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Closing Entries

The document discusses closing entries and the accounting cycle. It explains how to prepare closing entries by debiting revenue accounts and crediting an income summary account, debiting expenses and crediting the income summary account, and then debiting the income summary and crediting owners capital. It also discusses preparing a post-closing trial balance.

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Mohsin Hassan
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209 views21 pages

Closing Entries

The document discusses closing entries and the accounting cycle. It explains how to prepare closing entries by debiting revenue accounts and crediting an income summary account, debiting expenses and crediting the income summary account, and then debiting the income summary and crediting owners capital. It also discusses preparing a post-closing trial balance.

Uploaded by

Mohsin Hassan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Closing Entries

LEARNING Prepare closing entries and a post-closing trial


OBJECTIVE
2 balance.

At the end of the accounting period, the company makes


the accounts ready for the next period.

Illustration 4-8
Temporary versus permanent accounts
LO 2
Preparing Closing Entries

Closing entries formally recognize in the ledger the transfer of


 net income (or net loss) and
 owner’s drawings
to owner’s capital.

Companies generally journalize and post closing entries only at


the end of the annual accounting period.
Closing entries produce a zero balance in each temporary
account.

LO 2
Preparing Closing Entries

Diagram of closing
process—corporation

Retained Earnings Owner’s Capital is a


permanent account. All
other accounts are
temporary accounts.

LO 2
• In preparing closing entries, companies could close each income statement account directly to
owner’s capital.
• However, to do so would result in excessive detail in the permanent Owner’s Capital account.
• Instead, companies close the revenue and expense accounts to another temporary account,
Income Summary, and they transfer the resulting net income or net loss from this account to
owner’s capital.
• Companies record closing entries in the general journal.
• A center caption, Closing Entries, inserted in the journal between the last adjusting
entry and the first closing entry, identifies these entries. Then the company posts
the closing entries to the ledger accounts.
1. Debit each revenue account for its balance, and credit Income Summary for
total revenues. (From revenue to income summary)
2. Debit Income Summary for total expenses, and credit each expense account
for its balance. (From expenses to income summary)
3. Debit Income Summary and credit Owner’s Capital for the amount of net
income. (from income summary to owners capital)
4. Debit Owner’s Capital for the balance in the Owner’s Drawings account, and
credit Owner’s Drawings for the same amount. (from drawings to capital)
Preparing Closing Entries

CLOSING
ENTRIES
ILLUSTRATED

Illustration 4-10
Closing entries
journalized
LO 2
Preparing a Post-Closing Trial Balance

Purpose is to prove the equality of the permanent account balances


carried forward into the next accounting period. Illustration 4-12
Post-closing trial balance

LO 2
LEARNING Explain the steps in the accounting cycle
3
OBJECTIVE and how to prepare correcting entries.

Illustration 4-15
1.
1. Analyze
Analyze business
business transactions
transactions

9.
9. Prepare
Prepare aa post-closing
post-closing 2.
2. Journalize
Journalize the
the
trial
trial balance
balance transactions
transactions

8.
8. Journalize
Journalize and
and post
post 3.
3. Post
Post to
to ledger
ledger accounts
accounts
closing
closing entries
entries

7.
7. Prepare
Prepare financial
financial 4.
4. Prepare
Prepare aa trial
trial balance
balance
statements
statements

6.
6. Prepare
Prepare an
an adjusted
adjusted trial
trial 5.
5. Journalize
Journalize and
and post
post
balance
balance adjusting
adjusting entries
entries

LO 3
Class Exercise
• The following selected accounts appear in the adjusted trial
balance columns of the worksheet for McQueen Company:
• Depreciation Expense;
• Owner’s Capital;
• Owner’s Drawings;
• Service Revenue;
• Supplies;
• Accounts Payable.

• Identify the accounts that would be included in a post-


closing trial balance.
Class Exercise
• The steps in the accounting cycle are listed in random order below. List the
steps in proper
• sequence, assuming no worksheet is prepared, by placing numbers 1–9 in the
blank spaces.
• (a) _____ Prepare a trial balance.
• (b) _____ Journalize the transactions.
• (c) _____ Journalize and post closing entries.
• (d) _____ Prepare financial statements.
• (e) _____ Journalize and post adjusting entries.
• (f) _____ Post to ledger accounts.
• (g) _____ Prepare a post-closing trial balance.
• (h) _____ Prepare an adjusted trial balance.
• (i) _____ Analyze business transactions.
Class Exercise
• The steps in the accounting cycle are listed in random order below. List the
steps in proper
• sequence, assuming no worksheet is prepared, by placing numbers 1–9 in the
blank spaces.
• (a) __4___ Prepare a trial balance.
• (b) ___2__ Journalize the transactions.
• (c) __8___ Journalize and post closing entries.
• (d) __7___ Prepare financial statements.
• (e) __5___ Journalize and post adjusting entries.
• (f) __3___ Post to ledger accounts.
• (g) __9___ Prepare a post-closing trial balance.
• (h) __6___ Prepare an adjusted trial balance.
• (i) __1___ Analyze business transactions.
DO IT! 2 Closing Entries

The worksheet for Hancock Company shows the following in the


financial statement columns:
Owner’s Drawings $15,000
Owner’s Capital $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner’s
capital.

Income Summary 18,000


Owner’s Capital 18,000
Owner’s Capital 15,000
Owner’s Drawings 15,000

LO 2
Class Exercise
• E4-8 Turner Company ended its fiscal year on July 31, 2012. The company’s
adjusted trial balance as of the end of its fiscal year is as shown below.

• (a) Prepare the closing entries using page J15.


• (b) Post to Owner’s Capital and No. 350 Income Summary accounts. (Use the
three-column form.)
• (c) Prepare a post-closing trial balance at July 31.
1.REVENUE 64000
Rent revenue 6500
Income summary 70500
2 income summary 78600
expenses 78600
3capital 16000
drawings 16000
Capital 8100
income summary 8100(loss)
45200
8100 +16000 21100
Class Exercise
• E4-11 Selected accounts for Brianna’s Salon are presented
below. All June 30 postings are from closing entries.

• (a) Prepare the closing entries that were made.


• (b) Post the closing entries to Income Summary
• BE4-4 The ledger of Quentin Company
contains the following balances: Owner’s
Capital $30,000; Owner’s Drawings $2,000;
Service Revenue $50,000; Salaries and Wages
Expense $27,000; and Supplies Expense
$7,000. Prepare the closing entries at
December 31.
• BE4-6 The income statement for Evergreen
Golf Club for the month ending July 31 shows
• Service Revenue $16,400, Salaries and Wages
Expense $8,200, Maintenance and Repairs
• Expense $2,500, and Net Income $5,700.
Prepare the entries to close the revenue and
expense accounts.
• End

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