (yielding zero balances) revenues and expenses- that is,
all revenues and expenses accounts. Revenue and expense account balances are
transferred (closed) to Retained Earnings account.