Completing the

Topic
Accounting Cycle

6 Lecture 13
 REVENUES
REVENUES AND
AND EXPENSES
EXPENSES
 Revenues and expenses are two
categories of equity.
 Revenues increases Equity result from
products and services provided to
customers.
 Expenses decreases Equity result from
assets and services used in a
company’s operation
 MEASUREMENT
MEASUREMENT OF
OF
BUSINESS
BUSINESS INCOME
INCOME
 Example of revenue account
are:
• Sales, Commissions Earned,
Professional Fees Earned,
Rental Revenue, and Interest
Revenue.
 REVENUES
REVENUES AND
AND EXPENSES
EXPENSES
 Example of expenses are:
• Advertising Expense, Store
Supplies Expense, Office
Salaries Expense, Sale Salaries
Expense, Rent Expense, Utilities
Expense, Insurance Expense
 MEASUREMENT
MEASUREMENT OF
OF
BUSINESS
BUSINESS INCOME
INCOME
 Revenues are defined as “an increase
in economic benefits during the
accounting period in the form of inflows
or enhancements of assets or
decreases of liabilities that result in
increases in equity, other those
relating to contributions from equity
participants”
 MEASUREMENT
MEASUREMENT OF
OF
BUSINESS
BUSINESS INCOME
INCOME
 This definition encompasses both:
• Revenues arising from the ordinary
course of business such as sales of
goods or rendering of services or
• Gains, realised or unrealised, from
other activities, such as gain on sale
of fixed assets or gain on exchange
differences
 MEASUREMENT
MEASUREMENT OF
OF
BUSINESS
BUSINESS INCOME
INCOME
 Expenses and Revenue Concepts
Expenses are defined in the Accounting
Framework as “decrease in economic
benefits during the accounting period in the
form of outflows or depletions of assets or
incurrence of liabilities that result in
decreases in equity, other than relating to
distributions to equity participants”
 MEASUREMENT
MEASUREMENT OF
OF
BUSINESS
BUSINESS INCOME
INCOME
 The definition of expenses
encompasses both:
• Expenses that arise in the ordinary
course of business such as cost of goods
sold or services provided, salaries and
depreciation; and
• Losses, realised or unrealised, from any
other activities, such as loss on sale of a
property or a loss on exchange difference
 Closing Process
 Resets revenue,
expense and Identify accounts for
withdrawal account closing.
balances to zero at
the end of the period.
Record and post closing
 Helps summarize a entries.
period’s revenues
and expenses in the
Income Summary
Prepare post-closing trial
account. balance.
 Temporary and Permanent
Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
Theclosing
closingprocess
process
applies
appliesonly
only to
to
temporary
temporaryaccounts.
accounts.
Recording
Recording Closing
Closing Entries
Entries

Close
Close Revenue
Revenue accounts
accounts
to
to Income
Income Summary.
Summary. Let’s see how the
closing process

Close
Close Expense
Expense accounts
accounts works!
to
to Income
Income Summary.
Summary.


Close
Close Income
Income Summary
Summary
account
account to
to Owner’s
Owner’s
Capital.
Capital.


Close
Close Withdrawals
Withdrawals to
to
Owner’s
Owner’s Capital.
Capital.
Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 25,000

10,000 25,000
Income Summary

Owner's Capital Withdrawals Account

30,000 5,000

30,000 Balances before closing. 5,000

Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000

Owner's Capital 25,000 Withdrawals Account

30,000 5,000

30,000 5,000
Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000
Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000

Owner's Capital 15,000 Withdrawals Account

30,000 5,000

The
Thebalance
balancein
inIncome
Income
30,000 Summary
Summaryequals
equalsnet
net 5,000
income.
income.
Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000
Close Income 25,000 25,000
Summary to
Owner’s Capital.
- -
Income Summary
10,000 25,000
15,000

Owner's Capital - Withdrawals

Withdrawals Account
Account
30,000
30,000 5,000
5,000
15,000

45,000 5,000
5,000
Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000 25,000 25,000

- -
Income Summary
10,000 25,000
15,000

-
Owner's Capital Withdrawals Account
5,000 30,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
40,000
Capital.
 Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.
 Close Revenue
accounts to
Income Summary.
  Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

D e c . 3 C1 o n su l ti n g r e v e n u e 7,850
R e n ta l r e v e n u e 300
I n c o m e su m m a r y 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.
 Close
 Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

Consulting Revenue
7,850 7,850

-
Income Summary
7,850
300
Rental Revenue
300 300

-
 Close Expense
accounts to
Income Summary.
  Close
 Close Expense
Expense Accounts
Accounts to
to Income
Income
Summary
Summary

Dec. 31 Income summary 4,365

Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts after

posting this closing entry.
 

Close
Close
CloseExpense
Expense Accounts
Accounts
Accounts to
to
toIncome
Close Expense Accounts toIncome
Expense Income
Income
Summary
Summary
Summary
Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense 4,365 7,850
1,610 1,610 1,050 1,050 300
3,785
- -

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
Close Income
Summary to
Owner’s Capital.
  Close
 Close Income
Income Summary
Summary to
to Owner’s
Owner’s
Capital
Capital

Dec. 31 Income summary 3,785

C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts after

posting this closing entry.


Close
Close
Close Income
IncomeSummary
Summary
Summary to
to
toOwner’s
Close Income Summary toOwner’s
Income Owner’s
Owner’s
Capital
Capital
Capital
Capital

C. Taylor, Capital Income Summary

30,000 4,365 7,850
3,785 3,785 300
-
33,785
 Close
Withdrawals to
Owner’s Capital.
  Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital

Dec. 31 C. Taylor, Capital 600

C. Taylor, Withdrawals 600

Now, let’s look at the ledger accounts after

posting this closing entry.
 Close
 Close Withdrawals
Withdrawals to
to Owner’s
Owner’s
Capital
Capital

C. Taylor,
Withdrawals C. Taylor, Capital
600 600 600 30,000
3,785

- 33,185
Post-Closing
Post-Closing Trial
Trial Balance
Balance

Let’s look at
 List
List of
of permanent
permanent FastForward’s
accounts
accounts and
and their
their post-closing trial
balances balance.
balances after
after posting
posting
closing
closing entries.
entries.

 Total
Total debits
debits and
and
credits
credits must
must be
be equal.
equal.
Post-Closing
Post-Closing Trial
Trial Balance
Balance
Let’s discuss
the
components
of a classified
balance
sheet.
 Classified
Classified Balance
Balance Sheet
Sheet
Categories of a Classified Balance Sheet
Assets Liabilities and Equity
Current Assets Current Liabilities
Noncurrent Assets Noncurrent Liabilities
Long-Term Investments Equity
Plant Assets
Intangible Assets

Current items are those expected to come due (both

collected and owed) within the longer of one year or
the company’s normal operating cycle.
 Snowboarding Components
Balance Sheet
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Current assets are expected
Land held for future expansion
Total investments 67,500
to be
48,000

sold, collected,$ or
Plant assets
Store equipment
used within one
33,200

year or the company’s

Less accumulated depreciation
Buildings
8,000
170,000
25,200
operating
cycle. 73,200
Less accumulated depreciation
45,000 125,000
Land
Total plant assets 223,400
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Store equipment $ 33,200
Less accumulated depreciation 8,000 25,200
Buildings 170,000
Long-term investments
Less accumulated depreciation
Land
125,000
73,200
are
45,000

expected to be held for the

Total plant assets
Intangible assets
longer
223,400
10,000

of one year or the operating

Total assets
cycle.
$ 343,800
 Snowboarding Components
Balance Sheet
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Plant assets are tangible long-lived
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
assets used to produce 67,500
Total investments
Plant assets
or sell
products $and
Store equipment 33,200 services.
Less accumulated depreciation
8,000 25,200
Buildings 170,000
Less accumulated depreciation 45,000 125,000
Land 73,200
Total plant assets 223,400
Intangible assets 10,000
Total assets $ 343,800
 Snowboarding Components
Balance Sheet
January 31, 2009
ASSETS
Current assets
Cash $ 6,500
Short-term investments 2,100
Accounts receivable 4,400
Merchandise inventory 27,500
Prepaid expenses 2,400
Total current assets $ 42,900
Long-term investments
Notes receivable 1,500
Investments in stocks and bonds 18,000
Land held for future expansion 48,000
Total investments 67,500
Plant assets
Store equipment $ 33,200

Intangible assets are

Buildings long-term
Less accumulated depreciation
25,200 8,000
170,000

resources used to produce or sell

Less accumulated depreciation
125,000 45,000
Land 73,200
Total plant assets 223,400
products and services and
Intangible assets 10,000 that
Total assets $ 343,800
lack physical form.
 Snowboarding Components
Balance Sheet
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Current liabilities are obligations due

within the longer of one year or the
company’s operating cycle.
 Snowboarding Components
Balance Sheet
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Long-term liabilities are obligations

not due within the longer of one year
or the company’s operating cycle.
 Snowboarding Components
Balance Sheet
January 31, 2009
LIABILITIES
Current liabilities
Accounts payable $ 15,300
Wages payable 3,200
Notes payable 3,000
Current portion of long-term liabilities 7,500
Total current liabilities $ 29,000
Long-term liabilities:
Notes payable (net of current portion) 150,000
Total liabilities $ 179,000
EQUITY
T. Hawk, Capital 164,800
Total liabilities and equity $ 343,800

Equity is the owner’s claim on the

assets.
End of Lecture