MUHASEBE I

For the preparation of financial statements, the starting point is the adjusted trial balance. As you can remember from the previous chapters, adjusted trial balance is one form of trial balance that holds in-term transactions’ totals and balances as well as the end of the period transactions’ totals and balances for final checking of the accounts and preparation of financial statements. After the preparation of adjusted trial balance and financial statements, closing entries will be recorded in order to get accounts ready for the next year. We will focus on closing process further in this chapter. Now, let’s have a look at the financial statements. Financial statements are prepared in order;

Income Statement shows the profit or loss of the company. So, how does profit or loss occur?
The positive difference between revenues and expenses give profit whereas the negative difference gives the loss. So, in the income statement company reports revenues, expenses
and their differences.

Non-current assets include the assets acquired to be used in business ‘s operations for more than 12 months and receivables of which due dates are more than 12 months and examples of non-current assets include investments in other companies, intellectual property (e.g. patents), and property, plant and equipment.

As the end of the period comes, adjusting entries are made to ensure the assets, liabilities and owner’s equity. After the adjustment transactions, adjusted trial balance is prepared, and financial statements are prepared afterwards. After the preparation of financial statements, the company journalizes and posts the closing entries. The final step of the accounting cycle is preparing the post-closing trial balance. Now, let’s summarize the steps in accounting cycles briefly:

After closing of revenue accounts, expense accounts and Income Summary account, it is time to prepare post-closing trial balance as the ending step in the accounting cycle. Post-closing trial balance shows the accounts with only balances. As the revenue accounts, expense accounts and Income Summary accounts were closed, it means that they have no balances.

Income statement is the financial statement that reports operation results of a business for a specific period of time (month, quarter quarter, or year year).

Revenues and expenses are reported in the income statement; assets, liabilities and owner’s equity are reported in the balance sheet.

Liquidity is the measure of how quickly and easily an account can be converted into cash.

Non-current assets include the assets acquired to be used in business ‘s operations for more than 12 months and receivables of which due dates are more than 12 months. From the perspective of liquidity, non-current assets’ convertibility into cash must be over 12 months.

If the company has a profit at the end of the period, the credit balance of the Income Summary account is transferred to the credit side of Capital account, because profit increases the Capital. If there is a loss, the debit balance of the Income Summary account is transferred to the debit side of Capital account, because loss decreases the Capital.

Now that the revenue accounts and expense accounts are closed and their balances were transferred to Income Summary account, the company may easily calculate its profit or loss.

After closing of revenue accounts,expense accounts and Income Summary account, it is timeto prepare post-closing trial balance as the ending step in the accounting cycle. Post-closing trial balance shows the accounts with only balances.

During the period, the company makes tens of thousands of financial transactions. Each transaction has to be recorded into journals and posted to the ledger. At the end of each month, monthly trial balance is prepared in order to ensure that the totals and the balances of the accounts are equal.  If the transaction is recorded recorded into a wrong account, the trial balance cannot figure it out. The trial balance is prepared as a cumulative table. This means that monthly totals are added onto previous months’ totals.  With the same manner, the trial balance prepared at the end of June includes six months’ total amounts. Preparing unadjusted trial balance at the end of the period is to be done before ending of the period activities.

For the preparation of financial statements, the starting point is the adjusted trial balance. After the preparation of adjusted trial balance and financial statements, closing entries will be recorded in order to get accounts ready for the next year

Owner’s equity shows the investments done by the owner/owners and the result of the operations of the company which is either profit or loss.