December 31, 2015 Bal. Php 25,000
X. CAMPOS DATE
December 31, 2015 Bal. Php 75,000
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• The analysis and updating of accounts at the end of the period before the financial statements are prepared is called the Adjusting Process.
The journal entries that bring the accounts up to date at the end of the accounting period are called Adjusting Entries.
• The following are normally adjusted at the end of a period:
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Accruals. These include unpaid salaries for the accounting period, unpaid interest expense, or unpaid utility expenses.-
Prepayments. If a company has prepaid expenses such as prepaid rent or prepaid insurance then the correct balances for these accounts have to be established at the end of each accounting period to reflect their correct balances.-
Depreciation and amortization expenses. Depreciation expenses are recognized at the end of each accounting period throughadjusting entries. If there are intangible assets such as franchise, the allocation of their costs which is called amortization expense, is also recognized at the end of each accounting period through adjusting entries.
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Allowance for uncollectible accounts. Bad debt expense from accounts receivable is also recognized through adjusting entries.Step 6: Prepare an Adjusted Trial Balance.
An adjusted trial balance is prepared after taking into consideration the effects of the adjusting entries. Again, this is to ensure that the total debit balances equal the credit balances after posting and journalizing adjusting entries made.
Step 7: Prepare the financial statements.
From the adjusted trial balance, the financial statements can then be prepared. These are the statement of financial position, statement of profit or loss, and the statement of cash flows.
Step 8: Make the closing entries.
In the discussion about accounts, it was discussed that nominal accounts (revenue and expense accounts) are closed to retained earnings, or an owner’s capital account because these accounts refer only to a specific accounting period. Actually, these accounts to be closed are accounts that can be seen in the income statement.
Upon closing:
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If the revenues exceed expenses during an accounting period, retained earnings will increase.-
The reverse is true which means that if the expenses exceed revenues, the retained earnings will decrease.In closing temporary accounts:
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Revenue account balances are transferred to an account called Income Summary Account (sometimes profit or loss summary).-
Expense account balances are also transferred to the Income Summary Account.-
The balance of the Income Summary (net income or net loss) is transferred to the owner’s capital account.-
The balance of the owner’s drawing account is transferred to the owner’s capital account.46
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Step 9: Make a Post-Closing Trial Balance.
A Post-Closing Trial Balance shows the accounts that are permanent or real. These are the accounts that can be seen in your balance sheet.
The post-closing trial balance is prepared to test if the debit balances equal the credit balances after closing entries are considered.
5. Basic Financial Statements.
A financial statement is basically a summary of all transactions that are carefully recorded and transformed into meaningful information. It also shows the company’s permanent and temporary accounts. Basically, financial statements are comprised of the following:
a. Income Statement
• These are also known as the Profit/Loss Statement, Statement of Comprehensive Income, or Statement of Income.
• This is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year.
Figure 1: Sample Income Statement Source: Warren, Duchac, Fess. Accounting.
b. Statement of Owner’s Equity
• These are also known as the Statement of Changes in Equity.
• This reports the changes in the owner’s equity over a period of time.
• It is prepared after the income statement because the net income or net loss for the period must be reported in this statement.
• Similarly, it is prepared before the balance sheet since the amount of owner’s equity at the end of the period must be reported on the balance sheet.
• Because of this, the statement of owner’s equity is often viewed as the connecting link between the income statement and balance sheet.
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Figure 2: Sample Statement of Owner’s Equity Source: Warren, Duchac, Fess. Accounting c. Balance Sheet
• Formerly known as the Statement of Financial Position.
• This provides information regarding the liquidity position and capital structure of a company as of a given date.
• It must be noted that the information found in this report are only true as of a given date.
• It shows a list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year.
Figure 3: Sample Balance Sheet Source: Warren, Duchac, Fess. Accounting d. Statement of Cash Flows
• The statement of cash flows reports a company’s cash inflows and outflows for a period.
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• This is used by managers in evaluating past operations and in planning future investing and financing activities.
• It is also used by external users such as investors and creditors to assess a company’s profit potential and ability to pay its debt and pay dividends.
Figure 4: Sample Statement of Cash Flows
PRACTICE (30 MINS)
1. Using the following (scrambled) accounts, prepare a balance sheet for ABC, a retail company, for the year ending in December 31, 2014.
Assume that these are the only Balance Sheet Accounts.
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Allowance for Doubtful Accounts 2,000Cash 23,000
Common Stock (PHP0.20 par) 45,000 Current Portion of L.T. Debt 6,000 Gross Accounts Receivable 40,000
Short-Term Bank Loan (Notes Payable) Allowance for doubtful accounts (2,000) Net accounts receivable 38,000
Short-term bank loan (notes payable) 18,000
Accounts payable 39,000
Accrued expenses 8,000
Current portion of L.T. Debt 6,000
Current liabilities 71,000
Long term debt 210,000
Total liabilities 281,000
Common stock (P0.20 par) 45,000 Additional paid-in capital 86,000
Retained earnings 138,000
Total liabilities and equity 550,000 Answer Key
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2. Prepare a multi-step income statement for the retail company, ABC, for the year ending December 31, 2014 given the information below:
Advertising expenditures 68,000
Beginning inventory 256,000
Depreciation 78,000
Ending inventory 248,000
Gross Sales 3,210,000
Interest expense 64,000
Lease payments 52,000
Management salaries 240,000
Materials purchases 2,425,000
R&D expenditures 35,000
Repairs and maintenance costs 22,000 Returns and allowances 48,000
Taxes 51,000
Income Statement The ABC Company
For the 12 month period Ending December 31, 2014
Net sales 3,162,000
Cost of goods sold 2,433,000
Gross profit 729,000
Operating expenses (excluding depreciation) 417,000
Depreciation 78,000
Operating profit 234,000
Interest expense 64,000
Earnings before taxes 170,000
Taxes 51,000
Net income 119,000
Answer Key
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EVALUATION (30 MINS)
1. Indicate whether the following items would appear on the income statement (IS), or balance sheet (BS).
A. ________ Office Supplies B. ________ Accounts Payable C. ________ Computer Equipment D. ________ Commission Fees Earned E. ________ Salaries Expense
F. ________ B. So, Capital G. ________ Accounts Receivable
2. Using the following accounts from the retail store, A-Mart Incorporated’s income statement for the year ending in December 31, 2013, answer the questions below. Note that all figures are in millions.
A. A-Mart’s gross profit is PHP___________________.
B. A-Mart’s operating profit is PHP___________________.
C. A-Mart’s net profit is PHP___________________.
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Teacher Tip:
Answer Key 1. a. BS b. BS c. BS d. IS e. IS f. BS g. BS
2. a. PHP 400 b. 150 c. 115
Cost of goods sold PHP600
Lease payments 30
Advertising 20
Taxes 35
Repairs and maintenance expenses 40
Management salaries 100
Net sales 1,000
Depreciation 60
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3. Using the following accounts from the A-Mart, Incorporated’s balance sheet for the year ending December 31, 2013, answer the questions below. Use cash as a plug figure. Note that all figures are in millions.
A. A-Mart’s current assets are PHP___________________.
B. A-Mart’s current liabilities are PHP___________________.
C. A-Mart’s total assets are PHP___________________.
D. A-Mart’s total liabilities are PHP____________________.
E. A-Mart’s total stockholder’s equity is PHP___________________.
Current portion of L.T. Debt PHP 60
Leasehold improvements 300
Accrued expenses 40
Accumulated depreciation 200
Gross fixed assets 900
Accounts payable 90
Inventories 190
Common stock (PHP1.00 par) 400
Short-term bank loan 20
Net accounts receivable 100
Long-term bank loan 600
Retained earnings 200
Cash ???
Teacher Tip:
Answer Key 3. a. PHP 410 b. 210 c. 1,410 d. 810 e. 600