Accounting Part 2

$EIII[}I 3 The Balance Sheet and the

Statement of Cash Flows

The third and fourth financial statements prepared at Main ldea
the end of the period are the balance sheet and the state-
ment of cash flows. The balance sheet reflects the account- The balance sheet reports the financial
ing equation at the end of the period. The statement of position at a specific point in time. The

cash flows shows how the business acquired and spent cash statement of cash flows reports the
during the period.
sources and uses of cash during the
The Balance Sheet accounting period.

What Is the Purpose of the Balance Sheet? Read to Learn...
The balance sheet is a report of the balances in the
L howto prepare a balance sheet.
permanent accounts at the end of the period. The main pur-
pose of the balance sheet is to report the assets of the busi- (p. 231)
ness and the claims against those assets on a specific date.In
other words, the balance sheet states the financial position > the purpose of a statement of cash

of a business at a specific point in time. The balance sheet flows. (p.25a)
summarizes the following information:
L how to perform ratio analysis. (p. 235)
. what a business owns
r what a business owes Key Terms current assets
o what a business is worth current
balance sheet
For this reason the balance sheet is sometimes called a report form liabilities
statement of working capital
statement of financial position. liquidity ratio
cash flows current ratio
The balance sheet is prepared from information in the ratio analysis quick ratio
Balance Sheet section of the work sheet and from the state- profitability ratio
ment of changes in owner's equity. The balance sheet may return on sales
be handwritten, typed, or, as in most cases, prepared by

computer.

The Sections of the Balance Sheet Permanent Accounts
Permanent accounts are
The balance sheet contains the following sections: assets, liabilities, and the
owner's capital account.
. the heading
. the assets section
o the liabilities and owner's equity sections

Heading. Like the heading of the income statement, the heading

of the balance sheet answers the questions who? what? when? The balance

sheet heading includes:

1. The name of the business (Who?)
2. The name of the financial statement (What?)
3. The date of the balance sheet (When?)

Section 3 The Balance Sheet and the Statement of Cash Flows 231

Boadrunner Delivery Service Point in Time
Balance Sheet

0ctober 31 ,20--

Roadrunner Delivery Service Period of Time

Figure 9-9 Headings fruFor the Month Ended October 31, 20--

of Financial Statements Unlike the income statement, which covers the entire period, the bal-
ance sheet relates to a specific point in time. The amounts shown on the
Balance Sheet The
balance sheet is a balance sheet are the general ledger balances in the accounts on the last day
"snapshot" of a business of the period. Notice the difference between the date lines on the balance
at a specific point in sheet and on the income statement in Figure 9-9.
time.
Assets Section. Refer to Roadrunner's balance sheet in Figure 9-10

as you read how to prepare the balance sheet. Roadrunner's work sheet
and statement of changes in owner's equity are also included to show the
information sources used to prepare the balance sheet. Roadrunner's bal-

ance sheet is prepared in report form, listing the balance sheet sections

one under the other.

The Assets section of the balance sheet is prepared as follows:

1. Write the word Assefs on the first line in the center of the column

containing the account names. A

2. On the following lines, list each asset account name and its balance

in the same order as they appear in the Balance Sheet section of the
work sheet. Enter the account balances in the first amount column.

Draw a single rule under the last account balance. B

3. On the next line, write the words Total Assets, indented about half

an inch. Add the individual asset balances and enter the total in the

second amount column. C

Do not draw a double rule under the total yet. Enter it when the Liabili-
ties and Owner's Equity sections are complete and equal to total assets.

Liabilities and Owner's Equity Sections. The information for

the Liabilities and Owner's Equity sections is taken from the work sheet and
from the statement of changes in owner's equity. Use the following steps to

complete the Liabilities and Owner's Equity sections.

1. On the line after Total Assets, write the

heading Liabilities in the center of the column

containing the account names. D

2. On the following lines, list the liability

account names and their balances in the same
order as on the Balance Sheet section of the
work sheet. Enter the account balances in the
first amount column. Draw a single rule under

the last account balance. E

232 9Chapter Financial Statements for a Sole Proprietorship

Roadrunner Delivery Service

Work Sheet

for-tne uonth Ended Octobei st 20-

lnLnNcesHeer -|I

.r-':-F.+qr!r- ]]

t0llQq1h in Bank

t 05 | Acctt. Rec.-City News

l0I Accts. Rec.-Green ComPany

ils co*putur Equipment

120 \ office Equipment

I 25 Delivery EquiPlltent

Accts. Pay.-Beacon Advertisi

205 Accts. Pay. Nplth $lpye Auto

3 0 1', Maria Sanche z,lC,4pital

302 Maria Sanchez, Withdrawals

303 I11991195ummary

401 Delivery Revenue 12

501 AdvertisingExpense RoadrunnerDeliveryService 13
,- "5""05l'1M-*a' i-+rd-n.. t:-h.d.. Statement of Changes in 0wner's Equity 14
15
ts 510 Ren 16
rc 515 Etil

Ner Il l -1- + 1 17
18
I 20--t,Besinnins Capitat, october 19
20 owner, e447llysrments by
zspp po)oloO)o II - I]
tncomeNet
lro*t tnrrrov in Capitat I ll s
, l-l -*f,ffiL- l I
Owner[,es.s: Withdrawals bv zals s oloo

l|ryaing Copital. October 31.20-- +

Roa dru n 1g1De!iveg l41icq qo l
00
Balance Sheet
0ctober 31, 20--

A Assers

Cash in Bank

A c c ounts Receiv abl e-C itY ll!1il s

Accounts Receivable-Green Company
Compqlgr Equipment

Delivery Equipment

C Total Assets

f

[l Accounts Payable-Beacon At)vertisi ng
\ Accounts Payable-Norlh Shore Auto

l) F rorat Liabitities

G Owrcr's fuuitY

ffioiio so*nrr, crfit t
l-lli I, rtuoLutaL LriLowaULitLiLtLieLLsT warn.4d ovrwr::n:Le" r's "E:1q::u::,iLty

Figure 9-L0 Preparing a Balance Sheet

3Section The Balance Sheet and the Statement of Cash Flows 233

3. On the next line, write the words Total Liabilifies, indented about
half an inch. Add the individual liability balances and enter the
total in the second amount column. F

4. On the next line, enter the heading Owner\ Equity in the center of
the column containing the account names. G

5. On the next line, write the name of the capital account. In the
second amount column, enter the ending balance of the capital
account as shown on the statement of changes in owner's equity. H

Proving the Equality of the Balance Sheet

Recall that the basic accounting equation must always be in bal-
ance. The balance sheet represents the basic accounting equation,
so the Assets section total must equal the total of the Liabilities and
Owner's Equity sections.

Assets = Liabilities * Owner's Equity

To prove the equality of the balance sheet, follow these steps:

Draw a single rule under the balance of the capital account. On
the next line, write the words Total Liabilities and Owner's Equity,

indented about half an inch. I

2. Add the total liabilities amount and the ending capital balance.
Enter the total in the second amount column. J This total must
equal the total assets amount. If the totals are not equal, there is an
error. Most errors occur when transferring amounts from the work
sheet or from the statement of changes in owner's equity. Verify
that each account balance has been transferred properly. Find and
correct the error and then complete the balance sheet.

3. When total assets equal total liabilities and owner's equity, draw
a double rule under the total assets amount and under the total
liabilities and owner's equity amount. K The balance sheet is now
complete.

Refer again to the amounts and their placement in Figure 9-1O. As you
can see, completion of the work sheet is the basis for preparing the three
financial statements studied so far.

The Statement of Cash Flows

What Is the Purpose of the Statement of Cash Flows?

Cash flowing through a business is like blood flowing through your body.
The flow of cash keeps a business alive. It is essential to have cash available
for the daily operations of the business and for unexpected expenses.

The statement of cash flows summarizes the following information:

. the amount of cash the business took in
. the sources of cash
o the amount of cash the business paid out
o the uses of cash

Like the income statement, the statement of cash flows covers a single

accounting period.

234 Chapter 9 Financial Statements for a Sole Proprietorship

This information is essential for sound management and investment

decisions. You will learn more about the statement of cash flows in

Chapter 19.

Ratio Analysis

What Is Ratio Analysis?

Ratio analysis is the process of evaluating the relationship between
various amounts in the financial Statements. Owners and managers use
ratio analysis to determine the financial strength, activity, and debt-paying

ability of a business.

Profitability Ratios

Profitability ratios are used to evaluate the earnings performance of Calculating Ratios

the business during the accounting period. The earning power of a busi- When calculating ratios,
ness is an important measure of its ability to glow and continue to earn be sure to use the correct
figures for the divisor and
revenue. lhe dividend.

One commonly used profitability ratio is return on sales. Business own- For example, to
ers use the return on sales ratio to examine the portion of each sales dollar calculate the ratio of net
that represents profit. To calculate this ratio, divide net income by sales. For income to sales:
example, the return on sales for Roadrunner Delivery Service is calculated
. the net income amount
as follows:
isthe dividend,
$1,150 net income 0.434 or 43.4o/o
$2,650 sales . and the sales amount is

L me ansor.

This percentage indicates that each dollar of sales produced 43.4 cents
of profit for Roadrunner. It can be compared to other accounting periods,
to determine whether it is increasing or decreasing.

For example, if net income next year is $2,750 and sales are $5,000, the

return on sales would be computed as follows:

$2,750 net income = 0.550 or 55.0olo

$5,000 sales

As you can see, profit per sales dollar would increase by 77.6 cents.

Liquidity Measures

Liquidity refers to the ease with which an asset can be converted to

cash. Current assets are those used up or converted to cash during the

normal opelating cycle of the business. These might include Accounts

Receivable, Cash in Bank, and Supplies. Current liabilities are debts of

the business that must be paid within the next accounting period. Accounts

Payable is an example of a current liability.

The amount by which current assets exceed current liabilities is known

as working capital . Because cullent liabilities are usually paid out of cur-

rent assets, working capital represents the excess assets available to continue

operations. The working capital for Roadrunner is calculated as follows:
Current Assets - Current Liabilities : Working Capital
$22,575 $17,725
$10,850

Section 3 The Balance Sheet and the Statement of Cash Flows 235

liquidity When you A liquidity ratio is a measure of the ability of a business to pay its cur-
thinkol liquidity,you
might think of water or rent debts as they become due and to provide for an unexpected need for
other liquids that flow cash. Two common ratios that are used to determine liquidity follow.

freely. ln accounting, Current Ratio. The current ratio reflects the relationship between
liquidity refers to how
easily an asset can be cunent assets and current liabilities. The current ratio is calculated by divid-
converted to cash. ing the dollar amount of current assets by the dollar amount of current
liabilities. The current ratio for Roadrunner based on the balance sheet in
Figure 9-10 is:

Current Assets = Current Ratio -$-2-2-.-5-7-5-' - 1.92 or 1.9:1
Current Liabilities
$71,725

The current liabilities of a business must be paid within a yeaL These
liabilities are paid from current assets.

A ratio of 2:7 or higher is considered favorable by creditors. It indicates
that a business is able to pay its debts and that a business has twice as many
current assets as current liabilities. A low ratio may indicate that a company
could have trouble paying its debts.

Quick Ratio. A quick ratio is a measure of the relationship between

short-term assets and cuffent liabilities. Short-term liquid assets-those that
can be quickly converted to cash-are cash and net receivables. The quick
ratio is computed by dividing the total cash and receivables by total current
liabilities.

The quick ratio for Roadrunner based on the Balance Sheet in Figure

9-10 is:

Cash and Receivables = Quick Ratio $22,575 = 7.92:7
Current Liabilities
$Ll.7x

In some instances the current ratio and the quick ratio can be the same,
as in the case in this example.

A quick ratio of 1 :1 is considered adequate. This indicates that a business
can pay its current debts with cash from incoming receivables. If a business
has a quick ratio of 1:1 or higher, the business has $ 1.00 in liquid assets for
each $ 1.00 of current liabilities.

Quick ratios may also be compared
from one year to the next. For example,

suppose that cash and receivables for

the previous year were $48,653 and cur-
rent liabilities were $53,245. That year's
quick ratio would be computed as:

=$48,653 O.91:1

$53,245

As you can see, Roadrunner has

improved its llquidity position in the

current year. The $1.92 in liquid assets
per $1.00 in current liabilities (current
year) is stronger than $0.91 in liquid

assets per $1.00 in current liabilities

(previous year).

236 9Chapter Financial Statements for a Sole Proprietorship

stITtIN 3

Reinforce the Main ldea

Using a diagram like this
one, summarize the steps for
creating a balance sheet. Add
answer boxes for steps as
needed.

Do the Math

Compute the four amounts that are missing from the balance sheet below. On a separate

sheet of paper, write the description and the dollar value of the four missing amounts.

r-l T-

r Accou n ts Rece ivablc-Cha mber of Comme rce ssilolol{oo -
pffice EQuiPment
Computer Eqvlpmenl ,offiro'shs'l

Total Assets +
Liabilities
L
Accounts Payable-Tip Top Adverlising
r
n
+
Interesl Pa)Ullq 2

Salaries Pavable l

Total Liabilities '.,.--l
s Esllly

chuck rhompson, Capitarowner

rr I EauityI Totul Liabilitrcs i4a owner's

f-

--iI

en Problem 9-5 Calculating Return on Sales l

* The Gawle Company is a family-owned and operated appliance rental and repair business.

The income statement for the month ended August 31 includes the following:

Rental Revenue $3,256 Rent Expense $2,100
483
Repair Revenue 2,140 Utilities Expense

Advertising Expense 575 Net Income 1,108
Maintenance Expense 1,130

lnstructions Calculate the return on sales for the month for The Gawle Company.

Section 3 The Balance Sheet and the Statement of Cash Flows 237

IHAPTIIt g

Key Concepts

l. The income statementreports revenue earned and the expenses incurred for a specific period of

time. It also reports the net income or net loss for the period.
2. Sections of the income statement:

Section Information Presented

Heading a Name of the business
a Name of the report
a Accounting period covered

Revenue Balance of each revenue account for the period. The information comes from
the Income Statement section of the work sheet.

Expenses Balance of each expense account for the period. The information comes from
the Income Statement section of the work sheet.

Net income Total expenses subtracted from total revenue. The result is net income or net

loss.

3. The statement of changes in owner's equity summarizes the impact that the period's business
transactions had on the capital account.

4. Sections of the statement of changes in owner's equity:

Section Information Presented

Heading a Name of the business
a Name of the report
a Accounting period covered

Beginning The information comes from the owner's capital account in the general ledger.
Capital
Increases in . Investments by Owner
Capital
e Net Income
Decreases in Information about investments by the owner comes from the owner's capital
account in the general ledger. Information about rret income comes from the
Capital income statement.

Ending . Withdrawals by Owner
Capital . Net Loss

Information about withdrawals by the owner comes from the work sheet.
Information about net loss comes from the income statement.

Beginning Capital * Increases - Decreases

238 Chapter 9 Summary

IrlAPTEt{ g

5. The balance sheetrepofis the balances in the permanent accounts at the end of the period. It

states the financial position of a business on a specific date.Information comes from the Balance
Sheet section of the work sheet and the statement of changes in owner's equity.

6. Sections of the Balance Sheet:

Section Information Presented

Heading a Name of the business
a Name of the report
a Date of the last day of the accounting period

Assets Balance of each asset account. The information comes from the Balance Sheet
section of the work sheet.

Liabilities Balance of each liability account. The information comes from the Balance
Sheet section of the work sheet.

Owner's The balance of the owner's capital account. The information comes from the
Equity statement of changes in owner's equity.

7. The statement of cash flows rcports how much cash the business took in and paid out during the
period and why the Cash in Bank account increased or decreased.

8. Ratio analysis evaluates the relationship between various financial statement amounts.

Profitability ratio Earnings performance during the accounting period

Return on sales Determines the percent of each sales dollar that is profit:

:Return on Sales Net Income / Sales

Liquidity ratio Ease with which an asset can be converted to cash

Current ratio Current Assets
Current Liabilities

Quick ratio Cash and Receivables
Current Liabilities

Key Terms

balance sheet (p.237) liquidity ratio (p.236) statement of
current assets (p.23s) profitability ratio (p.23s)
current liabilities (p.23s) quick ratio (p.236) cash flows @.na)
current ratio (p.236) ratio analysis (p.23s)
financial statements (p.22o) report form (p.232) statement of changes
income statement (p.227) return on sales (p. 23s)
in owner's equity (p.225)

working capital (p. 235)

Chapter 9 Summary 239

ItlAPTEt{ $

Check Your Understanding
l. lncome Statement

a. What is the purpose of the income statement?

b. What is the source of information used to prepare the income statement?
2. Preparing an lncome Statement

a. List the sections of the income statement.
b. How is net income or net loss calculated?
5. Statement of Changes in Owne/s Equity

a. What is the purpose of the statement of changes in owner's equity?
b. What sources of information are used to prepare the statement of changes in owner's equity?
4. Preparing a Statement of Changes in Owne/s Equity
a. ln a statement of changes in owner's equity, what items are totaled in the'Add" section?
b. What items are subtracted from the subtotal?
5. Balance Sheet
a. What is the purpose of the balance sheet?

b. How does the date in a balance sheet heading differ from the other financial statements?

6. Preparing a Balance Sheet
a. What sources of information are used to prepare the balance sheet?
b. How are balance sheet account names shown using the report form?

7. Statement of Cash Flows
a. What is the purpose of the statement of cash flows?
b. Why does management need the information in the statement of cash flows?

8. Ratio Analysis

a. What is the purpose of computing ratios from amounts on financial statements?
b. Who might be interested in the profitability ratio of a business?

Apply Key Terms

As a game store owner, you want to develop an informa-
tion sheet for the store manager. Explain the importance of
financial statement preparation using these key terms.

balance sheet quick ratio
ratio analysis
cu[ent assets report form
current liabilities return on sales
current ratio statement of cash flows
financial statements statement of changes in
income statement
liquidity ratio owner's equity
profitability ratio working capital

240 Chapter 9 Review and Activities

I}IAPTIt{ g

Preparing Financial Statements

Making the Transition from a Manual to a Computefized System

Task Manual Methods Computerized Methods
Preparing an
income statement . Transfer all revenue and expense o From t}reReports menu, select

Preparing a accounts and their balances from Income Statement or Profit and Loss,
the work sheet. depending on the accounting software.
statement of
changes in . Subtract expenses fiom revenue to . Click Print.
owner's equity
determine net income or net loss. Since the software automatically
Preparing a computes the ending balance of
balance sheet . Transfer the beginning balance of the the capital account for you, it is not
necessary to prepare this statement.
capital account from the work sheet.
. From the Reports menu, select
. Add additional investments and net
Balance Sheet.
income or loss.
. Click Print.
. Subtract withdrawals.
. Calculate the ending balance for the

capital account.

. Transfer permanent accounts and their

balances from the work sheet.

. Transfer the ending capital account

balance from the statement of changes
in owner's equity.

. Total all asset account balances.
. Total all liabilities and owner's equity

account balances.

. Verifl that assets equal liabilities and

owner's equity.

Peachtree Question Q&A

How do I prepare Answer
financial statements
in Peachtree? 1 From the Reports menu, select Financial Statements.
2 Choose the statement you wish to print from the Reports list.
3 Click Print when the statement appears on the screen.

EQuickBooks e&A

QuickBooks Question Answer

How do I prepare 1. From the Reports menu, select Company & Financial.
financial statements 2. Choose the report you wish to print from the list.
in QuickBooks? 3. Click Print.

Chapter 9 Computerized Accounting 241

ItlAPTIt{ g

Step-by-Step lnstructions: Problem 9-4 Preparing an lncome Statement

Problems 9-4,9-5 The work sheet for Wilderness Rentals for the month ended
September 30,2O-- is in your working papers.
l. Select the problem set lnstructions Using the work sheet, prepare an income statement for
Wilderness Rentals.
for Wilderness Rentals
Analyze
(Prob. s-4, s-s).
2. Rename the company Problem 9-5 Preparing a Statement of Changes

and set the system date. in Owne/s Equity
5. Print a General Ledger
lnstructions Using the work sheet for Wilderness Rentals in your working
Trial Balance, lncome papers and the income statement prepared in Problem 9-4, prepare a
Statement, Statement statement of changes in owner's equity and a balance sheet. Ronald Hicks
of Changes in Owner/s made an additional investment in the business of $500 during the period.
Equity, and Balance
Sheet. Analyze
4. Complete the Analyze
activity.
5. End the session.

Peachtree'

Step-by-Step lnstructions: Problem 9-5 Preparing Financial Statements
Problem 9-6
The trial balance for the Hot Suds Car Wash is listed below and in your
1. Select the problem set working papers.
for Hot Suds Car Wash
(Prob. e-6). Instructions

2. Rename the company 1. Complete the work Hot Suds CarWash
and set the system date. sheet in your working Trial Balance

5. Print a General Ledger papers. F0r the Ouarter Ended September 30, 20-"
Trial Balance, lncome
Statement, Statement Prepare an income Debit
of Changes in Owner's statement for the
Equity, and Balance quarter ended lol Cosh iil Bailk
Sheet. September 30,20--. ,o\ /l,i i '. Re,. I in(il Brown
Prepare a statement I10 Acds. Rec.-Vdlley Auto
4. Complete the Analyze of changes in
activity. owner's equity. 1 1 5'. Detailitg Supplies
Regina Delgado
5. End the session. made no additional I 20 DeletS(nt Sulplie\
investments during 125 ()frtc Equipnetl
QuickBooks the period.
4. Prepare a balance 13u Offiie FumitiltL
Step-by-SGp lnstructions: sheet in report form.
1:15 Cat Wnsh Etluipialt
Problem 9-6 201 Accts. Pay.-Alleil Vtlcilum Syst?ths
205 Acds. Poy.-O'Bilan's Offrc? SLtPPly
l. Restore the Problem ' 30L Ragina Delgodo, Coliitdl
305 Regino Delsndo, Withrl/awdls
' e-6.QBB file. 310 ltlconle Silfit1lory
2. Print a Trial Balance, 401 Wdsll Revenue
Profit & Loss report, and 405 W1x Rtutnue

41O Inteilot Detailing Rcvenue
501 A.fuettising Exl et6e
505 Eqililrment Rcntal Expe$e

510 Mdintcninca Erpeilsa
520 Reilt Expeilse
530 Utilitics Eryanse

Balance Sheet.

5. Complete the Analyze

I 4. activity. your work. Analyze
Back up

242 9Chapter Problems

Problem 9-7 Preparing Financial Statements I}lAPTIt{ g

The general ledger accounts and balances for Kits & Pups Grooming follow. Peachtree'

General Ledger $ 4,296 Step-by-Step lnstructions:
101 Cash in Bank 1,528 Problem 9-7
105 Accts. Rec.-Juan Alvarez 904
110 Accts. Rec.-Nathan Carlsbad 1,279 l. Select the problem
115 Accts. Rec.-Martha Giles 1,368
120 Grooming Supplies 8,467 set for Kits & Pups
125 Office Equipment 3,396 Grooming (Prob.9-7).
130 Office Furniture 2,730 2. Rename the company
135 Computer Equipment 7,974 and set the system date.
140 Grooming Equipment 5. Print a General Ledger
145 Kennel Equipment 7,4t2 Trial Balance, lncome
201 Accts. Pay.-Able Store Equipment 3,876 Statement, Statement
205 Accts. Pay.-Dogs & Cats Inc. of Changes in Owner's
207 Accts. Pay.-Pet Gourmet 2,746 Equity, and Balance
301 Abe Shultz, Capital 7,291 Sheet.
305 Abe Shultz, Withdrawals 30,928 4. Complete the Analyze
310 Income Summary 1,900
401 Boarding Revenue activity.
405 Grooming Revenue 77,989
50L Advertising Expense 4,420 5. the *:r]on
505 Equipment Repair Expense 3,934
510 Maintenance Expense 943 lnd
520 RentExpense 2,483
530 Utilities Expense 8,850 QuickBooks
3,836
! Step-by-Step lnstructions: i

i Problem 9-7

l. Restore the Problem i

9-7.QBB file.

2. Print a Trial Balance,

Profit & Loss report, and

Balance Sheet.

lnstructions 3. Complete the Analyze

1. Prepare a work sheet for the month ended September 30,2O-- activity.
2. Prepare an income statement for the period.
. o: T:k lp-l:::*:'k_- .
3. Prepare a statement of changes in owner's equity. Abe Shultz made an
additional investment of $2,500 during the period.

4. Prepare a balance sheet in report form.

Analyze

Problem 9-8 Preparing a

Statement of Changes
in Owne/s Equity

lnstructions Use the balance sheet and income statement shown to
prepare a statement of changes in owner's equity. (The owner made an
additional investment of $4,000 and withdrew $1,500 during the period.)

9Chapter Problems 243

IrlAPTEtt I

Step-by-Step Instructions: 0ulback Guide Service
Problem 9-8 lncome Statement

I. Select the spreadsheet For the Month Ended September 30, 20--

template for Problem G"id;sr;iu R *"* t.

9-8. _ltpet;e;'
UyertiqryS t4p9!!9.
2, Enteryour name and
Mairylenance Expense
the date in the spaces Rent Expense
Salaries Experyle
provided on the
utiltlts;ltPst;C_
template.
Total Exoense.s
5. Complete the spread- Net Income

sheet using the Outbq{!1149 tglylqe_

instructions in your Balance Sheet
sqplqmlqLQQ 20--
working papers.
Assefs
4. Print the spreadsheet
Cash in Bank
j and proof your work. i
Acc ounts Re c eiv ab I e-M cry | ohn s q1
5. Complete the Analyze ; Accounts Receivable-Feldman, lones & Ritter
4Seq ttlts 8e c q tuq!lg:!p4g skiQ;!9ry; Inc.
activity.
I, Office Supplies
5. Save your work and

i _-_:_"'j pe: x.ri-toth8ersaprmead.sheet i
I

1_*..-.*__"-..._.,-......-_"....-.-.._.."..'.-,_...-__-....-...-,.__..1

Liabilities

Accounts Pa
Accounts Pavable- Premier Processors

ToLaI Liabililies

I u Stljlq e!!95!. C aptat

Total Liabilities and Owner's

Analyze

244 Chapter 9 Problems

IHAPIEI{ g

4 Practice your test-taking skills! The questions on this page are reprinted with permission
from national organizations:

r Future Business Leaders of America

o Business Professionals of America
Use a separate sheet of paper to record your answers.

Future Business leaders of America

Mumrrrr Cnorcn

1. The balance sheet shows how a business is doing
a. for a period of 12 months.
b. on a specific date during the year.
c. regarding its profit or loss.
d. All of the above

2. Financial statements are prepared in the following order:

a. income statement, balance sheet, owners'equity.
b. income statement, statement of owners' equity, balance sheet.
c. statement of owners' equity, balance sheet, income statement.
d. balance sheet, income statement, statement of owners' equity.
3. The purpose of the Income Statement is to report

a. all assets, liabilities, and owner's equity at a specified time.
b. all the accounts used in journalizing a business's transactions.
c. balances in the capital accounts in order to determine the net income or loss.
d. the net income or loss for a fiscal period.

Business Professionals of America

Murrrprs Cnorcr

4. At the end of a fiscal period when a balance sheet is prepared, from which

document may we find the ending owner's capital balance?

a. Worksheet c. Tiial Balance

b. Income Statement d. Statement of Changes in Owner's Equity

5. During the month of February, Tom had the following transactions involving

revenue and expenses:

Paid $75 phone bill

Provided services to clients for $1,200 cash

Paid salaries of $650 to employees

Paid $125 for computer maintenance
Provided services on account totaling

$2,000

What was Tom's net income or net

loss for the period? Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning
a. Net Income $350 Competitive Events and select Chapter 9.
b. Net Loss $1,650
c. Net Income $2,350 . Practice Questions and Test-Taking Tips
d. Net Income $3,200 . Concept Capsules and Terminology

fL tlencoeaccountint.glencoe'com Chapter 9 Winning Competitive Events 245

IHAPTTll $

CFiffiLq Financial Statements

Ihirki-& 1. Name the one piece of information that is included on both the income
6 statement and the statement of changes in owner's equity.

2. Explain why the date line on the balance sheet is different from the one on

the other statements.
3. The net income computed on the income statement is different from the

amount computed on the work sheet. How do you resolve this problem?
4. Explain why the Withdrawals account is reported on the statement of

changes in owner's equity but is not reported on the income statement.
5. What items are needed to complete the first three financial statements? List

office supplies, forms, and any information needed.
6. Assess the value of using the income statement, the statement of changes in

owner's equity, and the balance sheet for making business decisions.

cotusru[Y Service Business: Video Arcade
Taki Yamamoto owns a video arcade business called Arcadia. Taki has hired your

accounting firm to record Arcadia's financial information. Taki hands you a folder

containing these documents:

. Canceled checks withJune dates: $800 for rent, $120 for electricity, $70 for

telephone service, $180 for insutance, $250 for newspaper advertising, and
$200 for a cleaning service.

. Invoice dated June 16 for a used video game sold on account for $2,000.
. Cash register tapes for June showing total cash sales of $5,890.

IusrRucrrons
L. Using the preceding information, make a list of accounts needed to record

the transactions indicated by the financial documents Taki has given you.
2. Prepare an income statement for Arcadia for the month of June.

Financial Report or Repair?

Your favorite uncle, who owns a restaurant, has asked you to help with his

bookkeeping. He desperately needs a bank loan and wants you to prepare the

financial statements. After going over his accounting records, you do not believe

a bank will give him a loan; but you notice that by leaving out an expense or two,
your uncle's business could look mole promising. After all, he does have some

good ideas for improving the business,

Erurcer Drcrsrou MexrNc

1. What are the ethical issues? 4. How do the alternatives affect the

2.What are the alternatives? parties?

3. Who are the affected parties? 5. What would you do?

Presenting the Balance Sheet

Team up with a classmate and give a brief presentation of the purpose and use of
a balance sheet. Create a sample balance sheet for your presentation.

246 Chapter 9 Real-World Applications and Connections

IHAPTII{ g

&rSruls BeYoruo Using Computers to Process lnformation

fnuu-RE[s-- Being able to use computers and software is essential for most business tasks.

ON rxrJon

As the accounting clerk for Jewels and Tieasures, you manually prepared the
income statements in the past. This year you will use a spreadsheet program.
IusrnucrroNs

Prepare a list of reasons why using a spreadsheet program is an improvement over
manually preparing financial statements.

The Euro

Financial statements are generally prepared in the curency of the country in

which the business operates. Many European countries use a single currency, the

euro. Nations in the European Union began using the euro in 2002.Individuals
and businesses both benefit by having a single currency. Travelers can use

one currency in multiple countries. Businesses have a more stable business

environment due to the elimination of exchange rate fluctuations.

InstnucrtoNs Imagine that you own a business with locations in Italy and

France. Describe how the adoption of the euro in both countries has changed

your financial statement preparation.

Your Business

Do you dream of having your own business? The experience of tracking your own

finances can help you create the general ledger accounts for that business.

Pensowar Frreucr Acrrvrrv Create an income statement for a typical high
school student. List revenue and expense accounts, and identify expenses that

some, but not all, students would have.

Pnnsouer Fmrcn Orvrnsn Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 9.

ffi\nalyzing Return on Sales

s(FINANCIAL Business owners are especially interested in the return on sales (see page 235). This
ItEports
percentage shows how much of each revenue

dollar becomes profit for the business. lueQurrr

INsrnucrrows Use Roadrunner's income state- Financial Statements
in Sports
ment on page 222 to calculate its return on
sales. (Use $1,100 as net income instead of Financial statements summarize
resulb for owners, managers,
$1,150.) If total sales are about equal from and other interested pafties. Visit

month to month but return on sales decreases glencoeaccounting
each month, what does this say about the .glencoe,com and click
business? What suggestions can you offer to

improve the return on sales? on Student Center. Click on

WebQuest and select Unit 2 to

continue your lnternet project.

-, glencoeaccounting.glencoe.com Chapter 9 Real-World Applications and Connections 247
€

Completing the

Accounting Cycle for

a Sole Proprietorship

What You'll Learn Predict

Explain why it is necessary l. What does the chapter title tell you?
to update accounts through
closing entries. 2. What do you already know about this subiect from personal experience?
5. What have you learned about this in the earlier chapters?
Explain the purpose of the 4. What gaps exist in your knowledge of this subiect?
lncome Summary account.
Radio Flyer
Explain the relationship
between the lncome Many adults love to give children the same kinds of toys
Summary account and the they enjoyed when they were young. A Radio Flyer wagon is
capital account.
that kind of toy. Antonio Pasin, an Italian immigrant living in
Analyze and journalize the Chicago, crafted and sold the first wooden red wagons in 79t7 .
closing entries.
The company has been passed down through the
Post the closing entries to the generations, just like the love of the toys it produces. Antonio's
general ledger. grandson, Robert Pasin, is now the chief executive officer of
Radio Flyer. He has taken the company in new directions by
Prepare a post-closing trial adding tricycles, scooters, and other riding toys.
balance.
Radio Flyer's revenue comes from selling classic wagons and
Define the accounting terms newer toys. At the end of each accounting period, the company
introduced in this chapter. closes its accounts and analyzes the revenues and expenses.

Why lfs lmportant What Do You Think?

For accounting purposes the Why would Radio Flyer employees want to compare sales
life of a business is divided of different toys from one accounting period to another?
into specific periods of time.

chapter 10 completing the Accounting cycle for a Sole Proprietorship

fL glencoeaccountlng'glen(oe.com

$tIIImt l Preparing Closing Entries

Main ldea In Chapter 9 you learned how to prepare three financial statements:

Closing entries transfer the . The income statement reports revenue, expenses/ and net income or
temporary account balances
to the owner's capital net loss for the accounting period.
account.
. The statement of changes in owner's equity summarizes the impact
Read to Learn...
of the business transactions on the owner's capital account.
> the last two steps of the
. The balance sheet reports the financial position of the business at
accounting cycle. (p. zsO)
the end of the period.
> the purpose of closing
Accountants for a company like Mattel prepare financial statements
entries. (p.2s0) and then journalize and post the closing entries. They prepare a post-
closing trial balance to verify that the accounting records still balance.
) the purpose of the
Completing the Accounting Cycle
lncome Summary
account. (p. 253) What Are the Last Two Steps of the Accounting Cycle?

) how to journalize the During the accounting period, the accountant records transactions

closing entries. (p. 253) involving revenue, expenses, and withdrawals in temporary accounts.
At the end of the period, the accountant transfers the balances in the
Key Terms
temporary accounts to the owner's capital account to bring it up to date
closing entries and to prepare the accounting records for the next period.
Income Summary account
compound entry Closing entries are journal entries made to close, or reduce to zero,
the balances in the temporary accounts and to transfer the net income
Accounting Period or net loss for the period to the capital account.
By dividing the life of
a business into time After the closing entries have been journalized and posted, a trial
periods, decision makers balance is prepared to prove the equality of the general ledger after the
can see patterns and closing process. The trial balance prepared after closing is called a post-
make comparisons. closing trial balance. As you can see in Figure 10-1, the closing process
and the post-closing trial balance complete the accounting cycle.

Starting the Eighth Step in the
Accounting Cycle: lournalizing the

Closing Entries

What Is the Purpose of Closlng Enffies?

Preparing financial records for the start of a new period is a little like
keeping stats for a basketball team. For basketball stats, individual and team
scores are recorded for every game/ but each new game starts with a score
of zero. Similarly, in keeping the stats or accounting for a business, entries
are posted to the accounts during the accounting period (game), but the

250 Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

Collect and verify Analyze each Journalize Post to Figure 10-1 The
source documents transaction each transaction the ledger
Accounting Cycle with Steps 8
ACCOUNT jfmfi)fIcrl.rrEouRnAuLnrII
and e Highlighted
,ear1.-r*

;%"+-
,,.;JffiffrE;

[Fosr-cLos[\]G ',,. 6 lI-- carrRnLrAuLc-r-lI
I rnrnr anlArrrce I
I-IIIF-GENERAL 'l '-d*, m
FI :IllIl rounrunr I I WOBK SHEET I
Prepare a
Prepare a | ,.n".^ III ffi-l trlml trial balance
post-closing IIANGES INII
trial balance [--Tn -PreDI. are a
lFFsFolIil work sheet
-BsAHLAENCii-E I

Journalize and post Prepare financial
closing entries statements

temporary accounts (Rent Expense, Maintenance Expense, Revenue, etc.) Sefting Deadlines
start each new accounting period (game) with zero balances. ln international
business be aware of
The income statement, you'Il remember, reports the net income or net
Ioss for one accounting period. The statement is prepared from information cultural differences
recorded and accumulated in the revenue and expense accounts. At the end about time. Business
of the period, the accountant records entrieS to cloSe, or reduce to zero, the is conducted at
revenue and expense accounts because their balances also apply to only one a faster pace in
accounting period. These closing entries also transfer the net income or net the United States
than in some other
loss for the period to the capital account. cultures. Tight
The closing process is shown in Figure 1,O-2 onpage 252. deadlines can cause
problems overseas
. Prior to the closing process/ you know that net income or net loss is if workers resent
being pressured to do
calculated on the work sheet. A things at a pace other
than the one they are
. The net income or net loss amount then appears on the income used to.

statement. B

. On the statement of changes in owner's equity, the ending balance of

the capital account includes net income or net loss. C

. The ending balance of the capital account then appears on the balance

sheet. D

. At this point, however, the balance of the capital account in the general

ledger does not equal the amount on the balance sheet because the
closing entries need to be journalized and posted. E

For example, the balance on the work sheet for Maria Sanchez, capital
is $25,400, but on the balance sheet, it is $26,050. These two amounts differ
because the withdrawals and the net income have not been recorded in the
capital account in the general ledger. The closing process updates accounts
through closing entries and brings the balance of the general ledger capital

account up to date.

Section 1 Preparing Closing Entries 251

Roadrunner DeliveI1t Service
Work Sheet

For the Month Ended october 31, 20"

Roadrunner Delivery Service
lncome Statement

For the Month Ended october 31, 20-

Roadrunner Deliverl/ Service

Statement o{ Changes in 0rmer's Equity

For the Month Ended 0ctober 31, 20-

I Srgnning Capilot, October 1. 20- 25

Add: lnuestments by Owner 1

| ,Net lncomr Balance Sheet
october 31, 20--
Total lncrease in CaPital

Subtotal

tL

I tess;Withdrawals bY Owner
Ending CaPital, Odober 3 l, 20-

+

D"E-1B.-trr--It.-;|.caBfEaDt-ll

-t-

s1 301 Maia Sanchez, Ca.Pitdl
fi- 302 Maria Sqnchez' Withdrawals

Figure L0-2 The Closing Process

252 Chapter 10 completing the Accounting cycle for a Sole Proprietorship

The Income Summary Account Income Summary
The lncome Summary
What Is the Purpose of the Incotne Sutntnary Account? account does not have a
normal balance.
Before the closing entries are journalized and posted, no single account
in the general ledger shows all of the levenue and expenses for the period.
This information is scattered among the individual revenue and expense

accounts. There is, however, one general ledger account that, until this

point, has not been used. That is the Income Summary account.
The lncome Summary account is used to accumulate and summarize

the revenue and expenses for the period. This account serves as a simple
income statement in the ledger. Expenses, which have debit balances, are
transferred as debits to Income Summary. Revenues, which have credit
balances, are transferred as credits to Income Summary. The balance of the
account equals the net income or net loss for the fiscal period.

Refer to the chart of accounts for Roadrunner Delivery Service on
page79. Notice that Income Summary is in the Owner's Equity section of
the general ledger. It is located there because of its relationship to the own-

er's capital account. Remember that the revenue and expenses transferred
to the Income Summary account actually represent increases and decreases
to owner's equity. The balance of Income Summary (the net income or net
loss for the period) is transferred to the capital account at the end of the

closing process.
Like the withdrawals account, lncome Summary is a temporary account.

However, it is quite different from the other temporary accounts.

. Income Summary is used only at the end of the accounting period to

summarize the balances from the revenue and expense accounts.

. Income Summary does not have a normal balance, which means

that it does not have an increase or a decrease side. As shown in the
following T account, the debit and credit sides of the account are simply
used to summarize the period's revenue and expenses.

. The balance of the Income Summary account before and after the

closing process is zero.

. The lncome Summary account does not appear on any financial

statement.

Income Summary

If Revenue > Expenses Debit Credit
Revenue
If Revenue < Expenses .-+ Expenses Balance is net income

Balance is net loss

Preparing Closing Entries

How Do You fournalize Closing Entries?

Four iournal entries are prepared to close the temporary accounts for

Roadrunner:

1. Transfer the balances of all revenue accounts to the credit side of the

Income SummarY account.

Section 1 Preparing Closing Entries 253

lncome Summary ) Transfer all expense account balances to the debit side of the
Describe how and why
the lncome Summary Income Summary account.
account is used. 3. Transfer the balance of the Income Summary account to the

capital account (net income to the credit side; net loss to the
debit side).

4. Transfer the balance of the withdrawals account to the debit side of

the capital account.

Closing Revenue to lncome Summary

The first step in the closing procedure is to transfer the balance of
the revenue account to lncome Summary. The balance for the revenue
account is found in the Income Statement section of the work sheet. (Refer
to the work sheet in Figure 9-3 on page 2ZZ when reading about closing

entries.)

First Closing Entry-Close Revenue to Income Summary

ANALYSIS tdentifY t. Roadrunner has only one revenue account, Delivery Revenue. The

ClossifY accounts affected are Delivery Revenue and lncome Summary.
2. Delivery Revenue is a revenue account.lncome Summary is a
+/-
temporary owner's equity account.
5. The Delivery Revenue account balance is decreased by $2,650 to zero.

That amount, $2,650, is transferred to the lncome Summary account.

DEBIT-CREDIT RULE 4. Decreases in revenue accounts are recorded as debits. Debit Delivery

Revenue for $2,650.
5_ To transfer the revenue to the lncome Summary account, credit lncome

Summary for $2,650.

T ACCOI.]NTS 6.

Closing 2,650 Balance 2,650 Credit
Closing 2,650

JOURNAL ENTRY 7. -

Income Summary

254 chapter 10 Completing the Accounting cycle for a Sole Proprietorship

To record closing entries in the general journal, follow these steps: Closing ln your personal
life, what types of
1. Enter Closing Entries in the center of the Description column. "closing" activities do
2. Enter the date (the last day of the accounting period). you perform at the end
3. Enter the name(s) of the account(s) to be debited and the debit of a time period?

amount(s).

4. Enter the name of the account, Income Summary, to be credited

and the amount to be credited.

Closing Expenses to Income Summary

The second closing entry transfers the balances of the expense accounts

to Income Summary. The balances of the expense accounts are found in
the Income Statement section of the work sheet.

Second Closing Entry-Close Expenses to Income Summary

ANALYSs ldentify t. The accounts affected by the second closing entry are Advertising

Clossify Expense, Maintenance Expense, Rent Expense, Utilities ExPense,

+/- and lncome Summary.
2- Advertising Expense, Maintenance Expense, Rent Expense, and

Utilities Expense are expense accounts. lncome Summary is a
temporary owner's equity account.
5. The balances of the four expense accounts are decreased to zero; the
total decrease is $ 1,500. The total amount, $l,5OO, is transferred to the

lncome Summary account.

DEBIT.CREDIT RULE 4- To transfer the expenses to the lncome Summary account, debit

Income Summary for $l,5OO.
5. Decreases in expense accounts are recorded as credits. Credit

Advertising Expense, $75; Maintenance Expense, $600; Rent
Expense, $700; Utilities Expense, $125.

T ACCOUNTS 6.
Debit
Debit Credit
Closing 1,500 + Closing 75

Balance 75

Debit Credit Debit Credit
+ Closing 600 + Closing 700

Balance 600 Balance 7OO

Debit Credit
+ Closing 125

Balance 125

1Section Preparing Closing Entries 255

JOURNAL ENTRY 7-

It is not necessary to use a separate closing entry for each expense

account. As you can see, Roadrunnel's ently has one debit and four credits.
A journal entry with two oI more debits oI two or mole credits is called

a compound entry . A compound entry saves both space and posting time.
For example, each of Roadrunner's expense accounts could be closed to

Income Summary separately. That, however, requires four entries and post-
ings to the lncome Summary account instead of one entry and posting.

Closing lncome Summary to Capital

The third closing entry transfers the balance of the Income Summary
account to the capital account. As shown in the T account, after closing

RoadrUnner'S revenue and expense aCCOUntS, InCome SUmmary has a Credit
balance of $1,150. A credit balance indicates net income for the period. It is
the same amount that appears on the work sheet.

Income Summary

2 Closing entry for expenses 1,500 1 Closing entry for revenue 2,650

Balance

Third Closing Entry-Close Income Summary to Capital

t. The accounts lncome Summary and Maria Sanchez, Capital are affected.
2. lncome Summary is a temporary owner's equity account. Maria

Sanchez, Capital is an owner's capital account.

5. The tncome Summary account balance is reduced to zero by
transferring $1,150, the net income amount, to the capital account'
Maria Sanchez, Capital is increased by $1,150'

DEBIT-CREDIT RULE To reduce the lncome Summary balance to zero, debit lncome

Summary for $.l,150.
Net income is recorded as a credit to the owner's capital account. Credit

Maria Sanchez, Capital for $1,150.

256 Chapter 10 Completing the Accounting cycle for a Sole Proprietorship

T ACCOUNTS 6.
Debit
Credit Credit
Closing 1,150 Balance 1,150 +

Balance 25,400
Closing 1,150

JOURNAL ENTRY 7.

After the third closing entry has been posted, the lncome Summary
account appears in T-account form as follows.

lncome Summary

2 Closing entry for expenses 1,500 1 Closing entry for revenue 2,650

3 Closing balance to owner's
capital account
1,150

If a business has a net loss, [ncome Summary has a debit balance. In
that case, the third closing entry debits the capital account and credits
Income Summary for the amount of the net loss. Figure 1O-3 shows this
general journal entry.

GENERAL JOURNAL

DESCRIPTION POST DEBIT
REF,
Closing Entries
Figure 1O-3 Closing
Mqtg jarychgZ,9opttal
lncome 5ummary for the
Income Summa Amount of Net Loss

Closing Withdrawals to Capital

The fourth and last closing entry transfers the balance of the withdrawals
account to the capital account. As you recall, withdrawals decrease owner's
equity. The balance of the withdrawals account is transferred to the capital
account to reflect the decrease in owner's equity. The balance of the with-
drawals account is found in the Balance Sheet section of the work sheet.

Section 1 Preparing Closing Entries 257

Fourth Closing Entry-Close Withdrawals to Capital

ANALYSIS ldentify t. The accounts affected by the fourth closing entry are Maria Sanchez,
Clossify
Withdrawals and Maria Sanchez, Capital.
+/- 2. Maria Sanchez, Withdrawals is a temporary owner's equity account.

Maria Sanchez, Capital is an owner's capital account.
5. Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez,

Capital is decreased by $500.

DEBIT-CREDIT RULE 4. Decreases in owner's capital accounts are recorded as debits. Debit
Maria Sanchez, Capital for $500.
Decreases in owner's withdrawal accounts are recorded as credits.
Credit Maria Sanchez, Withdrawals for $500.

T ACCOT]NTS Maria Sanchez, Capltal

Credit
Closing 500

v

JOURNAL ENTRY 7.

Figure 10-4 summarizes the closing entries for Roadrunner.

GENERAL JOURNAL PAGE J

POST, CREDIT

Figure 1O-4 Journalizing I."-ii,i:

the Closing Entries alll .ll

258 Chapter 10 Completing the Accounting cycle for a Sole Proprietorship ' 4::',,
:rl
5;ir

,q[]i:

o00olR+:;r,

9oil gi,

1 01 rit,.
1ll

rlr1
gg 1,,,

rs l

1l

qqlr.:ll:l

$tITlnil I

Reinforce the Main ldea

Use a table like this one to
describe the closing entries
that are made at the end of
each accounting period.

Do the Math

Using these general ledger account balances, calculate the net income or net loss for the

period. Then calculate the increase or decrease in owner's capital.

AnnaZaian, Capital $25,000
Anna Zaian, Withdrawals 5,000

Accounting Fees Revenue 9,000

Advertising Expense 1,000

Miscellaneous Expense 2,0oo

Rent Expense 1,500

Utilities Expense 500

QA Problem l0-l Preparing Closing Entries

W lnstructions Prepare closing entries for the following in your working papers.

1. A closing entry must be made for the account Ticket Revenue, which has a balance
of $6,000.

2. A business has three expense accounts: Gas and Oil Expense (balance, $700),
Miscellaneous Expense (balance, $600), and Utilities Expense (balance, $1,800). The
end of the fiscal year is June 30.

Qa Problem l0-2 Analyzint a Source Document

W Instructions Using the source document:

1. Journalize the transaction in a general DEPABTMENT OF WATEB & POWER
journal in your working papers.
455 Moin 53tr4i 2t 30 ACC.UNI r\o.: 00384843848-339
2. Post the entry to the appropriate sdru\ota' FL 32004

T accounts. INVOICE NO.:

3. Assume it is the end of the accounting f GulMew Tropical Fish and supplies
period. Record the closing entry for TO 4524 West Pdlm Bay A\enue
this account in the general journal.
USAGE MiTI,: AMAIE{I
4. Post the closing entry to the r'.IJI'F..
March 15,20-. April 14, 20- 1,u00 kwh $.129 per kwh s1 29.00

appropriate T accounts.

Section 1 Preparing Closing Entries 259

$,tITlB]l I osting Closing Entries and

Main ldea Preparing a Post-Closing
Trial Balance
After the closing entries are
posted, a post-closing trial In Section 1 you learned how to journalize the closing entries. In this
balance is prepared to verify section you will complete the accounting cycle.
that debits equal credits.
Completing the Eighth Step in the
Read to Learn... Accounting Cycle: Posting the Closing
Entries to the General Ledgel
> how to post the closing
What Is Special About Posting the Clasing Entries?
entries to the general
ledger. (p.260) The next step in the closing process is to post the closing entries to
the general ledger accounts. The posting procedure is the same as for any
> how to prepare a post- other general journal entry, with one exception. The words Closing Entries
are written in the Description column of the general ledger account. The
closing trial balance. posting of the closing entries for Roadrunner is shown in Figure 1O-5.
(p.262) Note that Closing Entries can be abbreviated as Clos. Ent.

Key Terms GENERAL JOURNAT

post-closing trial balance

Oct. 31 Delivery Revenue 401 2

Iname Summary
A!rytql4 a4p9!!e , 501
Maintenance Lxpense 50:
Rent Expense
I 5:-1.(
_Utilities Expense

Income Summary 193
Maria Sanchez, Capitol 301

Figure LO-5 Closing Entries Maria Sanchez, Ca?ital
Maria Sanchez, Withdrawals
Posted to the General Ledger

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

ACCouNr Mgnl SaryllyZ.9opIal ACCOUNT X9. 307
DATE I DESoRTPTToN
ACCOUNT 119. 302
iiot. E"t.
BALANCE
itit. a"t.
DEBIT ] CFIEDIT
Maria S anche z, W ithdraw als

'.-

oescnrelon jP$fl

46699p1 ircorz r*lyryqfa

37 '. Clos. Ent.
31 , CIos. Ent.

Delivery Revenue

DESCRIPTION iPSPJ

ACCOUNT Advertising Expense -ACCOUNT 519" 501

Maintenance Eutense

DESoFTPToN ";;;F BALANcE

,p:Brr , , :t.o,r, pFqI , fESl

31 i Clos. Ent.

Figure 10-5 Closing Entries Posted to the General Ledger (continued)

Section 2 Posting Ctosing Entries and Preparing a Post-Closing Trial Balance 261

ACCOUNT Rent Exqense ACCOUNT NO 510

DATE DESCRTPTION PROET BALANCE

20-- -T

Oct. 166 C1 L0l

i I Clos. Ent. UJ

Xggggyl UrfL:tl:iLl:i^t-ies EF-x.-pense

j alorscnrelon 1ffi

on.l28

Clos. Ent. G3

rl

Figure 1O-5 Closing Entries Posted to the General Ledger (continued)

Post-Closing Trial The Ninth Step in the Accounting Cycle:
Balance How is the
post-closing trial Preparing a Post-Closing Trial Balance
balance similar to the
trial balance? How is it If We Already Have a Trial Balance, Why Do We Need a
different?
P o st- Clasing Trial B slance?

The last step in the accounting cycle is to prepare a post-closing trial bal-

ance. The post-closing trial balance is prepared to make sure total debits
equal total credits after the closing entries are posted. The post-closing trial
balance for Roadrunner is shown in Figure 10-6.

Notice that only accounts with balances are listed on the post-closing
trial balance. After the closing process, only permanent accounts have bal-
ances. Temporary accounts have zero balances, so there is no need to list
those accounts on the post-closing trial balance.

R oa d ru rygQq! vellSe rulce

Post-Closing Trial Balance

October 31, 20--

Dglivqy Equ1pltt97t

Maria Sanchez, CaPital

lI rotut

+

Figure 10-6 Post-Closing Trial Balance

262 chapter 10 completing the Accounting cycle for a Sole Proprietorship

$EITIIt'l 7,

Reinforce the Main ldea

Create a table like this one to
list the general ledger account
classifications. In the column
titled'Appears on Post-
Closing Trial Balance," place
an X next to each account that
carries a balance into the next
accounting period.

Do the Math

You work for a company with a large accounting department, and every accounting clerk
has specific duties. Your co-worker responsible for preparing the post-closing trial balance
is ill today. Your supervisor asked you to prepare the post-closing trial balance. Using your
computer or lined paper, draft the post-closing trial balance using the following account
balances: Cash, $27,800; Accounts Receivable, $33,000; Equipment, $81,000; Accounts

Payable, $24,500; and Owner's Capital, $117,300.

en Problem l0-5 Determining Accounts Affected
IG by Closing Entries

The following list contains some of the accounts used by Living Well Health Spa.

General Ledger Exercise Equipment Rent Expense
Accts. Pay.-The Fitness Income Summary
Laundry Equipment Repair Tools
Shop Maintenance Expense Ted Chapman, Capital
Membership Fees Ted Chapman,
Accts. Rec.-Linda Miscellaneous Expense
Brown Office Furniture Withdrawals
Advertising Expense Utilities Expense
Cash in Bank

Exercise Class Revenue

lnstructions Using the form in your working papers:

1. In the first column, indicate the financial statement where each account appearc: balance

sheet or income statement.
In the next column, indicate whether or not the account is affected by a closing entry.
In the last column, indicate whether or not the account appearc on the post-closing trial

balance. Account Name Financial Is the account Does the account
Statement affected by a appear on the post-
The first Accts. Pay.-The closing entry? closing trial balance?
account is
shown as an Fitness Shop Balance Sheet No Yes
example.

Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance 263

Key Concepts

1. The eighth step in the accounting cycle is to journalize and post the closing entries:

. Closing is the process of transferring the balances in the temporary accounts to the owner's

capital account.

. The asset, liability, and owner's capital accounts are never closed.

2. The [ncome Summary account has two purposes:

. to accumulate the revenue and expenses for an accounting period, and
. to summarize the revenue and expenses for an accounting period.

3. Income Summary is a temporary owner's equity account used to record net income or net loss:

. A credit balance (net income) in Income Summary increases capital.
. A debit balance (net loss) decreases capital.
. The Income Summary account does not have a normal balance. That is, it does not have an

increase side or a decrease side.

. The Income Summary account balance is zero before and after the closing process.

o The Income Summary account does not appear on any financial statements.

4. Prepare four closing entries:
a. Close the revenue account(s) to Income Summary.

20--
Revenue Account
Income Summary

b. Close the expense accounts to Income Summary.

31 tncome Summary

E4pgnse Account

ttpeue4epq!

Expg4!949!9trryt

c. Close Income Summary to the owner's capital account.

Income SqrnrngU l

d. Close the owner's withdrawals account to the owner'S capital account.

371Owner's Account

Withdrawals Account

264 Chapter 10 SummarY

Income Summarv

If Revenue > Expenses Credit
Revenue
If Revenue < Expenses .+ Balance is net income

Balance is net loss

.5. After the closing entries have been journalized, follow this procedure:

. Post them to the general ledger.

o For each posted entry, enter the words Closing Entry in the Description column of the general
ledger account.

6. The ninth step in the accounting cycle is to prepare a post-closing trial balance. Only the
permanent accounts are listed on the post-closing trial balance.

Roadrunner Delivery Service
Post-Closing Trial Balance
December 31,20--

Cash in Bank
Accts. Rec.-Citv News

gglryplter tqlipmel!

Eauioment

Accts. Pav.-Beacon Ad
Accts. Pav.-North Shore Auto

A!!is;!!ch9z,slp$at

Key Terms

closing entries (p. 250)

compound entry (p.256)

lncome Summary account (p.253)

post-closingtrialbalance (p.262)

Chapter L0 Summary 265

Check Your Understanding

l. Closing Entries

a. Which accounts are considered temporary accounts?
b. Why are temporary accounts closed at the end of the fiscal year?

lncome Summary Account

a. What is the purpose of the lncome Summary account?
b. How does the lncome Summary account differ from the other temporary accounts?

lncome Summary and Capital Accounts

a. Explain the relationship between the lncome Summary account and the capital account.
b. Why doesn't the lncome Summary account have a normal balance?

Analyzing and lournalizing Closing Entries

a. What is the source of information for the closing entries?
b. List the steps for journalizing the closing entries.

Posting the Closing Entries

a. Classify the Income Summary account (asset, liability, owner's equity, revenue, or expense).
b. How is the posting procedure for closing entries different from the posting procedure for

other general journal entries?
Post-Closing Trial Balance

a. What is the purpose of the post-closing trial balance?
b. Why does the post-closing trial balance have balances of only permanent accounts?

Apply Key Terms

On a separate sheet of paper, write a brief
definition for each of the following terms.

closing entries
compound entry
Income Summary account
post-closing trial balance

266 Chapter 10 Review and Activities

Closing the Accounting Period

Making the Transition from a Manual to a Computerized System

Task Manual Methods Computerized Methods
Closing Entries
. Using a general journal form, prepare . It is not necessary to journalize closing

closing entries for revenue, expense/ entries. Closing entries are performed
income summary, and withdrawals by the computerized system.
accounts. Post the closing entries in the
general ledger accounts.

Peachtree Question Q&A

What is the difference Answer
between changing the
accounting period and In Peachtree the accounting peiodrcfers to the period used to record
closing the fiscal year transactions. At the end of an accounting period (usually at month-end), you
in Peachtree? should change to the next accounting period. For example, at March 31, you
would select the next accounting period, April 1, 20-- through April 30, 20--.
How do I close the The fiscal year should be closed only when you are sure that all entries have
fiscal year? been recorded and all reports have been printed for the year.

1. Post and print all journal entries before closing the fiscal year. Closing the fiscal
year cannot be reversed.

2. From the ?asks menu/ select System.
3. Select Year-End Wizard.
4. You will be prompted to complete Year-End closing procedures.

EQuickBooks e&A

QuickBooks Question Answer

What is the difference . In QuickBooks the accounting period refes to the month used to record
between changing the
accounting period and transactions. Changing the accounting period is as simple as entering the first
closing the fiscal year day of the next month. The software does not require that you manually adiust
in QuickBooks? accounting periods.

How do I close the . The fiscal year should be closed only when you are sure that all entries have
fiscal year?
been recorded and all reports have been printed for the year.

L . Record all j ournal entries before closing the fiscal year.
2. Fromtl:re Edit menu, select Preferences.
3. Choose the Accounting preference and click the Company Preferences tab.
4. In the Date field, enter the closing date and click the Set Password button.
5. Enter and confirm the password, and click OK.

Chapter 1O Computerized Accounting 267

Step-by-Step lnstructions: Problem l0-4 Preparing Closing Entries

Problem I0-4 A portion of the work sheet for Wilderness Rentals for the period ended
December 31 follows.
l. Select the problem set
lnstructions Using the information from the work sheet, prepare the
for Wilderness Rentals
journal entries to close the temporary accounts.
(Prob. l0-a).
2. Rename the company 1. Record the closing entry for the revenue account.
2. Record the closing entry for the expense accounts.
and set the system date. 3. Record the closing entry for the Income Summary account.
3. Select System from 4. Record the closing entry for the withdrawals account.

the losl<s menu and Wilderness Rentals
then choose Year-End Work Sheel
Wizard.
4. Complete the Analyze For the Period Ended December 31, 20-

activity. ACCOUNT NAME

s. End the session. Cash in Bank

TIP: Print the General Accts. Rec.-Helen Katz

i Ledger or General Ledger Accts. Rec.-Polk and Co.

i Trial Balance report to find
: an account balance.

t-

4 115 lOfftce Supplieq

5 120 Office Equipment

6 ing Equipment

7 aCC]!.!!L 4dr9Ltu!9 Eqyilp. !!19.

l*,4S gy.=DEtd re c h C o:l p r,tlSt s

?.
Acqls. llL=grq N[gllq9

Ronald Hicks, C_apltgl _

Ronald Hicks, Withdrawals

r qurruent Re!!q! R9 u- 9 nu9

Net Income

Problem t 0-5 Preparing a Post-Closing

Trial Balance

lnstructions Use the accounts shown on the next two pages to prepare

a Dec. 31 post-closing trial balance for Hot Suds Car Wash.

268 Chapter 10 Problems

Cash in Bank Accounts Receivable-
Linda Brown

Debit Credit Debit Credit Peachtree'
+ +

Balance 8,000 Balance 875

Accounts Receivable- Step-by-Step lnstructions:
Valley Auto
Problem l0-5
Debit
+ Office Equipment l. Select the problem set
Credit
Balance 5,050 for Hot Suds Car Wash

(Prob, lo-s).
2. Rename the company

r and set the system date.
,

Office Furniture Car Wash Equipment ji a. Balance, I
!
Complete the Analyze
adivitY.
Debit Credit Debit Credit 'r;,5- ;
+ + End the session.

Balance 9,000 Balance 65,000 ; TIP: Print the General t,
Ledger Trial Balance after
Accounts Payable- , ,
O'Brian's Office Supply I you complete the closing i
i,i"cp-l*roo-sc*ie,n*sgs..t.rt-oia.*lg"be-*na*e.rl"aa*te"ni acPeos.t- I
Accounts Payable-
Allen Vacuum Systems Debit Credit
+
Credit
+ Balance 2,500

Balance 41,000

Regina Delgado, Capital Regina Delgado, Withdrawals QuickBooks

35,925 Debit Credit @
Closing 16,000 + Closing 1,500 Step-by-Step lnstructions:

Balance 1,500 Problem l0-5

Income Summary Wash Revenue I. Restorethe Problem

I0-5.QBB file.

Debit Credit Debit Credit 2. Print a Post-Closing Trial
Closing 15,000 +
Balance.
Balance 15,000 : 5. Complete the Analyze i
Closing 19,OOO Closing 35,000 ' activity.
Closing 16,000 ! i
+. sackupyourwork. ;

,

Wax Revenue Interior Detailing Revenue

Debit Credit Debit Credit
Closing 8,000 + Closing LZ,OOO +

Balance 8,000 Balance 12,000

Advertising Expense Equipment Rental Expense

Debit Credit Debit Credit
+ Closing 2,500 + Closing 3,OOO

Balance 2,500 Balance 3,000

Chapter 1O Problems 269

Maintenance Expense Rent Expense

Debit Closing 5,000 Debit Credit
+ + Closing 5,000

Balance 5,000 Balance 5,000

Utilities Expense

Debit Credit
+ Closing 3,500

Balance 3,500

Peaclrtrce' Problem 10-6 lournalizing Closing Entries

Step-by-Step lnstructions: The following account names and balances appear on the work sheet for
Kits & Pups Grooming for the month ended December 31.
Problem Io-6
Kits & Pups Grooming
1. Select the problem Work Sheet
set for Kits & Pups
For the Month Ended December 31, 20-
Grooming (Prob. l0-6).
2, Rename the company ACCOUNT NAME

and set the system date. iCash in Bank
5. Close the current fiscal ': Accts. Rec.-luan Alvarez

year. Accts. Rec.-Martha Giles
4. Complete the Analyze
Compuler Equipment
activity.
5. End the session.

Accts. Pay.-P et G ourmet

4ar_!l-IZ slpitot
I 4a_ejl!4t .]Y\\dr!y q4

Mrirlerlorlce tr1p!!E9
Rent Expense

lnstructions Using this information, record the closing entries for Kits &

Pups Grooming. Use general iournal page 11.

270 Chapter 1O Problems

Problem l0-7 Posting Closing Entries and ItlAPTEI{ II

Preparing a Post-Closing Peachtrce'

Trial Balance Step-by-Step Instructions:

Period ending December 31 closing entries for Outback Guide Service are: Problem l(F7
l. Select the problem
] slosj4s E4lties rylsyo-)elotl t
'I set for Outback Guide
31 Guide Service Revenue
Iz Service (Prob. l0-7).
. ..Income S_ummary
3l lncome Summary 2. Rename the company
and set the system date.

3. Close the fiscal year.
4. Print a post-closing Trial

Balance.

activity.

Rent Exoense -ll-l alsos\oo to Peachtrce'

8 Utilities Expense Step-by-Step lnstructions:
s 31 lncome Summary
Problem l(F8
,l I il"qaitArtesa,eapitst l. Select the problem set

11 3l',lr4ri!q O1legq-Caaital for Showbiz Video

I I lug4itt Ortega, \lithdraYak (Prob. l0-8).
2. Rename the company
InstructionS Using your working papers, post the closing entries to the
appropriate general ledger accounts and prepare a post-closing trial balance. and set the system date.
5. Print a General Ledger
Analyze
Trial Balance.
Problem t 0-8 Completing Period-End Activities 4. Print an lncome State-

The general ledger for Showbiz Video shows the following at December 31: men! Balance Sheet and
Statement of Changes in
General Ledger Owne/s Equity.
5. Close the fiscal year.
101 Cash in Bank r2,ooo 207 6. Print a post-closing Trial

105 Accts. Rec.-G. Cohen 3,000 New Media Suppliers 3,000 Balance.
110 Accts. Rec.-J. Coletti 900 209 Accts. Pay.-Palace Films 14,000 7. Complete the Analyze
113 Accts. Rec.-S. Flannery L,800 301 Greg Failla, Capital 33,775
: activity.
115 Accts. Rec.-Spring 30s Greg Failla, Withdrawals 4,000 8. End the session.

Branch School District 1,500 310 Income Summary QuickBrrcks

130 Office Equipment 5,000 401 Video Rental Revenue 9,600 Step-by-Step lnstructions:
135 Office Furniture 8,000 405 VCR Rental Revenue 3,500 Problem lO-8

140 Computer Equipment 10,000 501 Advertising Expense 1,600 l. Restore the Problem
145 Video Tapes 7,200
20,000 505 Equipment Repair Io-8.QBB file.
150 Video Equipment 9,000 2. Print a Trial Balance, a
Expense
Profit & Loss report, and
a Balance Sheet

20L Accts. Pay.-Broad Street 510 Maintenance Expense 400

Office Supply 400 s20 Rent Expense 1,000

205 Accts. Pay.- 530 Utilities Expense 375

Computer Horizons 15,500

Chapter lO Problems 271

lnstructions Using the preceding account names and balances:

1. Prepare the six-column work sheet. The period covered is one month.
2. Prepare the financial statements. Greg Failla invested $10,000 during

the month.

3. Record the closing entries on page 72 of the general journal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.

Problem l0-9 Completing End-of-

Period Activities

At the end of December, the general ledger forJob Connect showed the
following account balances:

General Ledger 6,000 2O7 Accts. Pay.-Wildwood

101 Cash in Bank

105 Accts. Rec.- Furniture Sales 2,OOO

CompuRiteSystems 1,000 301 Richard Thng, Capital 23,600

110 Accts. Rec.- 302 RichardTang,

Marquez Manufact. 500 Withdrawals 3,000

113 Accts. Rec.-Roaring 303 Income Summary

Rivers Water Park 600 401 Placement Fees Revenue 6,900

11s Accts. Rec.-M. Spencer 200 405 Technology Classes
Revenue
130 Office Equipment 7,OOO Z,4OO

135 Office Furniture 5,000 501 Advertising Expense 3,000

740 Computer Equipment 8,500 505 Maintenance Expense 800

201 Accts. Pay.-Micro 510 Miscellaneous Expense 800
520 Rent Expense
Solutions Inc. 2,goo 2,OOO

205 Accts. Pay.-Vega 530 Utilities Expense 900

Internet Services 1,600

Instructions Using the preceding account names and balances:

1. Prepare the six-column work sheet. The period covered is one month.
2. Prepare the financial statements.
3. Record the closing entdes on page 28 of the general iournal.
4. Post the closing entries.
5. Prepare a post-closing trial balance.

272 Chapter 1O Problems

4 Practice your test-taking skills! The questions on this page are reprinted with permission

from national organizations:

. Future Business Leaders of America
. Business Professionals of America

Use a separate sheet of paper to record your answers.

Future Business Leaders of America
Murrrprn Crrorcn
L. Which of the following accounts needs no closing entries?

a. Capital
b. Supplies Expense
c. Fees Owed
d. A1l of the above
2. After adjusting and closing entdes have been posted, a
a. balance sheet is prepared.
b. trial balance is prepared.
c. post-closing balance sheet is prepared.
d. post-closing trial balance is prepared.
3. The Capital account balance minus the net loss minus the Drawing account
balance equals

a. net loss.
b. total liabilities.
c. the capital amount shown on a balance sheet.
d. the capital amount shown on an income statement.

Business Professionals of America

Murrrprn Cnorcr
4. Which of the following will not appear on a post-closing trial balance?

a. Accounts Payable

b. Sales

c. Owner's Capital

d. Cash
5. At the end of the fiscal period, the income summary account shows a credit

balance of $3,500. This income summary account balance will be closed out to
which account?

a. a debit to owner's capital

b. a credit to owner's capital

c. a debit to owner's revenue

d. a credit to owner's withdrawals

.

Go to glencoeaccounting.glencoe.com and
click on Student Center. Click on Winning

Competitive Events and select Chapter l0'

. Practice Questions and Test-Taking Tips
.Concept Capsules and Terminology

€ glencoeaccounting'glencoe.com Chapter 1O Winning Competitive Events 273

CffiLs Completing the Accounting Cycle
rhh@ 1. What is the last step of the accounting cycle?

t 2,Why are the temporary accounts closed to the owner's capital account at the
end of the accounting period?

3. Make the closing entries for (a) a $5,000 net income for the year ending
December 31 and (b) a $4,000 net loss for the quarter endingJune 30.

4. Compare and contrast the closing entry for an expense account and the
closing entry for the withdrawals account.

5. What items do you need to ioumalize the closing entries? Include office
supplies and forms as well as any information that will be needed.

6. What is the value of preparing a post-closing trial balance?

co"siltruv Service Business: Computer Consulting

You note after preparing financial statements for Computer Works and completing

the closing entries below that the owner's capital account balance is $34,400 in
the general ledger but is $43,400 on the statement of changes in owner's equity.
The capital account balance was $38,900 at the beginning of the month.
INsrnucrrorvs (L) Identify the mistakes in the closing entdes and (2) calculate the

correct capital account balance.

Date Description Debit Credit

Aug. 31 Consulting Fee Revenue 9,24O 9,24O

Income Summary 87O

Aug. 31 Income Summary

Advertising Expense 300

Internet Access Expense 20

Rent Expense 550

31Aug. Rex Moran, Capital 8,100

Income Summary 8,100

Computer Viruses

Computer viruses "reproduce" themselves in computer programs, slowing the

system or destroying data. A friend gives you a computer game with a harmless

virus. To add some fun at work, you load the game onto the company's network.

Ersrc.lr Dncrsron Mlxrrc

1. What are the ethical issues? 4. How do the alternatives affect the

2.What are the alternatives? parties?

3. Who are the affected parties? 5. What would you do?

Explaining Cause and Effect

Your boss Ieft you a note questioning the decrease in his owner's capital account.
You see that his withdrawals were the cause. List some points to explain the
situation. Pick a classmate to listen to your explanation, which should prove that
you understand that the withdrawals account is closed to the capital account.

274 Chapter 10 Real-World Applications and Connections

}IlJ[lHEtt$ Working in a Team
Imagine that you work in the accounting department for the multimedia division

of MTV. The CD-ROM project manager wants to produce and sell a new CD-ROM
with clips from the latest music videos. You and your co-workers have questions.

Iusrnucrrous Form a team of five students and list the questions you may

have. Compile your questions and opinions about the product (from a financial
perspective) into a one-page report and present it to the class.

l-t-t#unmt.f\f*imw? The World Trade Organization

ACCOUNYfTVG The World Trade Organrzation (WTO) negotiates most trade agreements between

nations. The organization is dedicated to resolving disputes, stimulating

economic growth, and lowering trade barriers. It handles issues including tariffs,
customs processes, professional services, e-commerce, and import licensing.
h.lsrnucrrons List the issues the WTO is reviewing this month. Locate the Web
site for the WTO and click on the 'Events calendar'link.

Your Checking Account

Whether you are a business owner or a consumer/ you will probably use a

checking account. You are responsible for keeping track of your cash by recording
deposits and withdrawals on the check stubs in the checkbook.

PnnsoNA.r FmaNcr Acrrvrrv Assume that you opened a checking account by
depositing $200 at the beginning of the month. During the month you wrote

three checks: 101 for $25, 102for $50, and 103 for $75. When and where should

you record each deposit and check? Calculate the checking account balance.

PBnsolrer Fng,tNcn OlIuNr Log on to glencoeaccounting.glencoe.com and
click on Student Center. Click on Making It Personal and select Chapter 10.

\f6'Analvzino Calculating Return on Owner's Equity
rruAr,rirnr,
l{tipofis One measure of business success is the return on owner's equity (ROE):

Net Income $3,600 1'1..25o/o

Beginning Owner's Equity - Withdrawals - =$34,500 $2,500

The resulting percentage shows the amount Closing Entries

earned during the period on each dollar The closing entries for professional
sporls teams are similar to those
invested by the owner. for other types of businesses. Go to
fllsrnucrroNs Use Roadrunner's income state-
glencoeaccounting
ment (page 222) and statement of changes in "glencoe,com and click
owner's equity (page 226) to calculate October's
ROE. How does this return compare with a bank on Student Center. Click on
savings account that pays 2 percent interest per WebQuest and select Unit 2 to
continue your lnternet proiect.
year?

€ ghncoeaccounting.glencoe.com Chapter 1O Real-World Applications and Connections 275

IHAPTEtl II Cash Control and
Banking Activities

What You'll Learn Predict

Describe the internal controls l. What does the chapter title tellyou?
used to protect cash.
2. What do you already know about this subject from personal experience?
Describe the forms needed 5. What have you learned about this in the earlier chapters?
to open and use a checking 4. What gaps exist in your knowledge of this subject?
account.
lamba Juice
Record information on check
stubs. Snacking at school does not have to be about greasy chips,
candy bars, and sugary sodas. Across the nation schools are
Prepare a check. getting healthier about snacks. In many places students can
now choose from smoothies like the Tropical Awakening or the
Prepare bank deposits, Strawberry Nirvana-both popular drinks from Jamba Juice.
Made with 100 percent fruit iuices, Jamba smoothies provide
Reconcile a bank statement. three to six of the daily recommended servings of fruit.

Journalize and post entries Founded in 1990, the company now operates more than
relating to bank service 430 stores nationwide. You can imagine how important it is
charges. to control cash as customers buy smoothies, juice, and baked
goods. Companies likeJambaJuice use cash registers and
Describe the uses of the specific bank deposit procedures to be sure that cash is properly
electronic funds transfer
system. accounted for.

Define the terms introduced What Do You Think?
in this chapter.
What do you think is the most common problem that
Why lfs lmportant occurs inJambaJuice stores in regard to cash?

Banking tasks are basic
practices in business and in
your personal life,

Chapter 11 Cash Control and Banking Activities

r{*eE # * €{i *# * * {+aE ffi CE S " g 3 e* c= +'{B sae

$tIItI}l I anking Procedures

Main ldea In any business, cash (currency, coins, and checks) is used in daily
transactions. An important part of accounting for a business, therefore,
lnternal controls are steps involves tracking the cash received and paid out. For example, Jamba
taken to protect assets and Juice has established procedures for processing the cash received from
keep reliable records. the sale of drinks and other items. Jamba Juice also has a system of moni-
toring and controlling cash paid out for wages, utilities, supplies, and
Read to Learn...
numerous other expenses.
> how a business protects
Protecting Cash
cash. (p.278)
Haw Does a Business Protect Cash?
> how to use a checking
It is important to protect cash from loss, waste, theft, forgery, and
account. (p.278)
embezzlement. Cash is protected through internal controls and external
Key Terms controls. Internal controls refer to procedures within the business that
are designed to protect cash and other assets and to keep reliable records.
internal controls Internal controls for cash include:
external controls
checking account L. Limiting the number of persons handling cash.
check 2, Separating accounting tasks involving cash. For example, one
depositor
signature card person handles cash receipts, another handles cash payments,
deposit slip and a different person keeps the accounting records showing the
endorsement amounts received or paid.
blank endorsement
special endorsement 3. Bonding (insuring) employees who handle cash or cash records.
restrictive endorsement 4. Using a cash register and a safe.
payee 5. Depositing cash receipts in the bank daily.
drawer 6. Making all cash payments by check.
drawee 7. Reconciling the bank statement.
voiding a check
External controls are the measures and procedures provided out-
Cosh is more than dollar side the business to protect cash and other assets. For example, banks
bills. ln accounting, cosh maintain controls to protect the funds their customers deposit. These
also means checks and controls include verifying the accuracy of signatures on checks and
funds on deposit in a maintaining records of monetary transactions.
bank or credit union.
The Checking Account

How Do You Maintain a Checking Account?

A checking account allows a person or business to deposit cash in
a bank and to write checks against the account balance. A check is a
written order from a depositor telling the bank to pay a stated amount
of cash to the person or business named on the check. A depositor is a
person or business that has cash on deposit in a bank.

278 Chapter 11 Cash Control and Banking Activities

OpenEng a Checking Account

A checking account helps protect cash and pro- ^i1-" smaa3 fl:fi?'-'R.
srGNAruRE llari*sanchpz
vides a record of cash transactions. Accr.r/EEcKGn sAVi c-R

The Signature Card. To open a checking n orHER
No. STGNATURES REeutReo 1
account, a business owner fills out a signature card
SOC. SEC, NO. OR TAXPAYER I,D, NO.

and deposits cash in the bank. A signature card con-

tains the signature(s) of the person(s) authorized to 1

write checks on the account. The bank keeps the sig- $-

nature card on file so that it can be matched against 2 SIGNATURE
signed checks presented for payment. The use of a .{
signature card protects both the account holder and
the bank against checks with forged signatures. See THEINDIVIDUALSWHOHAVESIGNEDABOVEAREAUTHORIZEDTOUSETHISACCOUNTACCOROINGIO *
i
THERULESANDBEGUUTIoNSTHATAPPLYToITANDANYSPECIALINSTBUoTIoNSoNFILEWTHTHE
*BANK. EACH PERSON WHO SIGNS ACKNOWLEDGES THAT THESE RULES AND REGUUTIONS HAVE BEEN
A IRECEIVED AND AGREES To THEIR TERMS. EACH PERSoN ALso AUTHoRIZES THE BANK To REoUEST
BEPOBTINGAGENCYCONSUMEB REPOBT FROMANY CONSUMEB :
*

Figure 11-1 for the signature card used to open the FOR BANK USE

checking account for Roadrunner Delivery Service. IDENTIFICATION UA blale LlCenSe

The Checkbook. When a depositor opens a PBESENIED

coMMENrs SoleProprietorship--deliveryservice

checking account, checks are printed for the depos- f3336SJ 155 Gateway Btvd.. Sacramento, cA 94230
itor's use. Printed checks are packaged together in a
833fi. 443-e6e6 fiBi{E"" 443-1692
checkbook like the one shown in Figure 11-2. Each
dnrweccourur DcApIoNoHANGE DNEWSTGNATURE EADDtTtoNALSTGNATURE
page has several detachable checks attached to check
E TND|VIDUAL E JoINT E coFPoRATE
stubs, and both are numbered in sequence. Using
l-l orHER

OPENED BY GLC

checks with preprinted numbers helps a business BA'.tnof,*t#.? october 1, 20--

keep track of every check that it writes, an important

internal control. Figure 11-1 Checking

The ABA Nurnber. In addition to having a preprinted check num- Account Signature Card

ber, each check is printed with the account number and an American Bankers

Association (ABA) number. The ABA number is the fractional number printed

in the upper right corner of a check, just below the check number. The ABA

number identifies the bank and speeds the hand sorting of checks.

Look at the ABA number on the check in Figure 11-3 on page <-r
280. The number above the line and to the left of the hyphen rep- <J
resents the city or state where the bank is located. The number to

the right of the hyphen indicates the specific bank. The number

below the line is the code for the Federal Reserve district where <J to- r0g, ----i..ioi
<2
the bank is located. <J

The ABA number was developed to speed the sorting of checks C " $_
by hand. An updated version of the ABA number is also printed
<2
on the bottom of each check for electronic sorting. The ABA
number, the account number, and the check number are printed <-2
at the bottom of the check in a special ink and typeface. These
specially printed numbers are called MICR (magnetic ink character <-r
recognition) numbers. Can you identify the MICR numbers on the
check in Figure 11-3? c<O-:--f-f--i--i--f---ln---i, ilo. 104 *

_20_ {
!

i

-$- .-. .;

Making Deposits Figure 1L*2 Checkbook

A business makes regular deposits to protect the currency, coins, and
checks it receives. Most businesses make daily deposits.

Deposits are accompanied by a deposit slip, a bank form listing the

cash and checks to be deposited. The deposit slip, also called a deposit ticket,

Section 1 BankingProcedures 279

LRoadrunner Deliverv Service No. 101
155 Gater,vaY Stvo...........*
;' ):-- 71-627
Sacramento, CA 94230 3222

DATE 20

PAY TO THE DOLLARS
ORDER OF

k$"*
nmerb an Ngtia ruaf E an

SACRAMENTO. CALIFORNIA

Figure 1 1-3 Printed MEMO

Check r:1e?e?lEa?t: lollr, lil loI

Figure 1L-4 Deposit Slip gives both the depositor and the bank a detailed record of the deposit. Most
banks provide printed deposit slips with the depositor's name, address, and
account number. A deposit slip for Roadrunner Delivery Service is shown

in Figure 11-4.
To complete a deposit slip, follow these steps:

1. Write the date on the Date line.
2. On the cash line, indicate the total amount of currency and coins.
3. List checks separately by their ABA numbers. Write only the number

that appears above the line in the ABA number, including the
hyphen. If there are many checks, list the checks by amount on a
calculator tape and attach the tape to the deposit slip. on the first
Checks line, write "See tape listing," followed by the total amount

of the checks.

4. Add the amounts, and write the total amount on the Total line.

The checks are arranged in the order listed on the deposit slip. The

deposit slip and the cash and checks are handed to a bank teller. The teller
verifies the deposit and gives the depositor a receipt. The deposit receipt is
usually a machine-printed form, although it may be a copy of the deposit

slip stamped and initialed by the teller.

@. nme* ar l[ationat kE an o DOLLARS CENTS
SACRAMENTO. CALIFORNIA
tll
'-}A; 6November 20 -' U)
Checks and olher items are received for deposit subject to
the terms and conditions o{ this bank's collection agreement ozUE.

,LRoadrunner Delivery Service tll

lcc ualeway o,ru.....'...€ a

Sacramento, CA 94230 u-F

1lli:...':.1,,:,1 :i,: IIJ

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tD

I-:- 1.

Endorsing checks. A check is a form of property. when a business

receives a check, it acquires the right to that check. To deposit the check in a

checking account, the depositor endorses the check to transfer ownership to

the bank. An endorsement is an authorized signature written or stamped

on the back of a check that transfers ownership of the check'

280 Chapter L1 Cash Control and Banking Activities