Note that the transaction analysis was relatively simple with a few transactions and a few accounts. However, with thousands of transactions and hundreds of accounts, the spreadsheet program is not sufficient.
Therefore accountants use a “double entry” system based on debits and credits.
Often, investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet. In such cases a gain (if a credit) or loss (if a debit) must be recognized.
Ex: Land that cost $10,000 is sold for $11,000 cash. Prepare the GJE:
Gain on Sale of Land 1,000
Note: gains are a form of revenues and losses are a form of expenses on the income statement.
The sale of inventory is recorded in a different manner – discussed in Chapters 4 and 7.
The “accrual system of accounting” and “accrual of revenues and expenses” are both discussed in this chapter.
Note that the “accrual of revenues and expenses” is a subset of the AJEs discussed in this chapter.
In comparison, the “accrual system of accounting” refers to the entire process of revenue and expense recognition, and relates to the definitions of matching and revenue recognition discussed in Chapter 3.
The contributed capital in the adjusted trial balance is an ending balance; the ledger account must be examined to see if any activity (like issue of additional stock) occurred.
The retained earnings on the adjusted trial balance is a beginning balance; while the revenues, expenses and dividends are displayed in the trial balance, they have not yet been included in (closed to) retained earnings.
Comments on the preparation of financial statements from adjusted trial balance (ATB):
revenue and expense balances from the ATB are carried to the income statement.
net income is carried to the retained earnings column in the SSE.
other activity, like dividends and issue of stock, are reflected in the SSE.
ending balances in the SSE are carried to the stockholders’ equity section of the balance sheet.
asset and liability balances from the ATB are carried to the balance sheet.
Financial Statement Examples - Kelly Supply Kelly Supply Income Statement For the Year Ended December 31, 2006 Revenues: Sales $27,000 Interest revenue 50 Total revenues $27,050 Expenses: Cost of goods sold $ 9,000 Wages expense 8,000 Rent expense 1,000 Interest expense 3,000 Depreciation expense 3,000 Amortization expense 500 Total expenses . 24,500 Net income $ 2,550
2,550 (1,000) $6,550 10,000 2,550 (1,000) $6,550 40,000 Kelly Supply Statement of Stockholders’ Equity For the Year Ended December 31, 2006 Common Retained Total Stock Earnings Beginning balance $30,000 $5,000 $35,000 Common stock issuances 10,000 Net income Dividends Ending balance