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Illustrated Solution for Problem 412:

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Illustrated Solution for Problem 4-12: Unifying Concepts: ... The expenses account is also a nominal account and is debited to Retained Earnings to close it. ... – PowerPoint PPT presentation

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Title: Illustrated Solution for Problem 412:


1
Chapter 4
Completing the Accounting Cycle
Illustrated Solution for Problem 4-12 Unifying
Concepts Analysis of Accounts
2
Account Balances at 12/31/03
3
Account Classifications
A Asset L Liability OE Owners
Equity R Revenue E Expense
4
Total Assets at 12/31/03
  • Total assets at 12/31/03
  • Cash 122,000
  • Accounts Receivable 98,000
  • Inventory 320,000
  • Supplies on Hand 20,000
  • Furniture (net) 80,000
  • Buildings (net) 480,000
  • Land 520,000
  • Total assets 1,640,000

5
Net Income for the Year
  • Net Income for year ended 12/31/03
  • Sales Revenues 830,000
  • Less Cost of Goods Sold (440,000)
  • Salaries Expense (100,000)
  • Net Income 290,000

6
The Closing Process
Revenues
Retained Earnings
xxx
Beg. Bal. xxx
Bal. xxx
Revenues
Since the revenues account is a nominal account,
it is closed at the end of the period to Retained
Earnings.
7
The Closing Process
The expenses account is also a nominal account
and is debited to Retained Earnings to close it.
Retained Earnings
Beg. Bal. xxx
Revenues
Expenses
Expenses
xxx
Bal. xxx
8
The Closing Process
The dividends account, which is also nominal, is
credited to close out the balance.
Retained Earnings
Beg. Bal. xxx
Revenues
Expenses
Dividends
Dividends
xxx
Bal. xxx
9
The Closing Process
Retained Earnings is a real account and always
carries a balance.
Retained Earnings
Beg. Bal. xxx
Revenues
Expenses
Dividends
End. Bal. xxx
Net income for the period is determined by these
two entries.
10
Retained Earnings at 12/31/03
Since a beginning Retained Earnings balance is
not known, the amount of ending Retained Earnings
must be computed by using the basic accounting
equation Assets Liabilities Owners
Equity
11
Retained Earnings at 12/31/03
Since a beginning Retained Earnings balance is
not known, the amount of ending Retained Earnings
must be computed by using the basic accounting
equation Assets Liabilities Owners
Equity
Total Assets (1,640,000) Total Liabilities
(240,000 500,000) Owners Equity (?).
12
Retained Earnings at 12/31/03
Since a beginning Retained Earnings balance is
not known, the amount of ending Retained Earnings
must be computed by using the basic accounting
equation Assets Liabilities Owners
Equity
Total Assets (1,640,000) Total Liabilities
(240,000 500,000) Owners Equity
(?). Therefore, Owners Equity at 12/31/03
900,000
13
Retained Earnings at 12/31/03
Since a beginning Retained Earnings balance is
not known, the amount of ending Retained Earnings
must be computed by using the basic accounting
equation Assets Liabilities Owners
Equity
Total Assets (1,640,000) Total Liabilities
(240,000 500,000) Owners Equity
(?). Therefore, Owners Equity at 12/31/03
900,000 Owners Equity (900,000) Capital
Stock (600,000) Retained Earnings (?)
14
Retained Earnings at 12/31/03
Since a beginning Retained Earnings balance is
not known, the amount of ending Retained Earnings
must be computed by using the basic accounting
equation Assets Liabilities Owners
Equity
Total Assets (1,640,000) Total Liabilities
(240,000 500,000) Owners Equity
(?). Therefore, Owners Equity at 12/31/03
900,000 Owners Equity (900,000) Capital
Stock (600,000) Retained Earnings
(?) Therefore, Retained Earnings at 12/31/03
300,000
15
Retained Earnings at 01/01/03
If ending Retained Earnings is 300,000 and net
income for the period is 290,000, with 40,000
of Dividends, then beginning Retained Earnings
must be 50,000. Retained
Earnings Beg. bal. X 50,000 Dividends 40,0
00 Net income 290,000 End. bal. 300,000
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