Preparing the Financial Statements

Preparing the Financial Statements

Once the adjusting entries have been made or entered into a worksheet, the financial statements can be prepared using information from the ledger accounts. Because some of the financial statements use data from the other statements, the following is a logical order for their preparation:

• Income statement
• Statement of retained earnings
• Balance sheet
• Cash flow statement

Income Statement

The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:

• Revenue
• Expenses
• Capital gains or losses

Statement of Retained Earnings

The retained earnings statement shows the retained earnings at the beginning and end of the accounting period. It is prepared using the following information:

• Beginning retained earnings, obtained from the previous statement of retained earnings.
• Net income, obtained from the income statement
• Dividends paid during the accounting period

Balance Sheet

The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:

• Balances of all asset accounts such cash, accounts receivable, etc.
• Balances of all liability accounts such as accounts payable, notes, etc.
• Capital stock balance
• Retained earnings, obtained from the statement of retained earnings

Cash Flow Statement

The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods
:

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MBA Accounting Notes

Preparing the Financial Statements
Once the adjusting entries have been made or entered into a worksheet, the financial statements can be prepared using information from the ledger accounts. Because some of the financial statements use data from the other statements, the following is a logical order for their preparation:
Income statement
Statement of retained earnings
Balance sheet
Cash flow statement

Income Statement

The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:
Revenue
Expenses
Capital gains or losses

Statement of Retained Earnings

The retained earnings statement shows the retained earnings at the beginning and end of the accounting period. It is prepared using the following information:
Beginning retained earnings, obtained from the previous statement of retained earnings.
Net income, obtained from the income statement
Dividends paid during the accounting period

Balance Sheet

The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:
Balances of all asset accounts such cash, accounts receivable, etc.
Balances of all liability accounts such as accounts payable, notes, etc.
Capital stock balance
Retained earnings, obtained from the statement of retained earnings

Cash Flow Statement

The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods:

Direct method: cash flow information is derived by directly subtracting cash disbursements from cash receipts.
Indirect method: cash flow information is derived by adding or subtracting non-cash items from net income.

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Trial Balance Notes

Trial Balance
If the journal entries are error-free and were posted properly to the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credits, then an error has occurred somewhere in the process. The total of the accounts on the debit and credit side is referred to as the trial balance.

To calculate the trial balance, first determine the balance of each general ledger account as shown in the following example:
General Ledger

Cash
Sep
1
7500

17
400

25
425
Sep
15
1000

28
500

Bal. 6825
Accounts Receivable
Sep
17
700
Sep
25
425

Bal. 275
Parts Inventory
Sep
8
2500
Sep
18
275

Bal. 2225
Accounts Payable
Sep
28
500
Sep
8
2500

Bal. 2000
Capital

Sep
1
7500

Bal. 7500
Revenue

Sep
17
1100

Bal. 1100
Expenses
Sep
15
1000
Sep
18
275


Bal. 1275

Once the account balances are known, the trial balance can be calculated as shown:
Trial Balance

Account Title
Debits
Credits
Cash
6825
Accounts Receivable
275
Parts Inventory
2225
Accounts Payable
2000
Capital
7500
Revenue
1100
Expenses
1275


10600




10600




In this example, the debits and credits balance. This result does not guarantee that there are no errors. For example, the trial balance would not catch the following types of errors:
Transactions that were not recorded in the journal
Transactions recorded in the wrong accounts
Transactions for which the debit and credit were transposed
Neglecting to post a journal entry to the ledger

If the trial balance is not in balance, then an error has been made somewhere in the accounting process. The following is listing of common errors that would result in an unbalanced trial balance; this listing can be used to assist in isolating the cause of the imbalance.
Summation error for the debits and credits of the trial balance
Error transferring the ledger account balances to the trial balance columns
Error in numeric value
Error in transferring a debit or credit to the proper column
Omission of an account
Error in the calculation of a ledger account balance
Error in posting a journal entry to the ledger
Error in numeric value
Error in posting a debit or credit to the proper column
Error in the journal entry
Error in a numeric value
Omission of part of a compound journal entry

The more often that the trial balance is calculated during the accounting cycle, the easier it is to isolate any errors; more frequent trial balance calculations narrow the time frame in which an error might have occurred, resulting in fewer transactions through which to search.

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General Journal Entries Notes

General Journal Entries

The journal is the point of entry of business transactions into the accounting system. It is a chronological record of the transactions, showing an explanation of each transaction, the accounts affected, whether those accounts are increased or decreased, and by what amount.

A general journal entry takes the following form:

Date

Name of account being debited

Amount

Name of account being credited

Amount

Optional: short description of transaction

Consider the following example that illustrates the basic concept of general journal entries.

Mike Peddler opens a bicycle repair shop. He leases shop space, purchases an initial inventory of bike parts, and begins operations. Here are the general journal entries for the first month:

Date

Account Names & Explanation

Debit

Credit

9/1

Cash

7500

Capital

7500

Owner contributes $7500 in cash

to capitalize the business.

9/8

Bike Parts

2500

Accounts Payable

2500

Purchased $2500 in bike parts

on account, payable in 30 days.

9/15

Expenses

1000

Cash

1000

Paid first month's shop rent of $1000.

9/17

Cash

400

Accounts Receivable

700

Revenue

1100

Repaired bikes for $1100; collected $400

cash; billed customers for the balance.

9/18

Expenses

275

Bike Parts

275

$275 in bike parts were used.

9/25

Cash

425

Accounts Receivable

425

Collected $425 from customer accounts.

9/28

Accounts Payable

500

Cash

500

Paid $500 to suppliers for parts

purchased earlier in the month.

Most of the above transactions are entered as simple journal entries each debiting one account and crediting another. The entry for 9/17 is a compound journal entry, composed of two lines for the debit and one line for the credit. The transaction could have been entered as two separate simple journal entries, but the compound form is more efficient.

In this example, there are no account numbers. In practice, account numbers or codes may be included in the journal entries to allow each account to be positively identified with no confusion between similar accounts.

The journal entry is the first entry of a transaction in the accounting system. Before the entry is made, the following decisions must be made:

which accounts are affected by the transaction, and

which account will be debited and which will be credited.

Once entered in the journal, the transactions may be posted to the appropriate T-accounts of the general ledger. Unlike the journal entry, the posting to the general ledger is a purely mechanical process - the account and debit/credit decisions already have been made

.

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Chart of Accounts Notes

Chart of Accounts

The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number. To set up a chart of accounts, one first needs to define the various accounts to be used by the business. Each account should have a number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order. Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards. An example of how the digits might be coded is shown in this list:
Account Numbering

1000 - 1999: asset accounts
2000 - 2999: liability accounts
3000 - 3999: equity accounts
4000 - 4999: revenue accounts
5000 - 5999: cost of goods sold
6000 - 6999: expense accounts
7000 - 7999: other revenue (for example, interest income)
8000 - 8999: other expense (for example, income taxes)
By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.
Defining Accounts

Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. Accounting software packages often come with a selection of predefined account charts for various types of businesses.
There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts. However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.
Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.
Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.
Account Order

Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.
Sample Chart of Accounts

The following is an example of some of the accounts that might be included in a chart of accounts.
Sample Chart of Accounts

Asset Accounts

Current Assets

1000
Petty Cash 1010 Cash on Hand (e.g. in cash registers) 1020 Regular Checking Account 1030 Payroll Checking Account 1040 Savings Account 1050 Special Account 1060 Investments - Money Market 1070 Investments - Certificates of Deposit 1100 Accounts Receivable 1140 Other Receivables 1150 Allowance for Doubtful Accounts 1200 Raw Materials Inventory 1205 Supplies Inventory 1210 Work in Progress Inventory 1215 Finished Goods Inventory - Product #1 1220 Finished Goods Inventory - Product #2 1230 Finished Goods Inventory - Product #3 1400 Prepaid Expenses 1410 Employee Advances 1420 Notes Receivable - Current 1430 Prepaid Interest 1470 Other Current Assets
Fixed Assets

1500
Furniture and Fixtures 1510 Equipment 1520 Vehicles 1530 Other Depreciable Property 1540 Leasehold Improvements 1550 Buildings 1560 Building Improvements 1690 Land 1700 Accumulated Depreciation, Furniture and Fixtures 1710 Accumulated Depreciation, Equipment 1720 Accumulated Depreciation, Vehicles 1730 Accumulated Depreciation, Other 1740 Accumulated Depreciation, Leasehold 1750 Accumulated Depreciation, Buildings 1760 Accumulated Depreciation, Building Improvements
Other Assets

1900
Deposits 1910 Organization Costs 1915 Accumulated Amortization, Organization Costs 1920 Notes Receivable, Non-current 1990 Other Non-current Assets
Liability Accounts

Current Liabilities

2000
Accounts Payable 2300 Accrued Expenses 2310 Sales Tax Payable 2320 Wages Payable 2330 401-K Deductions Payable 2335 Health Insurance Payable 2340 Federal Payroll Taxes Payable 2350 FUTA Tax Payable 2360 State Payroll Taxes Payable 2370 SUTA Payable 2380 Local Payroll TaxesPayable 2390 Income Taxes Payable 2400 Other Taxes Payable 2410 Employee Benefits Payable 2420 Current Portion of Long-term Debt 2440 Deposits from Customers 2480 Other Current Liabilities
Long-term Liabilities

2700
Notes Payable 2702 Land Payable 2704 Equipment Payable 2706 Vehicles Payable 2708 Bank Loans Payable 2710 Deferred Revenue 2740 Other Long-term Liabilities
Equity Accounts


3010
Stated Capital 3020 Capital Surplus 3030 Retained Earnings
Revenue Accounts


4000
Product #1 Sales 4020 Product #2 Sales 4040 Product #3 Sales 4060 Interest Income 4080 Other Income 4540 Finance Charge Income 4550 Shipping Charges Reimbursed 4800 Sales Returns and Allowances 4900 Sales Discounts
Cost of Goods Sold


5000
Product #1 Cost 5010 Product #2 Cost 5020 Product #3 Cost 5050 Raw Material Purchases 5100 Direct Labor Costs 5150 Indirect Labor Costs 5200 Heat and Power 5250 Commissions 5300 Miscellaneous Factory Costs 5700 Cost of Goods Sold, Salaries and Wages 5730 Cost of Goods Sold, Contract Labor 5750 Cost of Goods Sold, Freight 5800 Cost of Goods Sold, Other 5850 Inventory Adjustments 5900 Purchase Returns and Allowances 5950 Purchase Discounts
Expenses


6000
Default Purchase Expense 6010 Advertising Expense 6050 Amortization Expense 6100 Auto Expenses 6150 Bad Debt Expense 6200 Bank Fees 6250 Cash Over and Short 6300 Charitable Contributions Expense 6350 Commissions and Fees Expense 6400 Depreciation Expense 6450 Dues and Subscriptions Expense 6500 Employee Benefit Expense, Health Insurance 6510 Employee Benefit Expense, Pension Plans 6520 Employee Benefit Expense, Profit Sharing Plan 6530 Employee Benefit Expense, Other 6550 Freight Expense 6600 Gifts Expense 6650 Income Tax Expense, Federal 6660 Income Tax Expense, State 6670 Income Tax Expense, Local 6700 Insurance Expense, Product Liability 6710 Insurance Expense, Vehicle 6750 Interest Expense 6800 Laundry and Dry Cleaning Expense 6850 Legal and Professional Expense 6900 Licenses Expense 6950 Loss on NSF Checks 7000 Maintenance Expense 7050 Meals and Entertainment Expense 7100 Office Expense 7200 Payroll Tax Expense 7250 Penalties and Fines Expense 7300 Other Taxes 7350 Postage Expense 7400 Rent or Lease Expense 7450 Repair and Maintenance Expense, Office 7460 Repair and Maintenance Expense, Vehicle 7550 Supplies Expense, Office 7600 Telephone Expense 7620 Training Expense 7650 Travel Expense 7700 Salaries Expense, Officers 7750 Wages Expense 7800 Utilities Expense 8900 Other Expense 9000 Gain/Loss on Sale of Asset
s

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The Balanced Scorecard Notes

The Balanced Scorecard

Traditional financial performance metrics provide information about a firm's past results, but are not well-suited for predicting future performance or for implementing and controlling the firm's strategic plan. By analyzing perspectives other than the financial one, managers can better translate the organization's strategy into actionable objectives and better measure how well the strategic plan is executing.
The Balanced Scorecard is a management system that maps an organization's strategic objectives into performance metrics in four perspectives: financial, internal processes, customers, and learning and growth. These perspectives provide relevant feedback as to how well the strategic plan is executing so that adjustments can be made as necessary. The Balance Scorecard framework can be depicted as follows:
The Balanced Scorecard Framework


Financial
Performance
Objectives
Measures
Targets
Initiatives

Customers
Objectives
Measures
Targets
Initiatives
Strategy
Internal
Processes
Objectives
Measures
Targets
Initiatives

Learning
& Growth
Objectives
Measures
Targets
Initiatives





The Balanced Scorecard (BSC) was published in 1992 by Robert Kaplan and David Norton. In addition to measuring current performance in financial terms, the Balanced Scorecard evaluates the firm's efforts for future improvement using process, customer, and learning and growth metrics. The term "scorecard" signifies quantified performance measures and "balanced" signifies that the system is balanced between:
short-term objectives and long-term objectives
financial measures and non-financial measures
lagging indicators and leading indicators
internal performance and external performance perspectives

Financial Measures Are Insufficient

While financial accounting is suited to the tracking of physical assets such as manufacturing equipment and inventory, it is less capable of providing useful reports in environments with a large intangible asset base. As intangible assets constitute an ever-increasing proportion of a company's market value, there is an increase in the need for measures that better report such assets as loyal customers, proprietary processes, and highly-skilled staff.
Consider the case of a company that is not profitable but that has a very large customer base. Such a firm could be an attractive takeover target simply because the acquiring firm wants access to those customers. It is not uncommon for a company to take over a competitor with the plan to discontinue the competing product line and convert the customer base to its own products and services. The balance sheets of such takeover targets do not reflect the value of the customers who nonetheless are worth something to the acquiring firm. Clearly, additional measures are needed for such intangibles.
Scorecard Measures are Limited in Number

The Balanced Scorecard is more than a collection of measures used to identify problems. It is a system that integrates a firm's strategy with a purposely limited number of key metrics. Simply adding new metrics to the financial ones could result in hundreds of measures and would create information overload.
To avoid this problem, the Balanced Scorecard focuses on four major areas of performance and a limited number of metrics within those areas. The objectives within the four perspectives are carefully selected and are firm specific. To avoid information overload, the total number of measures should be limited to somewhere between 15 and 20, or three to four measures for each of the four perspectives. These measures are selected as the ones deemed to be critical in achieving breakthrough competitive performance; they essentially define what is meant by "performance".
A Chain of Cause-and-Effect Relationships

Before the Balanced Scorecard, some companies already used a collection of both financial and non-financial measures of critical performance indicators. However, a well-designed Balanced Scorecard is different from such a system in that the four BSC perspectives form a chain of cause-and-effect relationships. For example, learning and growth lead to better business processes that result in higher customer loyalty and thus a higher return on capital employed (ROCE).
Effectively, the cause-and-effect relationships illustrate the hypothesis behind the organization's strategy. The measures reflect a chain of performance drivers that determine the effectiveness of the strategy implementation.
Objectives, Measures, Targets, and Initiatives

Within each of the Balanced Scorecard financial, customer, internal process, and learning perspectives, the firm must define the following:
Strategic objectives - what the strategy is to achieve in that perspective.
Measures - how progress for that particular objective will be measured.
Targets - the target value sought for each measure.
Initiatives - what will be done to facilitate the reaching of the target.

The following sections provide examples of some objectives and measures for the four perspectives.
Financial Perspective

The financial perspective addresses the question of how shareholders view the firm and which financial goals are desired from the shareholder's perspective. The specific goals depend on the company's stage in the business life cycle.
For example:
Growth stage - goal is growth, such as revenue growth rate
Sustain stage - goal is profitability, such ROE, ROCE, and EVA
Harvest stage - goal is cash flow and reduction in capital requirements
The following table outlines some examples of financial metrics:

Objective
Specific Measure Growth
Revenue growth
Profitability
Return on equity
Cost leadership
Unit cost



Customer Perspective
The customer perspective addresses the question of how the firm is viewed by its customers and how well the firm is serving its targeted customers in order to meet the financial objectives. Generally, customers view the firm in terms of time, quality, performance, and cost. Most customer objectives fall into one of those four categories. The following table outlines some examples of specific customer objectives and measures:
Objective Specific Measure New products
% of sales from new products
Responsive supply
Ontime delivery
To be preferred supplier
Share of key accounts
Customer partnerships
Number of cooperative efforts


Internal Process Perspective

Internal business process objectives address the question of which processes are most critical for satisfying customers and shareholders. These are the processes in which the firm must concentrate its efforts to excel. The following table outlines some examples of process objectives and measures:
Objective Specific Measure Manufacturing excellence
Cycle time, yield
Increase design productivity
Engineering efficiency
Reduce product launch delays
Actual launch date vs. plan



Learning and Growth Perspective

Learning and growth metrics address the question of how the firm must learn, improve, and innovate in order to meet its objectives. Much of this perspective is employee-centered. The following table outlines some examples of learning and growth measures:
Objective Specific Measure Manufacturing learning
Time to new process maturity
Product focus
% of products representing 80% of sales
Time to market
Time compared to that of competitors



Achieving Strategic Alignment throughout the Organization

Whereas strategy is articulated in terms meaningful to top management, to be implemented it must be translated into objectives and measures that are actionable at lower levels in the organization. The Balanced Scorecard can be cascaded to make the translation of strategy possible.
While top level objectives may be expressed in terms of growth and profitability, these goals get translated into more concrete terms as they progress down the organization and each manager at the next lower level develops objectives and measures that support the next higher level. For example, increased profitability might get translated into lower unit cost, which then gets translated into better calibration of the equipment by the workers on the shop floor. Ultimately, achievement of scorecard objectives would be rewarded by the employee compensation system. The Balanced Scorecardcan be cascaded in this manner to align the strategy thoughout the organization.
The Process of Building a Balanced Scorecard

While there are many ways to develop a Balanced Scorecard, Kaplan and Norton defined a four-step process that has been used across a wide range of organizationsL:
Define the measurement architecture - When a company initially introduces the Balanced Scorecard, it is more manageable to apply it on the strategic business unit level rather than the corporate level. However, interactions must be considered in order to avoid optimizing the results of one business unit at the expense of others.
Specify strategic objectives - The top three or four objectives for each perspective are agreed upon. Potential measures are identified for each objective.
Choose strategic measures - Measures that are closely related to the actual performance drivers are selected for evaluating the progress made toward achieving the objectives.
Develop the implementation plan - Target values are assigned to the measures. An information system is developed to link the top level metrics to lower-level operational measures. The scorecard is integrated into the management system.
Balanced Scorecard Benefits

Some of the benefits of the Balanced Scorecard system include:
Translation of strategy into measurable parameters.
Communication of the strategy to everybody in the firm.
Alignment of individual goals with the firm's strategic objectives - the BSC recognizes that the selected measures influence the behavior of employees.
Feedback of implementation results to the strategic planning process.
Since its beginnings as a peformance measurement system, the Balanced Scorecard has evolved into a strategy implementation system that not only measures performance but also describes, communicates, and aligns the strategy throughout the organization.
Potential Pitfalls

The following are potential pitfalls that should be avoided when implementing the Balanced Scorecard:
Lack of a well-defined strategy: The Balanced Scorecard relies on a well-defined strategy and an understanding of the linkages between strategic objectives and the metrics. Without this foundation, the implementation of the Balanced Scorecard is unlikely to be successful.
Using only lagging measures: Many managers believe that they will reap the benefits of the Balanced Scorecard by using a wide range of non-financial measures. However, care should be taken to identify not only lagging measures that describe past performance, but also leading measures that can be used to plan for future performance.
Use of generic metrics: It usually is not sufficient simply to adopt the metrics used by other successful firms. Each firm should put forth the effort to identify the measures that are appropriate for its own strategy and competitive position
.

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The Accounting Process & Cycle Notes

The Accounting Process
(The Accounting Cycle)
The accounting process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps:
Identify the transaction or other recognizable event.
Prepare the transaction's source document such as a purchase order or invoice.
Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited.
Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order.
Post general journal entries to the ledger accounts.
Note: The above steps are performed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are performed at the end of the accounting period:
Prepare the trial balance to make sure that debits equal credits. The trial balance is a listing of all of the ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been made. The actual sum of each column is not meaningful; what is important is that the sums be equal. Note that while out-of-balance columns indicate a recording error, balanced columns do not guarantee that there are no errors. For example, not recording a transaction or recording it in the wrong account would not cause an imbalance.
Correct any discrepancies in the trial balance. If the columns are not in balance, look for math errors, posting errors, and recording errors. Posting errors include:
posting of the wrong amount,
omitting a posting,
posting in the wrong column, or
posting more than once.


repare adjusting entries to record accrued, deferred, and estimated amounts.
ost adjusting entries to the ledger accounts.
repare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting entries are included. Correct any errors that may be found.
repare the financial statements.
Income statement: prepared from the revenue, expenses, gains, and losses.
Balance sheet: prepared from the assets, liabilities, and equity accounts.
Statement of retained earnings: prepared from net income and dividend information.
Cash flow statement: derived from the other financial statements using either the direct or indirect method.

repare closing journal entries that close temporary accounts such as revenues, expenses, gains, and losses. These accounts are closed to a temporary income summary account, from which the balance is transferred to the retained earnings account (capital). Any dividend or withdrawal accounts also are closed to capital.
ost closing entries to the ledger accounts.
repare the after-closing trial balance to make sure that debits equal credits. At this point, only the permanent accounts appear since the temporary ones have been closed. Correct any errors.
repare reversing journal entries (optional). Reversing journal entries often are used when there has been an accrual or deferral that was recorded as an adjusting entry on the last day of the accounting period. By reversing the adjusting entry, one avoids double counting the amount when the transaction occurs in the next period. A reversing journal entry is recorded on the first day of the new period.
Instead of preparing the financial statements before the closing journal entries, it is possible to prepare them afterwards, using a temporary income summary account to collect the balances of the temporary ledger accounts (revenues, expenses, gains, losses, etc.) when they are closed. The temporary income summary account then would be closed when preparing the financial statements.

d

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Closing Entries Notes

Closing Entries

At the end of the accounting period, the balances in temporary accounts are transferred to an income summary account and a retained earnings account, thereby resetting the balance of the temporary accounts to zero to begin the next accounting period.
First, the revenue accounts are closed by transferring their balances to the income summary account. Consider the following example for which September 30 is the end of the accounting period. If the revenue account balance is $1100, then the closing journal entry would be:
Date
Accounts
Debit
Credit
9/30
Revenue
1100


Income Summary

1100

Next, the expense accounts are closed by transferring their balances to the income summary account. If the expense account balance is $1275, then the closing entry would be:
Date
Accounts
Debit
Credit
9/30
Income Summary
1275


Expenses

1275

At this point, the net balance of the income summary account is a $175 debit (loss). The income summary account then is closed to retained earnings:
Date
Accounts
Debit
Credit
9/30
Retained Earnings
175


Income Summary

175
Finally, the dividends account is closed to retained earnings. For example, if $50 in dividends were paid during the period, the closing journal entry would be as follows:
Date
Accounts
Debit
Credit
9/30
Retained Earnings
50


Dividends

50
Once posted to the ledger, these journal entries serve the purpose of setting the temporary revenue, expense, and dividend accounts back to zero in preparation for the start of the next accounting period.
Note that the income summary account is not absolutely necessary - the revenue and expense accounts could be closed directly to retained earnings. The income summary account offers the benefit of indicating the net balance between revenue and expenses (i.e. net income) during the closing process.

Read more: Closing Entries Notes Notes MBA Accounting Notes http://www.friendsmania.net/forum/mba-accounting-notes-full-free-notes/86777.htm#ixzz1LqjtjECD

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