Formal Financial Statements

Closing The Books

Prepare Income Statement

All the information that we need to prepare our Income Statement is found in the Revenue and Expense Accounts Section of our After Closing Trial Balance Worksheet. All we need to do is transfer all the figures from our Worksheet to our formal Income Statement.

Don't Believe me ?

Income Statement Amounts

Just Sum the Revenues and Subtract the Cost of Goods Sold and Operating Expenses to arrive at the Net Income/Loss amount.

This is the amount that is transferred (closed) to the Owner's Capital Account with a Closing Entry.

Shabby Computer Systems Income Statement For Year Ended December 31, xxxx
Sales

Consulting Services	$50,000
Computer Sales	100,000
Total Sales		$150,000
Cost Of Goods Sold		72,500
Gross Profit		$77,500
Operating Expenses
Rent Expense	6,000
Utilities Expense	4,800
Office Supplies	1,200
Insurance Expense	6,000
Vehicle Operation Expense	3,600
Maintenance & Repairs	3,100
Depreciation Expense	3,100
Bad Debt Expense	1,000
Bank Charges	240
Advertising Expense	4,250
Professional Fees	2,250
Total Expenses		35,340
Net Income		$42,160

Prepare Capital Statement

All this statement does is show what caused the change in the Owner's Capital Account for the year. All the information needed to prepare this statement is contained in the Owner's Capital Account in our After Closing Trial Balance Worksheet.

Don't believe me ?

Capital Statement Amounts

Prepare Balance Sheet

All the information that we need to prepare our Balance Sheet is found in the Balance Sheet Area of our After Closing Trial Balance Worksheet. All we need to do is transfer all the figures from the After Closing Trial Balance Column to our formal Balance Sheet.

Don't believe me ?

Balance Sheet Amounts

It's really quite simple. After all our closing entries have been posted, the only accounts that have a balance are our Balance Sheet Accounts- Assets, Liabilities, and Equity. Of course as you already know, the Balance Sheet is only made up of the Asset, Liability, and Equity Accounts.

This layout is called the account form. In this form the major categories are presented side by side.

Another layout sometimes used is called the report form. In this form the major categories are stacked on top of each other. An example of the report form follows.

General Journal

Finishing Touches

Hang tight, we've almost completed closing our books. Just a few more tasks. We've been using Worksheets as an aid for closing our books and recording our adjusting and closing entries in these worksheets.

It's time to use this information to prepare and record these entries in our formal General Journal and post our General Journal Entries to our formal General Ledger and any Subsidiary Ledgers.

Well, let's prepare our Formal General Journal Entries and Post To Our General Ledger.

General Journal Formal Adjusting Entries

General Journal				Page
Entry No	Date	Account Name	Post Ref.	Debit	Credit
Adjusting Entries
1	Dec 31, xxxx	Office Supplies	X	1200
		Office Supplies Inventory	X		1200
Record Supplies Expense and Adjust Inventory Account
2	Dec 31, xxxx	Bad Debt Expense	X	1000
		Accounts Receivable	X/X		1000
Record Write off of Bad Debt of Joe The Deadbeat
3	Dec 31, xxxx	Insurance Expense	X	6000
		Prepaid Insurance	X		6000
Record Insurance Expense & Adjust Prepaid Balance
4	Dec 31, xxxx	Inventory For Resale	X	70000
		Cost Of Goods Sold	X	72500
		Purchases	X		70000
		Inventory For Resale	X		72500
Record Cost Of Goods Sold & Adjust Inventory For Resale Balance
5	Dec 31, xxxx	Bank Charges	X	240
		Cash	X		240
Record Bank Charges & Adjust Cash
6	Dec 31, xxxx	Depreciation Expense	X	3100
		Truck	X		3100
Record Depreciation Expense & Adjust Truck Balance
7	Dec 31, xxxx	Maintenance & Repairs Expense	X	500
		Other Accruals	X		500
Record Unrecorded & Unbilled Repair Expense & Liability
8	Dec 31, xxxx	Professional Fees	X	250
		Advertising Insurance	X		250
Correct Error In Recording Expenses

Where did we get the information for preparing the formal journal entries for our Adjusting Entries ? Would you believe our Adjusted Trial Balance Worksheet.

Adjusted Trial Balance Worksheet

The X in the Posting Reference Column (Post Ref.) tells us that the entry has been posted to the General Ledger Accounts. The X/X denotes that the entry has been posted to the General Ledger Account and Subsidiary Accounts Receivable Ledger.

General Journal Formal Closing Entries

General Journal				Page
Entry No	Date	Account Name	Post Ref.	Debit	Credit
Closing Entries

Close Drawing Account
a	Dec 31, xxxx	Shabby Computer Systems, Capital	X	24000
		Shabby Computer Systems, Drawing	X		24000
Close Drawing Account to Capital Account

Close Income/Expense Accounts
b	Dec 31, xxxx	Consulting Services	X	50000
		Income Summary	X		50000
Close Revenue Account Consulting Services to Income Summary Account
c	Dec 31, xxxx	Computer Sales	X	100000
		Income Summary	X		100000
Close Revenue Account Computer Sales To Income Summary Account
d	Dec 31, xxxx	Cost of Goods Sold	X	72500
		Income Summary	X		72500
Close Expense Account Cost of Goods Sold To Income Summary Account
e	Dec 31, xxxx	Rent Expense	X		6000
		Income Summary	X	6000
Close Expense Account Rent To Income Summary Account
f	Dec 31, xxxx	Utilities	X		4800
		Income Summary	X	4800
Close Expense Account Utilities To Income Summary Account
g	Dec 31, xxxx	Office Supplies	X		1200
		Income Summary	X	1200
Close Expense Account Office Supplies To Income Summary
h	Dec 31, xxxx	Insurance Expense	X		6000
		Income Summary	X	6000
Close Expense Account Insurance To Income Summary Account
i	Dec 31, xxxx	Vehicle Operation Expense	X		3600
		Income Summary	X	3600
Close Expense Account Vehicle Operation To Income Summary Account
j	Dec 31, xxxx	Maintenance & Repairs	X		2900
		Income Summary	X	2900
Close Expense Account Maintenance & Repairs To Income Summary Account
k	Dec 31, xxxx	Depreciation Expense	X		3100
		Income Summary	X	3100
Close Expense Account Depreciation To Income Summary Account
l	Dec 31, xxxx	Bad Debt Expense	X		1000
		Income Summary	X	1000
Close Expense Account Bad Debts To Income Summary Account
m	Dec 31, xxxx	Bank Charges	X		240
		Income Summary	X	240
Close Expense Account Bank Charges To Income Summary Account
n	Dec 31, xxxx	Advertising	X		4250
		Income Summary	X	4250
Close Expense Account Advertising To Income Summary Account
o	Dec 31, xxxx	Professional Fees	X		2250
		Income Summary	X	2250
Close Expense Account Professional Fees To Income Summary Account
p	Dec 31, xxxx	Income Summary Account	X	42160
		Shabby Computer Systems, Capital	X		42160
Close Income Summary Account And Transfer Ending Balance To Owner's Capital Account (Balance Is Profit/Loss For Period)

Where did we get the information for preparing the formal journal entries for our Closing Entries ? Would you believe our After Closing Trial Balance Worksheet.

After Closing Trial Balance Worksheet

The X in the Posting Reference Column (Post Ref.) tells us that the entry has been posted to the General Ledger Accounts.

What's Next ?

Closing The Books Video