Up to this point we have been studying the Solana Beach Bicycle Company, which is an individual proprietorship. In other words, the business has one owner—Samantha. She has invested some of her own money into the company as well as borrowing some additional money.
Adjusting Journal Entries and Closing Journal Entries :Accounting records are not kept up to date at all times. To do so would be a waste of time, effort, and money because much of the information is not needed for day-to-day decisions. Adjusting entries is a step taken to recognize financial events that have occurred prior to the financial statements’ issuance date but which have not been recorded in the journal.
During the month, the journal entries made to record the January transactions would be posted from the general journal to the general ledger. The general ledger is a book containing a record of each account. (See boxed section below Figure 6.8.) Posting is simply the process of transferring the information from the general journal to the individual account pages in the general ledger.
The terms “debit” and “credit” are enough to induce fear in even the most intrepid non-accountant. But even though you may never become an accountant, you will need to understand these concepts in order to have a solid grasp of accounting and business. In this chapter you’ll learn what these terms mean and how they are used in the world of accounting.
After analyzing the Balance Sheet and the Income Statement for Solana Beach Bicycle Company, Samantha had a clear understanding of what her business owned and what she owed, as well as what its “bottom line” is for the year. Although things are looking good so far, Sam has a nagging concern, which she raises at a meeting with her business advisor: “I have read that many small businesses go bankrupt, not because they don’t have a great product or a great service, but because they run out of cash. Is that right?”
The Income Statement: This financial statement is a listing of all Revenues and Expenses of the business earned or incurred during a particular period of time. The Income Statement is usually produced by a company monthly, quarterly, or annually. It is one of the three major statements produced by businesses in the United States, the other two being the Balance Sheet and the Statement of Cash Flows.