Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan) Chapter 9 Accounting Cycle of a Service Business Learning Objectives 1. Prepare a worksheet. 2. Prepare closing entries. 3. Prepare a balance sheet and income statement of a service business. 4. Prepare reversing entries.
Chapter 9: Accounting Cycle of a Service
Business (FAR by: Millan) Worksheet A worksheet is an analytical device used to facilitate the gathering of data for adjustments, the preparation of financial statements, and closing entries.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan) Financial statements • The financial statements are the end product of the accounting process. Information from the journal and the ledger are meaningless to most users unless they are summarized and communicated through the financial statements.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
The major processes in accounting are summarized below:
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Financial Statements • Statement of financial position (or Balance sheet) – shows information on assets, liabilities and equity. • Statement of profit or loss (or Income statement) – shows information on income and expenses, and consequently, the profit or loss for the period.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Closing entries • Closing entries are entries prepared at the end of the accounting period to “zero out” all nominal accounts in the ledger. This is done so that the transactions during the period will not commingle with the transactions in the next period.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Closing entries • Closing entries are prepared as follows: a. All income accounts are debited and all expense accounts are credited. The resulting balance is recorded in a clearing account called the “Income summary.” b. The balance of “Income summary” is closed to the “Owner’s capital” account. c. Any balance in the “Owner’s drawings” account is closed to the “Owner’s capital” account.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan) Reversing Entries • Reversing entries are entries usually made on the first day of the next accounting period to reverse certain adjusting entries made in the immediately preceding period.
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
Adjusting entries that may be reversed
1. Accruals for income or expense
2. Prepayments initially recorded using the expense method 3. Advanced collections initially recorded using the income method
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)
APPLICATION OF CONCEPTS
PROBLEM 1: FOR CLASSROOM DISCUSSION
Chapter 9: Accounting Cycle of a Service Business (FAR by: Millan)