Required: Prepare closing entries TPR had one major creditor at the beginning of 2020_ One of the major banks loaned TPR $500,000 for ongoing operating costs. The outstanding portion of the loan was $400,000 at the beginning of the year. The bank requires TPR to maintain a current ratio of 1.8:1 or the loan may become immediately repayable. It also requires TPR to have a debt to total asset ratio of no greater than 55%. Information required for adjusting journal entries: 1. There is no interest accrual required for the mortgage loan on the building because payment was made on December 31. The loan for the balloon machine carries an interest rate of 5% and has been outstanding for 15 days. 2. Depreciation of $800 on the cash register machines and $15,000 on the other equipment has not yet been recorded. 3. A dividend of $2,000 was declared but has not been recorded. It will be paid in March 2021. 4. The monthly electricity bill of $2,000 was received in early January 2021. This bill is for the month of December 2020. 5. Income tax expense of $27,000 is estimated as the payable. 6. Only 40% of the prepaid insurance amount related to 2020. 7. The lawyer's invoice for $800 for services performed in December 2020 was received in early January 2021. 8. Salaries that related to December 31, 2020, and not paid by the year end amounted to $12,000.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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