13-1
Chapter
13
Financial Statements
and Closing Procedures
Section 1: Preparing
the Financial Statements
Section Objectives
1.
2.
3.
McGraw-Hill
Prepare a classified income statement
from the worksheet.
Prepare a statement of owner’s equity
from the worksheet.
Prepare a classified balance sheet from
the worksheet.
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Objective 1
Prepare a classified income
statement from the worksheet
The Classified Income Statement
A classified income statement is sometimes
called a multiple-step income statement.
13-3
QUESTION:
What is a single-step income statement?
ANSWER:
A single-step income statement is a
format in which only one computation
is needed to determine the net income.
(Total Revenue – Total Expenses = Net Income)
13-4
Operating Revenue
Income Statement
Year Ended December 31, 2010
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
561,650.00
12,500.00
549,150.00
Net sales for Simpson Antiques
13-5
Cost of Goods Sold
The Cost of Goods Sold section contains information
about the cost of the merchandise that was sold during
the period.
Three elements are needed to compute the cost of
goods sold:

Beginning inventory
 Net delivered cost of purchases
 Ending inventory
13-6
Net Delivered Cost of Purchases
Purchases
+ Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
13-7
Total Merchandise Available for Sale
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
13-8
Cost of Goods Sold
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
(Ending Merchandise Inventory)
Cost of Goods Sold
13-9



Merchandise Inventory is the one account that appears on both
the income statement and the balance sheet.
Beginning and ending merchandise inventory balances appear on
the income statement.
Ending merchandise inventory also appears on the balance sheet
in the Assets section.
13-10
Cost of Goods Sold
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010
Purchases
Freight In
Delivered Cost of Purchases
Less Purchases Returns and Allowances
Purchases Discounts
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2010
Cost of Goods Sold
52,000.00
321,500.00
9,800.00
331,300.00
3,050.00
3,130.00
6,180.00
325,120.00
377,120.00
47,000.00
330,120.00
Merchandise available for sale
Cost of goods sold
13-11
Gross Profit on Sales

For Simpson Antiques net sales is the revenue earned from
selling clothes.

Cost of goods sold is what Simpson Antiques paid for the
clothes that were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and
provide a profit.

Gross profit is sales less the cost of goods sold.
13-12
Gross profit on sales for Simpson Antiques
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010
Purchases
Freight In
Delivered Cost of Purchases
Less Purchases Returns and Allowances
3,050.00
Purchases Discounts
3,130.00
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2010
Cost of Goods Sold
Gross Profit on Sales
13-13
561,650.00
12,500.00
549,150.00
52,000.00
321,500.00
9,800.00
331,300.00
6,180.00
325,120.00
377,120.00
47,000.00
330,120.00
219,030.00
Operating Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
94,615.00
Salaries for salespersons and 27,600.00
advertising
are examples of selling expenses.
26,500.00
13-14
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167836.2
Operating Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
Rent, utilities, and salaries for office employees
are examples of general and administrative
79,690.00
7,425.00
expenses.
13-15
125.00
4,975.00
2,400.00
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167836.2
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
Net Income from Operations
561,650.00
12,500.00
549,150.00
330,120.00
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
Net income from operations
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167,836.20
51,193.80
13-16
Other Income and Other Expenses
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
51,193.80
166.00
582.00
748.00
770.00
22.00
13-17
Net income for Simpson Antiques
Simpson Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Total Selling Expenses
Total Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
Net Income for Year
549,150.00
330,120.00
219,030.00
94,615.00
167,836.20
51,193.80
166.00
582.00
748.00
770.00
22.00
51,171.80
13-18
Objective 2


Prepare a Statement of Owner’s
Equity from the worksheet
The statement of owner's equity reports the changes that
occurred in the owner's financial interest during the period.
The ending capital balance for Patricia Simpson, $84,792.80, is
used to prepare the balance sheet.
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2010
Patricia Simpson, Capital, January 1, 2010
61,221.00
Net Income for Year
51,171.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
23,571.80
Patricia Simpson, Capital, December 31, 2010
84,792.80
13-19
Objective 3
Prepare a classified balance
sheet from the worksheet
QUESTION:
What are current assets?
ANSWER:
Current assets are assets consisting
of cash, items that normally will be
converted into cash within one year,
or items that will be used up within
one year.
13-20
Current Assets
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Assets
Current Assets
Cash
Petty Cash Fund
Notes Receivable
Accounts Receivable
Less Allow. for Doubtful Accounts
Interest Receivable
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
Prepaid Interest
Total Current Assets
13,136.00
100.00
1,200.00
32,000.00
1,050.00
1,325.00
4,900.00
75.00
Current assets for Simpson Antiques
13-21
30,950.00
30.00
47,000.00
6,300.00
98,716.00
Plant and Equipment

Noncurrent assets are called long-term assets.

An important category of long-term assets is plant and equipment.

For many businesses plant and equipment represents a sizable
investment.
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Assets
Prepaid Interest
Total Current Assets
Plant and Equipment
Store Equipment
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Total Plant and Equipment
Total Assets
75.00
30,000.00
2,400.00
5,000.00
700.00
6,300.00
98,716.00
27,600.00
4,300.00
31,900.00
130,616.00
13-22
Current Liabilities
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Assets
Prepaid Interest
Total Current Assets
Total Plant and Equipment
Total Assets
75.00
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
Notes Payable-Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Fed. Unemployment Tax Pay.
State Unemployment Tax Pay.
Salaries Payable
Sales Tax Payable
Total Current Liabilities
6,300.00
98,716.00
31,900.00
130,616.00
Total current liabilities
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
6,984.00
45,823.20
13-23
Long-Term Liabilities

Although repayment of long-term liabilities might not be due
for several years, management must make sure that periodic
interest is paid promptly.

Long-term liabilities include mortgages, notes payable, and
loans payable.
13-24
Owner's Equity
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2010
Patricia Simpson, Capital, January 1, 2010
61,221.00
Net Income for Year
51,171.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
23,571.80
Patricia Simpson, Capital, December 31, 2010
84,792.80
Simpson Antiques
Balance Sheet
Year Ended December 31, 2010
Assets
Owner’s Equity
Patricia Simpson, Capital
Total Liabilities and Owner's Equity
84,792.80
130,616.00
The ending balance from the statement of owner’s equity is
transferred to the Owner's Equity section of the balance sheet.
13-25
Chapter
13
Financial Statements
and Closing Procedures
Section 2: Completing the
Accounting Cycle
Section Objectives
McGraw-Hill
4.
Journalize and post the adjusting entries.
5.
Journalize and post the closing entries.
6.
Prepare a postclosing trial balance.
7.
Journalize and post reversing entries.
© 2009 The McGraw-Hill Companies, Inc. All rights reserved.
Objective 4
 All
Journalize and post the
adjusting entries
adjustments are shown on the worksheet.
 After
the financial statements have been prepared,
the adjustments are made a permanent part of the
accounting records.
 They
are recorded in the general journal as
adjusting journal entries and are posted to the
general ledger.
13-27
Adjusting Entries
Type of
Adjustment
Worksheet
Reference
Purpose
Inventory
(a – b)
Removes beginning inventory and adds ending
inventory to the accounting records.
Expense
(c – e)
Matches expense to revenue for the period; the
credit is to a contra asset account.
Accrued Expense
(f – i)
Matches expense to revenue for the period; the
credit is to a liability account.
Prepaid Expense
(j – l)
Matches expense to revenue for the period; the
credit is to an asset account.
Accrued Income
(m – n)
Recognizes income earned in the period.
The debit is to an asset account (Interest
Receivable) or a liability account (Sales Tax
Payable).
13-28
Objective 5
Journalize and Post the
Closing Entries

At the end of the period, the temporary
accounts are closed.

The temporary accounts are:

Revenue accounts
 Cost of goods sold accounts
 Expense accounts
 Drawing account
13-29
There are four steps in the closing process:
1.
Close revenue accounts and cost of goods sold accounts
with credit balances to Income Summary.
2.
Close expense accounts and cost of goods sold accounts
with debit balances to Income Summary.
3.
Close Income Summary, which now reflects the net income
or loss for the period, to owner's capital.
4.
Close the drawing account to owner's capital.
13-30
Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with
credit balances.
GENERAL JOURNAL
DATE
2010
Dec. 31
DESCRIPTION
POST.
REF.
DEBIT
PAGE
28
CREDIT
Closing Entries
Sales
Interest Income
Miscellaneous Income
Purchases Returns and Allowances
Purchases Discounts
Income Summary
561,650.00
166.00
582.00
3,050.00
3,130.00
568,578.00
Debit each account, except Income Summary, for its balance. Credit Income
Summary for the total.
13-31
Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with
Debit Balances.
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
Income Summary
Sales Returns and Allowances
Purchases
Freight
In
Credit each
account,
except Income Summary,
SummarySalaries
for theExpense
total. – Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equip
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equip.
Interest Expense
Dec.
31
13-32
PAGE
DEBIT
28
CREDIT
512,406.20
for its balance.
13,000.00
321,500.00
9,800.00
Debit
Income
79,990.00
7,425.00
125.00
4,975.00
2,400.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
770.00
Step 3: Closing the Income Summary Account.

The third closing entry transfers the Income Summary balance to the
owner's capital account.
 This closes the Income Summary account, which remains closed until it is
used in the end-of-period process for the next year.
 For Simpson Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b)
Closing Entries
12/31
12/31
52,000.00
512,406.20
12/31
12/31
564,406.20
615,578.00
Bal.
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Income Summary
Patricia Simpson, Capital
47,000.00
568,578.00
51,171.80
PAGE
DEBIT
28
CREDIT
51,171.80
51,171.80
13-33
Step 4: Closing the Drawing account.
This entry closes the drawing account and updates the capital account.
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Patricia Simpson, Capital
Patricia Simpson, Drawing
PAGE
DEBIT
28
CREDIT
27,600.00
27,600.00
13-34
Posting the Closing Entries

The closing entries are posted from the general journal to the
general ledger.

This process brings the temporary account balances to zero.

The word Closing is entered in the Description column.
13-35
Objective 6
Preparing a Postclosing Trial
Balance

Prepare a postclosing trial balance to confirm
that the general ledger is in balance.

Only the accounts that have balances – the asset,
liability and owner's capital accounts – appear on
the postclosing trial balance.

The postclosing trial balance matches the
amounts reported on the balance sheet.

To verify this, compare the postclosing trial
balance with the balance sheet.
13-36
Only the accounts that have balances—the asset, liability and owner's
capital accounts—appear on the postclosing trial balance.
Preparing a Postclosing Trial Balance
Simpson Antiques
Postclosing Trial Balance
December 31, 2010
Cash
13,136.00
Petty Cash Fund
100.00
Notes Receivable
1,200.00
Accounts Receivable
32,000.00
Allowance for Doubtful Accounts
Interest Receivable
30.00
Merchandise Inventory
47,000.00
Supplies
1,325.00
Prepaid Insurance
4,900.00
Prepaid Interest
75.00
Store Equipment
30,000.00
Accumulated Depreciation - Store Equipment
Office Equipment
5,000.00
Accumulated Depreciation - Office Equipment
Notes Payable - Trade
Notes Payable - Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employees Income Taxes Payable
Federal Unemployment Tax Payable
State Unemployment Tax Payable
Salaries Payable
Sales Tax Payable
Patricia Simpson, Capital
Totals
134,766.00
Temporary accounts do not
appear on the postclosing trial
balance.
1,050.00
Revenue
Cost of
Goods Sold
Expenses
Withdrawals
2,400.00
700.00
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
6,984.00
84,792.80
134,766.00
13-37
Journalize and post
reversing entries
Objective 7
QUESTION:
What are reversing entries?
ANSWER:
Reversing entries are journal entries
made to reverse the effect of certain
adjusting entries involving accrued
income or accrued expenses.
13-38
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
13-39
Step 6
Journalize and
post adjusting
entries
Thank You
for using
College Accounting, 12th Edition
Price • Haddock • Farina
13-40