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  1. College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed McGraw-Hill Ryerson 1

  2. CHAPTER 10 COMPLETING THE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS 2

  3. OBJECTIVE 1 Prepare a classified income statement from the worksheet. 3

  4. FINANCIAL STATEMENTHEADINGS Headings answer the following questions: Who? Name of the company What? Name of the financial statement When? Period of time covered by the statement or date of the statement 4

  5. FASHION WORLD Income Statement (Partial) Year Ended December 31, 20X4 Operating Revenue Sales 409,650.00 Less Sales Returns and Allowances 13,000.00 Net Sales 396,650.00 Cost of Goods Sold Delivered Cost of Goods Sold 253,800.00 Less Purchase Returns and Allowances 2,790.99 Cost of Goods Sold 251,009.01 Gross Profit on Sales 145,640.99 Operating Expenses Selling Expenses Sales Salaries Expense 56,490.00 Wages Expense 14,700.00 Advertising Expense 7,425.00 Supplies Expense 4,240.00 Cash Short or Over 125.00 Amortization Expense: Store Equipment 2,100.00 Total Selling Expenses 8,508.00 Subtract Sales Returns and Allowances from Sales to determine Net Sales. 5

  6. FASHION WORLD Income Statement (Continued) Year Ended December 31, 20X4 Gross Profit on Sales 145,640.99 Operating Expenses Selling Expenses Sales Salaries Expense 56,490.00 Wages Expense 14,700.00 Advertising Expense 7,425.00 Supplies Expense 4,240.00 Cash Short or Over 125.00 Amortization Expense: Store Equipment 2,100.00 Total Selling Expenses 85,080.00 General and Administrative Expenses Rent Expense 13,500.00 Insurance Expense 1,800.00 Utilities Expense 2,915.00 Office Salaries Expense 16,500.00 Payroll Taxes Expense 6,331.76 Telephone Expense 2,720.00 Uncollectible Accounts Expense 630.00 Merchandise Inventory Loss 500.00 Amortization Expense: Office Equipment 600.00 Total General and Administrative Expenses 45,497.75 The Total Operating Expenses are subtracted from the Gross Profit on Sales to determine the Net Income from Operations 6 Total Operating Expenses 130,577.75 (Subtract) - Net Income from Operations 14,898.44

  7. FASHION WORLD Income Statement (Partial) Year Ended December 31, 20X4 Beginning Cost of Goods Sold 253,800.00 Less Purchase Returns and Allowances 2,790.99 Ending Cost of Goods Sold 251,009.01 Gross Profit on Sales 145,640.99 Operating Expenses Selling Expenses Sales Salaries Expense 56,490.00 Wages Expense 14,700.00 Advertising Expense 7,425.00 Supplies Expense 4,240.00 Cash Short or Over 125.00 Amortization Expense: Store Equipment 2,100.00 Total Selling Expenses 8,508.00 7 7 Financial Statement forms do not have Debit and Credit Columns. They have “Totals Columns and “Totaling Columns”. Total columns are the ones to the right and any calculations (addition and/or subtraction) of figures used to arrive at totals are completed to the left.

  8. FASHION WORLD Income Statement (Partial) Year Ended December 31, 20X4 Operating Revenue Sales 409,650.00 Less Sales Returns and Allowances 13,000.00 Net Sales 396,650.00 Cost of Goods Sold Delivered Cost of Goods Sold 253,800.00 Less Purchase Returns and Allowances 2,790.99 Ending Cost of Goods Sold 251,009.01 Gross Profit on Sales 145,640.99 Operating Expenses Selling Expenses Sales Salaries Expense 56,490.00 Wages Expense 14,700.00 Advertising Expense 7,425.00 Supplies Expense 4,240.00 Cash Short or Over 125.00 Amortization Expense: Store Equipment 2,100.00 Total Selling Expenses 8,508.00 (Subtract) - The Cost of Goods Sold is subtracted from net sales to determine Gross Profit on Sales. 8

  9. FASHION WORLD Income Statement (Continued) Year Ended December 31, 20X4 Other Income Miscellaneous Income 68.00 Other Expenses Interest Expense 434.95 Net Other Expense 366.95 Net Income 14,696.29 Net Income from Operations 14,898.44 (Subtract) - • Other Income Accounts are added. • Interest Expense is subtracted from Total Other Income. • The Net Nonoperating Expense is subtracted from the Net Income from Operations to determine the Net Income for Year. 9

  10. OBJECTIVE 2 Prepare a statement of owner’s equity from the worksheet. 10

  11. FASHION WORLD Statement of Owner’s Equity Year Ended December 31, 20X4 Carolyn Wells, Capital, January 1, 20X4 71,632.76 Net Income for Year 14,696.29 Less Withdrawals for the Year 30,000.00 Decrease in Capital 15,303.71 Carolyn Wells, Capital, December 31, 20X4 56,329.05 The Statement of Owner’s Equity reports the changes that have occurred in the owner’s financial interest during the fiscal period. This statement is prepared before the Balance Sheet so that the amount of the ending capital is available for use in the Owner’s Equity section of the Balance Sheet. 11

  12. FASHION WORLD Statement of Owner’s Equity Year Ended December 31, 20X4 Carolyn Wells, Capital, January 1, 20X4 71,632.76 Investments 2,000.00 Net Income for Year 14,696.29 16,696.29 Subtotal 88,329.05 Less Withdrawals for the Year 30,000.00 Carolyn Wells, Capital, December 31, 20X4 58,329.05 This is an example of a Statement of Owner’s Equity when additional investment has been made by the owner during the period. 12

  13. FASHION WORLD Statement of Owner’s Equity Year Ended December 31, 20X4 Carolyn Wells, Capital, January 1, 20X4 Net Income for Year 14,696.29 Less Withdrawals for the Year30,000.00 Decrease in Capital 15303.71 Carolyn Wells, Capital, December 31, 20X4 56,329.05 FASHION WORLD Statement of Owner’s Equity Year Ended December 31, 20X4 Carolyn Wells, Capital, January 1, 20X4 Net Income for Year 14,696.29 Less Withdrawals for the Year10,000.00 Increase in Capital 4,696.29 Carolyn Wells, Capital, December 31, 20X4 76,329.05 71,632.76 Fashion World had a decrease in capital since the withdrawals were more than the income for the period. 71,632.76 13 This shows Fashion World with an increase in capital.

  14. FASHION WORLD Statement of Owner’s Equity Year Ended December 31, 20X4 Carolyn Wells, Capital, January 1, 20X4 Net Loss for Year 16,796.00 Less Withdrawals for the Year 24,000.00 Decrease in Capital 40,796.00 Carolyn Wells, Capital, December 31, 20X4 30,836.76 71,632.76 This Statement of Owner’s Equity shows Fashion World with a Net Loss for Year. 14

  15. OBJECTIVE 3 Prepare a classified balance sheet from the worksheet. 15

  16. FASHION WORLD Balance Sheet (partial) December 31, 20X4 Assets Current Assets Cash 7,200.00 Petty Cash 100.00 Accounts Receivable 23,568.00 Less Allow. for Doubtful Accounts 730.00 22,838.00 Merchandise Inventory 31,500.00 Prepaid Expenses Supplies 1,660.00 Prepaid Insurance 3,000.00 4,660.00 Total Current Assets 66,298.00 Capital Assets Plant and Equipment Store Equipment 12,000.00 Less Accumulated Amortization 2,100.00 9,900.00 Office Equipment 3,500.00 Less Accumulated Amortization 600.00 2,900.00 Total Plant and Equipment 12,800.00 Total Assets 79,098.00 CURRENT ASSETS 16

  17. FASHION WORLD Balance Sheet (partial) December 31, 20X4 Assets Current Assets Cash 7,200.00 Petty Cash 100.00 Accounts Receivable 23,568.00 Less Allow. for Doubtful Accounts 730.00 22,838.00 Merchandise Inventory 31,500.00 Prepaid Expenses Supplies 1,660.00 Prepaid Insurance 3,000.00 4,660.00 Total Current Assets 66,298.00 Capital Assets Plant and Equipment Store Equipment 12,000.00 Less Accumulated Amortization 2,100.00 9,900.00 Office Equipment 3,500.00 Less Accumulated Amortization 600.00 2,900.00 Total Plant and Equipment 12,800.00 Total Assets 79,098.00 PLANT AND EQUIPMENT 17

  18. FASHION WORLD Balance Sheet (partial) December 31, 20X4 Assets Current Assets Cash 7,200.00 Petty Cash 100.00 Accounts Receivable 23,568.00 Less Allow. for Doubtful Accounts 730.00 22,838.00 Merchandise Inventory 31,500.00 Prepaid Expenses Supplies 1,660.00 Prepaid Insurance 3,000.00 4,660.00 Total Current Assets 66,298.00 Capital Assets Plant and Equipment Store Equipment 12,000.00 Less Accumulated Amortization 2,100.00 9,900.00 Office Equipment 3,500.00 Less Accumulated Amortization 600.00 2,900.00 Total Plant and Equipment 12,800.00 Total Assets 79,098.00 The Total Plant and Equipment is added to the Total Current Assets. The sum is the Total Assets. 18

  19. FASHION WORLD Balance Sheet (Continued) December 31, 20X4 Liabilities and Owner’s Equity Current Liabilities Notes Payable: Trade 3,000.00 Notes Payable: Bank 9,000.00 Accounts Payable 3,138.00 Interest Payable 434.95 CPP Contributions Payable 610.00 EI Premiums Payable 225.00 Wages Payable 2,700.00 GST Payable 2,390.00 Less Prepaid GST 1,460.00 930.00 Provincial Sales Tax Payable 2,731.00 Total Current Liabilities 22,768.95 Owner’s Equity Carolyn Wells, Capital 56,329.05 Total Liabilities and Owner’s Equity 79,098.00 CURRENT LIABILITIES 19

  20. FASHION WORLD Balance Sheet (Continued) December 31, 20X4 Liabilities and Owner’s Equity Current Liabilities Notes Payable: Trade 3,000.00 Notes Payable: Bank 9,000.00 Accounts Payable 3,138.00 Interest Payable 434.95 CPP Contributions Payable 610.00 EI Premiums Payable 225.00 Wages Payable 2,700.00 GST Payable 2,390.00 Less Prepaid GST 1,460.00 930.00 Provincial Sales Tax Payable 2,731.00 Total Current Liabilities 22,768.95 Owner’s Equity Carolyn Wells, Capital 56,329.05 Total Liabilities and Owner’s Equity 79,098.00 OWNER’S EQUITY 20

  21. FASHION WORLD Balance Sheet (Continued) December 31, 20X4 Liabilities and Owner’s Equity Current Liabilities Notes Payable: Trade 3,000.00 Notes Payable: Bank 9,000.00 Accounts Payable 3,138.00 Interest Payable 434.95 CPP Contributions Payable 610.00 EI Premiums Payable 225.00 Wages Payable 2,700.00 GST Payable 2,390.00 Less Prepaid GST 1,460.00 930.00 Provincial Sales Tax Payable 2,731.00 Total Current Liabilities 22,768.95 Owner’s Equity Carolyn Wells, Capital 56,329.05 Total Liabilities and Owner’s Equity 79,098.00 • Total Current Liabilities and Carolyn Wells, Capital are added. The sum is the Total Liability and Owner’s Equity. • This total should be equal to Total Assets. 21

  22. OBJECTIVE 4 Journalize and post the adjusting entries. 22

  23. GENERAL JOURNAL Page 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 20X4 Dec. 31 Merchandise Inventory 5050 500.00 Merchandise Inventory 1021 500.00 To reduce the inventory carrying to the actual physical inventory count 31 Uncollectible Accounts Expense 5056 630.00 Allowance for Doubtful Accounts 1012 630.00 To record estimated loss from uncollectible accounts based on 0.3% of net credit sales of $210,000 Adjustment a Adjustment b From the worksheet, journalize the adjusting entries in the general journal. Above are Adjustments a & b. 23

  24. FASHION WORLD Worksheet (Partial) For the Year Ended December 31, 20X4 TRIAL BALANCE ADJUSTMENTS ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT Cash 7,200.00 Petty Cash 100.00 Accounts Receivable 23,500.00 (i) 68.00 Allowance for Doubtful Accounts 100.00 (b) 630.00 Merchandise Inventory 33,009.01 (a) 500.00 Prepaid Insurance 4,800.00 (h) 1,800.00 Supplies 5,900.00 (g) 4,240.00 Store Equipment 12,000.00 Accumulated Amortization: Store Equipment (c) 2,100.00 Office Equipment 3,500.00 Accumulated Amortization: Office Equipment (d) 600.00 Notes Payable: Trade 3,000.00 Notes Payable: Bank 9,000.00 Accounts Payable 3,138.00 Interest Payable 359.01 (f) 75.94 CPP Contributions Payable 610.00 EI Premiums Payable 225.00 Wages Payable (e) 2,700.00 Prepaid GST 1,460.00 GST Payable 2,390.00 Provincial Sales Tax Payable 2,731.00 Carolyn Wells, Capital 71,632.76 Carolyn Wells, Drawing 30,000.00 Sales 409,650.00 Sales Returns and Allowances 13,000.00 Miscellaneous Income (i) 68.00 Cost of Goods Sold 250,000.00 Merchandise Inventory Loss (a) 500.00 Sales Salaries Expense 56,490.00 Wages Expense 12,000.00 (e) 2,700.00 Advertising Expense 7,425.00 Supplies Expense (g) 4,240.00 Cash Short or Over 125.00 An End-of-Period Worksheet The adjusting entries are taken from the adjustment columns of the worksheet. Lowercase letters are used to identify the Debit & Credit part of each entry. For example, “a” debit and credit. 24

  25. GENERAL JOURNAL Page 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 20X4 (Adjustment f) Dec. 31 Wages Expense 5013 2,700.00 Salaries Payable 2,700.00 To record accrued salaries of part-time salesclerks for Dec. 28-31 5 1 2 3 ACCOUNT Wages ExpenseACCOUNT NO. 5013 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X4 Dec. 31 Balance  12,000.00 31 Adjusting J25 2,700.00 14,700.00 4 Steps in Posting from Journal to Ledger 25

  26. After all adjusting entries have been posted, the balances of the general ledger accounts should match the amounts shown in the Adjusted Trial Balance section of the worksheet. 26

  27. OBJECTIVE 5 Journalize and post the closing entries. 27

  28. CLOSING ENTRIES • The figures that are used to close the temporary accounts are found in the Income Statement section of the worksheet. • The temporary accounts are: the revenue, cost, and expense accounts. 28

  29. FASHION WORLD Worksheet (Partial) Year Ended December 31, 20X4 ACCOUNT NAME ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Sales 409,650.00 409,650.00 Miscellaneous Income 68.00 68.00 CLOSING REVENUE ACCOUNTS In order to close these accounts, make an entry opposite its balance (example, credits become debits). GENERAL JOURNAL Page 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Sales 4001 409,650.00 Miscellaneous Income 4093 68.00 Income Summary 409,582.99 29

  30. CLOSING THE DRAWING ACCOUNT TO OWNER’S EQUITY Reduce Capital With A Debit Entry Close Drawing With A Credit Entry 30

  31. After the four closing entries have been posted, only the Balance Sheet accounts have balances. All other accounts have been closed. 31

  32. OBJECTIVE 6 Prepare a postclosing trial balance. 32

  33. OBJECTIVE 7 List the steps in the Accounting cycle. 33

  34. ACCOUNTS RECEIVABLE AREA Financial Statements Source documents GENERAL LEDGER AND FINANCIAL REPORTING AREA Sales Journal Accounts Receivable Ledger Cash Receipts Journal General Journal General Ledger Worksheet ACCOUNTS PAYABLE AREA Purchases Journal Accounts Payable Ledger Cash Payments Journal 34