Week: 12

Instructor: Dr. Adnan Bashir

 Preparing Financial Statements: Prepare an income statement, a
statement of retained earnings, and a balance sheet.
• We have now completed the entire accounting cycle, the eight steps of which
include:
• 1. Journalize (record) transactions. Enter all transactions in the journal, thus
creating a chronological record of events.
• 2. Post to ledger accounts. Post debits and credits from the journal to the proper
ledger accounts, thus creating a record classified by accounts.
• 3. Prepare a trial balance. Prove the equality of debits and credits in the ledger.
• 4. Make end-of-period adjustments. Make adjusting entries in the general journal
and post to ledger accounts.
• 5. Prepare an adjusted trial balance. Prove again the equality of debits and credits
in the ledger. ( Note: These are the amounts used in the preparation of financial
statements.)
 Preparing Financial Statements: Prepare an income statement, a statement
of retained earnings, and a balance sheet.
• 6. Prepare financial statements and appropriate disclosures. An income statement
shows the results of operations for the period. A statement of retained earnings
shows changes in retained earnings during the period. A balance sheet shows the
financial position of the business at the end of the period. Financial statements
should be accompanied by notes disclosing facts necessary for the proper
interpretation of those statements.
• 7. Journalize and post the closing entries. The closing entries “zero” the revenue,
expense, and dividends accounts, making them ready for recording the events of
the next accounting period. These entries also bring the balance in the Retained
Earnings account up-to-date.
• 8. Prepare an after-closing trial balance. This step ensures that the ledger remains
in balance after the posting of the closing entries.
 Financial Statements
Income Statement
Purpose: Shows how much profit (or loss) the business made over a
specific period (e.g., a month, quarter, or year). It includes revenue,
expenses and net income.
Statement of Retained Earnings
Purpose: Shows changes in retained earnings, i.e., how much of the
company’s profit is kept (retained) in the business versus paid out as
dividends.
Beginning Retained Earnings ( Net Income (from the income statement)
− Dividends paid to shareholders) Ending Retained Earnings
 Financial Statements
Statement Time Frame Shows Main Focus

Revenues, Expenses, Business

Income Statement Over a period
Profit performance

Profit retained vs.

Retained Earnings Over a period Profit allocation
paid out

Assets, Liabilities,
Balance Sheet At a point in time Financial position
Equity
 Preparing Financial Statements: Prepare an income
statement, a statement of retained earnings, and a balance
sheet.
Melody Music Academy, Inc. offers private and group
music lessons and rents studio space to independent
instructors. The company performs monthly adjusting
entries but closes its accounts only at the end of the fiscal
year.
• Below is the company’s adjusted trial balance dated
December 31, 2024. (Note: The Retained Earnings
balance was last updated on December 31, 2023.)
Account Title Debit ($) Credit ($)
Cash 125,600
Accounts receivable 8,200
Prepaid rent 2,400
Unexpired insurance 1,800
Supplies 1,000

Musical Instruments (equipment) 40,000

Accumulated depreciation - instruments 9,000

Notes payable 15,000

Accounts payable 4,300
Salaries payable 2,700
Unearned lesson revenue 5,000
Capital stock 25,000
Retained earnings 32,000
Dividends 5,000
Lesson revenue earned 120,000
Studio rental revenue earned 30,000
Salary expense 72,000
Supply expense 2,200
Rent expense 7,200
Insurance expense 2,100
Advertising expense 3,000

Depreciation expense - instruments 3,000

Interest expense 500

Income taxes expense 8,300
Totals 283,300 283,300
a. Prepare the following financial statements for the year
ended December 31, 2024:
• Income Statement
• Statement of Retained Earnings
• Balance Sheet
b. Prepare the necessary closing entries as of December
31, 2024.
c. Prepare an after-closing trial balance dated December
31, 2024.
 Financial Statements: Income Statement
Revenue Amount ($)
Lesson Revenue 120,000
Studio Rental Revenue 30,000
Total Revenue 150,000

Expenses
Salary Expense 72,000
Supply Expense 2,200
Rent Expense 7,200
Insurance Expense 2,100
Advertising Expense 3,000
Depreciation Expense 3,000
Interest Expense 500
Income Tax Expense 8,300
Total Expenses 98,300

Net Income | 51,700 |

 Statement of Retained Earnings
(Year Ended December 31, 2024)
Item Amount ($)

Beginning Retained Earnings 32,000

Add: Net Income 51,700

Less: Dividends (5,000)

Ending Retained Earnings 78,700

 Balance Sheet (As of December 31, 2024)
Asset Amount ($)
Cash 125,600
Accounts Receivable 8,200
Prepaid Rent 2,400
Unexpired Insurance 1,800
Supplies 1,000
Equipment 40,000
Less: Accumulated Depreciation (9,000)
Total Assets 170,000

Liabilities Amount ($)

Notes Payable 15,000
Accounts Payable 4,300
Salaries Payable 2,700
Unearned Revenue 5,000
Total Liabilities 27,000
Equity
Capital Stock 25,000
Retained Earnings 78,700
Total Equity 103,700
Total Liabilities + Equity 130,700
 Closing Entries
• Closing entries are accounting journal entries made at the
end of an accounting period to transfer the balances of
temporary accounts to permanent accounts.
Closing Entries (Dec 31, 2024)
Dr. Cr

• Close Revenues to Income Summary

• Lesson Revenue 120,000
• Studio Rental Revenue 30,000
• Income Summary 150,000
• Close Expenses to Income
• Dr. Income Summary 98,300
• Cr. Salary Expense 72,000
• Cr. Supply Expense 2,200
• Cr. Rent Expense 7,200
• Cr. Insurance Expense 2,100
• Cr. Advertising Expense 3,000
• Cr. Depreciation Expense 3,000
• Cr. Interest Expense 500
• Cr. Income Taxes Expense 8,300
• Close Income Summary to Retained Earnings
• Dr. Income Summary 51,700
• Cr. Retained Earnings 51,700
• Close Dividends to Retained Earnings
• Dr. Retained Earnings 5,000
• Cr. Dividends 5,000
 After-Closing Trial Balance (December 31, 2024)
Account Title Debit ($) Credit ($)
Cash 125,600
Accounts Receivable 8,200
Prepaid Rent 2,400
Unexpired Insurance 1,800
Supplies 1,000
Equipment 40,000
Accumulated Depreciation 9,000
Notes Payable 15,000
Accounts Payable 4,300
Salaries Payable 2,700
Unearned Revenue 5,000
Capital Stock 25,000
Retained Earnings (Ending) 78,700
Totals 180,000 180,000
Thank You