Closing Entries

To update the balance in the owner's capital account, accountants close revenue, expense, and drawing accounts at the end of each fiscal year or, occasionally, at the end of each accounting period. For this reason, these types of accounts are called temporary or nominal accounts. Assets, liabilities, and the owner's capital account, in contrast, are called permanent or real accounts because their ending balance in one accounting period is always the starting balance in the subsequent accounting period. When an accountant closes an account, the account balance returns to zero. Starting with zero balances in the temporary accounts each year makes it easier to track revenues, expenses, and withdrawals and to compare them from one year to the next. There are four closing entries, which transfer all temporary account balances to the owner's capital account.

1. Close the income statement accounts with credit balances (normally revenue accounts) to a special temporary account named income summary.
2. Close the income statement accounts with debit balances (normally expense accounts) to the income summary account. After all revenue and expense accounts are closed, the income summary account's balance equals the company's net income or loss for the period.
3. Close income summary to the owner's capital account or, in corporations, to the retained earnings account. The purpose of the income summary account is simply to keep the permanent owner's capital or retained earnings account uncluttered.
4. Close the owner's drawing account to the owner's capital account. In corporations, this entry closes any dividend accounts to the retained earnings account. For purposes of illustration, closing entries for the Greener Landscape Group follow.

Accounting Cycle - Accounting

Complete the story.

Peachtree - Charts of Accounts - Account Type of Equity

Business Types and Equity Accounts 

When we setup a new company on New Company Setup - Company  Information window we have to select the business type. different business type use different equity accounts. which are as follows..

Corporation

When you select the Corporation business type during New Company Setup, the following equity accounts are automatically set up:

• Common Stock (Equity  doesn't close)
• Retained Earnings (Equity – Retained Earnings)
• Dividends Paid (Equity – gets closed)

S Corporation

When you select the S Corporation business type during New Company Setup, the following equity accounts are automatically set up:

• Common Stock (Equity – doesn't close)
• Retained Earnings (Equity – Retained Earnings)
• Dividends Paid (Equity – gets closed)

Partnership

When you select the Partnership business type during New Company Setup, the following equity accounts are automatically set up:

• Retained Earnings (Equity – Retained Earnings)
• Partner's Contribution (Equity – gets closed)
• Partner's Draw (Equity – gets closed)

Sole Proprietorship

When you select the Sole Proprietorship business type during New Company Setup, the following equity accounts are automatically set up:

• Retained Earnings (Equity – Retained Earnings)
• Owner's Contribution (Equity – gets closed)
• Owner's Draw (Equity – gets closed)

Limited Liability Company (LLC)

When you select the Limited Liability Company business type during New Company Setup, the following equity accounts are automatically set up:

• Retained Earnings (Equity – Retained Earnings)
• Member's Contribution (Equity – gets closed)
• Member's Draw (Equity – gets closed)

Adjusting Entries - Case 4.1 - Financial and Managerial Accounting by Williams et all 15e

Solution of the first two options are given here.
a.

No adjusting entry is needed, because although the revenue was collected in advance on September 1, it has all been earned prior to year-end. Thus, inclusion of the entire amount in revenue of the period is correct.

b.

Three months’ revenue was collected in advance on December 1 and was credited to an unearned revenue account. At December 31, an adjusting entry is needed to recognize that one-third of this advance payment that has now been earned as revenue. The effects of this adjusting entry will be to reduce a liability (unearned revenue) and increase revenue recognized as earned in the period. Of course, recognizing revenue also increases owners’ equity.

Adjusting Entries - Case 4.1 - Financial and Managerial Accounting by Williams et all 15e

Solution of the first two options are given here.
a.

No adjusting entry is needed, because although the revenue was collected in advance on September 1, it has all been earned prior to year-end. Thus, inclusion of the entire amount in revenue of the period is correct.

b.

Three months’ revenue was collected in advance on December 1 and was credited to an unearned revenue account. At December 31, an adjusting entry is needed to recognize that one-third of this advance payment that has now been earned as revenue. The effects of this adjusting entry will be to reduce a liability (unearned revenue) and increase revenue recognized as earned in the period. Of course, recognizing revenue also increases owners’ equity.

IAS 1 - Presentation of Financial Statements .... continue

Fair Presentation and Compliance with IFRSs
The financial statements must "present fairly" the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation.
IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations).
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material.
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure.
 
Going Concern
An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures.
 
Accrual Basis of Accounting
IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting.
 
Consistency of Presentation
The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS.
 
Materiality and Aggregation
Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial.
Offsetting> Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS.
 
Comparative Information
IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise.
If comparative amounts are changed or reclassified, various disclosures are required.

(source:iasplus.com)

Peachtree - Maintain Charts of Accounts

General Ledger

Now you have setup your company in Peachtree, it is recommended to establish Chart of accounts, General Ledger Defaults and Beginning Balance if any.

To establish the charts of accounts click the Maintains menu and select “Chart of Accounts...” 

The following window will displayed

Here you have to type Account ID, Description and the most Important Account Type.

Enter an account ID and description for the account. The account ID determines how the account is identified and sorted in the chart of accounts list and the General ledger account is displayed as typed in description. Most charts of accounts are set up with specific account types grouped together.

Account Types

Account types define how the account will be grouped in reports and financial statements. They also control what happens during fiscal year-end.

General Ledger accounts are assigned types on the General tab of the Maintain Chart of Accounts window. Select an account type from the drop-down list and select Save to save the account. The account type should be selected carefully. If you are entering a Revenue account then its type will be Income so on. A simplified chart of account with Account ID, Description and Account Type is given at the end of the chapter.

You can enter the Beginning Balances on the General tab. Select the Beginning Balances button. Peachtree displays the Select Period window.

Select the period in which you want to enter beginning balances. You can select from previous, current, or future periods.

Select OK. Peachtree displays the Chart of Accounts Beginning Balances window.

Click or tab to any of the white cells in the grid to add an amount. (The gray cells are for viewing purposes only.)

Enter all the beginning balances for the accounts. Scroll the list box to make sure the account amounts are correct.

If you are out of balance in the Beginning Balances for General Ledger Accounts window, Peachtree displays a warning message indicating that an equity account will be created (or updated) to contain the difference or out-of-balance amount.

This account will be named Beginning Balance Equity, and its type is Equity-Doesn't Close. This account does not appear in the Beginning Balances window, but it will appear in the list of accounts and on financial statements and general ledger reports.

Try to find the reason for the out-of-balance situation, and correct it if possible. (Select Cancel when Peachtree displays the warning message.) If you are entering beginning balances from financial statements supplied by your previous accounting system or by your accountant, you most likely made an error in data entry. Make sure you didn't leave out an account or balance and that you entered all amounts correctly.

When done close the window.

Add a New Account in G/L Beginning Balances

In the Beginning Balances window accessed from the Maintain Chart of Accounts window, select the New button. Peachtree displays the Enter New Account window.

Enter an account ID and description for the account and also chose the appropriate account type and select OK.

Delete an Account from the Chart of Accounts

In order to delete an account from the chart of accounts, there must be no transactions posted to the general ledger that reference the account ID. If an account has a nonzero balance, you must delete or remove transactions associated with it. These can include beginning-balance entries.

If an account has a nonzero balance, you can enter an adjusting G/L transaction in the General Journal to bring the account's balance to zero. Then, after two year-end closings, you can purge or delete the account.

To make the account inactive

You can make the account inactive to ensure that no further transactions are associated with it. Then after two year-end closings, you can purge the account.

From the Maintain menu, select Chart of Accounts. Peachtree displays the Maintain Chart of Accounts window.

Select the account you want to make inactive. To display a list of existing accounts, type ? in the G/L Account ID field, or select the Lookup button.

Select the Inactive check box to the right of the account ID. (There is an mark in the check box when it is selected.)

Peachtree - Accounting Software - Setup of Company

Setup of a Company

After the start of the program the following screen will appear. To establish a new company click “Set up a new company” option and follow the next instructions.

Following introductory screen will appear to guide you the rest of the process.

Now by clicking next you have to type the company information such as name, address, Telephone no., business type etc.

Again by clicking next you can chose among several methods to setup the charts of accounts. Here you can chose charts of accounts already developed by the software of many sample companies, or you can copy charts of accounts from existing Peachtree company or another accounting software compatible with Peachtree or you can build your own charts of accounts.

The next step will be to chose “Accounting Method”. There are two accounting method Cash and Accrual. Accrual method is usually followed, where we accrue expense and income weather paid or received or not.

 

Next phase will be to chose the “Posting Method”. By selecting the Real Time posting method the transactions are posted to the General Ledger as they are entered and saved. While in Batch, transactions are saved by the program and then posted in a group. This allows you to print and reconcile the transaction and then to save.

Then in the next phase you have to select the accounting period. Normal accounting period is 12 month accounting period.

In the next step, you have to chose the month when the accounting period will start and the month when first time the transaction will recorded

 

By clicking next “Congratulation” screen appear and by clicking Finish the company set up completes.