Week 5 accounting
Week 5 accounting ACCN 2010
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This 4 page Class Notes was uploaded by Sophie Levy on Monday October 3, 2016. The Class Notes belongs to ACCN 2010 at Tulane University taught by Christine Smith in Fall 2016. Since its upload, it has received 3 views. For similar materials see Financial Accounting in Accounting at Tulane University.
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Date Created: 10/03/16
Week 5 Tuesday, September 27, 2016 11:01 AM CCS Continuation Next step in Accounting Cycle after Balance Sheet: Close Nominal Accounts Closing Process 1. Closing Entries a. Close revenue account i. It has a credit balance in Fees Earned, so we must debit it for the equal amount ii. Must debit an account– we create Income Summary in the Liabilities side iii. No more revenue!! b. Close expense account(s) i. All have debit balances, so we credit each expense account for the equal amount ii. Must debit Income Summary the added up expenses (9,770, which is the same as the total expenses as reported on our income statement) c. Close Income Summary (b/c it has not been adjusted) i. We debit it for the amount ii. We credit Christine Smith Capital the same anitt's hers now d. Close Drawing Account i. Has a debit of $750, so we credit it for the amount ii. We debit C smith Capital the same amount (what we wanted to do earlier, Drawing is just a temporary account) 2. Post Closing Trial Balance a. No revenues or expenses appear on this b. Look at existing General Ledger accounts, draw totals in each one, then transfer over debits and credits c. Note: combine C Smith Capital and C Drawing d. Know success when i. Debits=credits ii. No temporary/income statement/nominal accounts (because they equal zero) iii. General ledger balance ties to C Capital and it equals the statement c. Note: combine C Smith Capital and C Drawing d. Know success when i. Debits=credits ii. No temporary/income statement/nominal accounts (because they equal zero) iii. General ledger balance ties to C Capital and it equals the statement of owner's equity 1) Nominal Accounts/income statement accounts: Accounts south of double horizontal line - Because we want the increases in equity (revenue) and decreases in equity (expenses) to be 0 as we begin the next period so that we can measure again - After closing revenue and expenses, we can say that all nominal accounts are 0! - Income Summary: created in Liabilities after closing Revenue and Expenses - Net Loss: expenses exceed revenue - Net Profit: revenue exceeds expenses (Should apply this all to the General Ledger): General Journal Closing Entries Date Trans # Account Debit Credit 7/31 Closing Entry 1 Fees Earned $11,000 Income Summary 11,000 7/31 CE2 Wages Expense 6,000 Delivery Expense 450 Rent Expense 1,000 Insurance Expense 100 Supplies Expense 2,100 Dep. Expense Equipment 50 Dep. Expense Delivery 70 Income Summary 9,770 7/31 CE3 Income Summary 1,230 C Smith Capital 1,230 7/31 CE4 C Smith drawing Account 750 C Smith Capital 750 CCS CCS Post Closing Trial Balance 7/31/2016 Account Debit Credit Cash 150 Supplies 1,200 Etc… C Smith Capital 10,480 Total 17,350 17,350 Other stuff to talk about: Business Activities (organized in natural chronology that it occurs) 1. Financing activities: get business IN business "it takes money to make money" a. Ex: C Capital's contribution of $10,000 cash 2. Investing activities: after initial resources, it can engage in this–acquisition of assets that lets it do what it needs to do a. Ex: Buying delivery van 3. Operating activities: all of the transactions that "bathe over the entity day to day in the pursuit of that goal" a. Ex: catering! Revenue transactions, expenses incurred… Ratio Analysis:w hen we prepare our story, we spread that information out. Looking at absolute numbers doesn't give us much infornso we have developed ratio analysis - Helps us determine good and bad - How we analyze/compare ratios 1. Intra-‐company: same company, different periods 2. Inter-‐company: different companies, same period 3. Against industry averages: company vs. averages - Types of Ratios 1. Profitability ratios: target "how well did we do at what we set out to do as a living?" i. Ex: profit margins, earnings per share 2. Liquidity ratios : "how equipped am I to meet my short term obligations?" i. Ex: Working Capital: take current assets and subtract from that your 1. Profitability ratios: target "how well did we do at what we set out to do as a living?" i. Ex: profit margins, earnings per share 2. Liquidity ratios : "how equipped am I to meet my short term obligations?" i. Ex: Working Capital: take current assets and subtract from that your current liabilities ($10,7506,750= working capital of $4,000) ii. Ex: Current Ratio: Current assets/current liabilities (10,750/6,750= 1.5926 )–better indicator because it shows you a better ratio 3. Solvency ratios: speaks to our ability to continue to operate "how well positioned are we?" i. Ex: Debt to asset ratio: total liabilities/total assets (6,750/17,230= 0.3918) ii. Differs greatly depending on what business, how long you've been in business, etc. Is debt bad? - From a business standpoint, we have to have debt - Incurring debt allows us operate - Opportunity costs: value of the next best thing In life, we need to look at these to come to good decisions ○
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