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Week 5 accounting

by: Sophie Levy

Week 5 accounting ACCN 2010

Sophie Levy

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closing entry notes
Financial Accounting
Christine Smith
Class Notes
25 ?




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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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