FUNDAMENTALS OF ACCOUNTANCY BUSINESS AND MANAGEMENT 1 LESSON 10.6.pptx

FUNDAMENTALS OF ACCOUNTANCY BUSINESS AND MANAGEMENT 1

1. Accounting Cycle for Merchandising-Type Businesses: Closing Lesson 10.6 ‹#› Fundamentals of Accountancy, Business, and Management 1 Accountancy, Business, and Management

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3. Every beginning always has an ending. That is why a merchandising business's last cycle is the preparation of closing entries before the start of another fiscal year. ‹#›

4. From here, merchandising businesses may make an economic decision and see the bigger picture of how the business performs. ‹#›

5. ‹#› You have been an accountant for Blue Clothing for a year now. The business provides smart casual clothing for kids and teenagers and has been operating for several years. Despite being in the industry for several years, Blue Clothing does not have the resources for accounting software due to its budget limitations. As the business's accountant, it means that you must prepare all steps in the accounting cycle manually. Blue Clothing Line

6. ‹#› It is the end of the month, and you have prepared a post-closing trial balance. Before submitting the report, you noticed that revenue accounts are still listed in the trial balance. This situation leaves you with the task of making a sound decision on what to do with this kind of error before submitting the report to your supervisor. Blue Clothing Line

7. Why is it an error to have revenue accounts on the post-closing trial balance? What should you do to fix this error? What would be the outcome if you disregarded the error and proceeded with reporting the financial data? ‹#› Questions to Ponder

8. Complete the accounting cycle of a merchandising business (ABM_FABM11-IVe-j-40). ‹#›

9. ‹#› At the end of this lesson, you should be able to do the following: Define closing entries. Identify the purpose of closing entries. Prepare a post-closing trial balance.

10. ‹#› What is the importance of a closing entry in a merchandising business?

11. a journal entry prepared at the end of an accounting period represents the transfer of balances from a temporary account to a permanent account Closing Entry ‹#›

12. Merchandising businesses use closing entries to reset the balances of temporary accounts. Closing Entry ‹#›

13. Definition and Purpose of Closing Entries Temporary Accounts comprise income statement accounts, such as sales and expense accounts. Income Summary used to transfer the balances of temporary accounts to a business's capital account, w hich is a permanent account on the balance sheet ‹#›

14. In this step, you debit sales, purchase returns and allowances, purchase discounts, and credit the income summary. Step 1: Close revenue accounts to income summary. Steps in Closing Temporary or Nominal Accounts ‹#›

15. Closing Temporary or Nominal Accounts made at the end of an accounting period to prepare temporary accounts for the next period Closing journal entries ‹#›

16. Step 1: Close revenue accounts to income summary. Steps in Closing Temporary or Nominal Accounts ‹#› Sales xxx Purchase Returns and Allowances xxx Purchase Discount xxx Income Summary xxx

17. In this step, you debit the income summary and credit expenses and contra-revenues accounts. Step 2: Close expense and contra-revenue accounts to income summary. Steps in Closing Temporary or Nominal Accounts ‹#›

18. Step 2: Close expense and contra-revenue accounts to income summary. Steps in Closing Temporary or Nominal Accounts ‹#› Income Summary xxx Purchases xxx Sales Returns and Allowances xxx Sales Discount xxx Cost of goods sold xxx Expenses xxx

19. In this step, you debit the income summary and credit the capital account or vice versa, depending on whether there is a net income or net loss. Step 3: Close income summary account to owner’s capital. Steps in Closing Temporary or Nominal Accounts ‹#›

20. If the balance in the Income Summary before closing is a credit balance (company has a net income), you will debit Income Summary and credit Capital . If the balance in the Income Summary before closing is a debit balance (company has a net loss), you will credit Income Summary and debit Capital . Step 3: Close income summary account to owner’s capital. Steps in Closing Temporary or Nominal Accounts ‹#›

21. Step 3: Close income summary account to owner’s capital. Steps in Closing Temporary or Nominal Accounts ‹#› To close the income summary when the company has a net income: Income Summary xxx Owner’s Capital xxx

22. Step 3: Close income summary account to owner’s capital. Steps in Closing Temporary or Nominal Accounts ‹#› To close the income summary when the company has a net loss: Owner’s Capital xxx Income Summary xxx

23. In this step, you debit the owner's capital account and credit the owner's drawing account. Step 4: Close the drawing account to the owner's capital. Steps in Closing Temporary or Nominal Accounts ‹#›

24. Step 4: Close the drawing account to the owner's capital. Steps in Closing Temporary or Nominal Accounts ‹#› Owner’s Capital xxx Owner’s Drawing xxx

25. Dream Athletics Co. is a sports apparel shop that provides different clothing types that are strategically designed for a specific sport. Below is the Adjusted Trial Balance of the business for the year one of its operations. Dream Athletics Co. ‹#› Dream Athletics Co. Unadjusted Trial Balance

26. Dream Athletics Co. ‹#› Step 1: Close revenue accounts to income summary. Sales 30,000 Income Summary 30,000

27. Dream Athletics Co. ‹#› Step 2: Close expense accounts to income summary. Income Summary 129,000 Purchases 50,000 Utilities Expense 14,000 Salaries Expense 65,000

28. Dream Athletics Co. ‹#› Step 3: Close income summary to owner’s capital. Income Summary 129,000 30,000 99,000 Dream, Capital 99,000 Income Summary 99,000

29. Dream Athletics Co. ‹#› Step 4: Close the drawing account to the capital account. Dream, Capital 48,000 Dream, Drawings 48,000

30. What will be the outcome if a business chooses not to close its temporary accounts before starting a new accounting period? ‹#› 1 Answer area

31. Preparation of Post-Closing Trial Balance ‹#› List all balance sheet accounts that contain non-zero balances at the end of an accounting period. Used to ascertain that the total of all debit balances equals the total of all credit balances.

32. Preparation of Post-Closing Trial Balance ‹#› (Name of Business) Post-Closing Trial Balance December XX, 202x Accounts Debit Credit

33. Using the financial data of Dream Athletics Co., get the ending capital account of the business. Preparation of Post-Closing Trial Balance ‹#› Dream, Capital 48,000 1,500,000 99,000 1,353,000

34. Preparation of Post-Closing Trial Balance ‹#› Dream Athletics Co. Unadjusted Trial Balance December 31, 202x Account Title Debit Credit Cash 1,300,500 Accounts Receivable 30,000 Supplies 6,500 Equipment 15,000 Furniture and Fixtures 15,000 Prepaid Insurance 12,000 Accounts Payable 6,000 Unearned Revenue 20,000 Dream, Capital 1,353,000 1,379,000 ___________ 1,379,000 ___________

35. ‹#› What is the difference between post-closing, unadjusted, and adjusted trial balances? 2 Answer area

36. Automation of the Accounting Cycle ‹#› Merchandising companies must close their books at the end of each fiscal year to organize their annual financial statements and tax returns. However, most small and medium-sized companies manually prepare monthly financial statements and close their books, creating bottlenecks in the financial reporting process. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

37. Automation of the Accounting Cycle ‹#› Management of multiple data from different departments, the lengthy process of closing the accounting cycle, and complex regulatory requirements are some of the prominent reasons why the closing phase has naturally been daunting for bookkeepers and accountants. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

38. Automation of the Accounting Cycle ‹#› With the rise of technology and modernization, most businesses leverage their operations through automation. Historically, large and multinational companies pushed the need for Enterprise Resource Planning (ERP) software to manage daily activities in accounting, procurement, planning, etc. But as businesses become complex and transparency has been demanded across all organizations, more and more entities are resorting to automated systems and/or ERP systems. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

39. Automation of the Accounting Cycle ‹#› Multiple software has provided services to businesses to date. Oracle, SAP, Quickbooks, and Xero are the most prominent systems currently used by different companies, with more service providers entering the ERP Market. Their services include but are not limited to automating journal entries and financial statements, data analysis, intercompany tasks, and database management. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

40. Automation of the Accounting Cycle ‹#› One of the major advantages of adopting an ERP system is the orchestration of accounting and other business processes, making it easy to organize data and make informed decisions. On the other hand, automating the journal entries almost removes human error and eliminates inefficiencies, especially in the closing process. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

41. Automation of the Accounting Cycle ‹#› Imagine thousands of journal entries to be consolidated every month-end. Automation provides confidence that the financial data is processed accordingly. With this, accountants can now focus on analyzing and presenting the information. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

42. Automation of the Accounting Cycle ‹#› Overall, automating the accounting cycle reduces errors and inefficiencies, provides transparency compliance and enhances employee satisfaction. In the long run, companies that adopt an ERP system also realize time and cost savings, creating better opportunities for growth and expansion. Eshghi, Bardia, “4 Use Cases and 5 Benefits of Financial Close Autonation,” AI Multiple, December 20, 2021, https://research.aimultiple.com/financial-close-automation/, last accessed on June 24, 2022.

43. ‹#› Closing entries prepare a company for the next accounting period by zeroing out any outstanding balances in accounts that should not be transferred over to the next accounting period. Temporary accounts (revenues and expenses), used to prepare the income statement at the end of the accounting period, should be closed to the income summary account. The income summary is used to transfer the balances of temporary accounts to a business's capital account. A post-closing trial balance records all balance sheet accounts that contain non-zero balances at the end of an accounting period.

44. ‹#›

45. True or False. A post-closing trial balance is a list of all accounts and their balances after the account balances have been updated for adjusting entries. ‹#› True False

46. True or False. Closing entries transfer the balances of all temporary accounts to the balance of the Cash account. ‹#› True False

47. True or False. The closing entry for expense accounts includes a debit to the owner's capital and a credit to all expense accounts. ‹#› True False

48. True or False. After closing entries are prepared, the balance of the owner's capital is updated. ‹#› True False

49. True or False. The post-closing trial balance is a list of all accounts and their balances after the account balances have been updated for closing entries. ‹#› True False

50. Preparing Closing Entries Venus Co. is a merchandising business that retails laboratory supplies to the market. Before the accounting year ends, the accountants of Venus Co. must prepare the closing entries before a new accounting period starts. Below are the ending balances of every account used by the business. Prepare closing entries using the steps provided in the discussion. ‹#›

51. Preparing Closing Entries ‹#› Cash 2,194,000 Unearned Revenue 10,000 Purchases 60,000 Accounts Receivable 50,000 Venus, Capital 2,500,000 Purchase Discount 1,000 Supplies 30,000 Venus, Drawings 5,000 Utilities Expense 56,000 Prepaid Insurance 21,000 Sales 70,000 Salaries Expense 102,000 Accounts Payable 5,000 Sales Discount 1,000 Rent Expense 30,000

52. Preparing Closing Entries ‹#› Answer area

53. Answer the following questions: What is an income summary and how does this relate to preparation of closing entries? ‹#› Answer area

54. Answer the following questions: What is the financial outcome for businesses who skip the preparation of closing entries and a post-closing trial balance prior to the start of another accounting period? ‹#› Answer area

55. Slide 1: Business Calculation Finance , by mohamed_hassan is free to use under the Pixabay License via Pixabay . Slide 3: Detective Male Adult , by mohamed_hassan is free to use under the Pixabay License via Pixabay .

56. Accountant Calculator Accounting , by mohamed_hassan is free to use under the Pixabay License via Pixabay . ‹#›