college accounting

1
Chapter
6
Skyline College
2
The Closing Process
3
The Income Summary Account

• Classified as a temporary owners equity account
• Only time it has a balance is during the closing
  process
• Has a zero balance after the closing process and
  remains with a zero balance until after the
  closing procedure for the next period

4
There are four steps in the closing process
1. Transfer the balance of the revenue account to
the Income Summary account.
2. Transfer the expense account balances to the
Income Summary account.
3. Transfer the balance of the Income Summary
account to the owners capital account.

• 4. Transfer the balance of the drawing account to
  the owners capital account.

5
Step 1 Transfer Revenue Account Balances
On December 31 the worksheet for JT s Consulting
Services shows one revenue account, Fees Income
of 35,000.
6
JTs Consulting Services Worksheet Month Ended
December 31, 2007
Net Income
22,633
22,633
It has a credit balance of 35,000.
120,000
35,000
35,000
120,000
7
Step 1 Close Revenue
Fees Income
Income Summary
Bal 35,000
- Closing 35,000
Closing 35,000

• The revenue account, Fees Income, is decreased
  by 35,000 to zero.
• The 35,000 is transferred to the temporary
  owners equity account, Income Summary.

8
Step 1 Close Revenue
The words Closing Entries are written in the
Description column of the general journal.
9
Step 2 Transfer Expense Account Balances

• The Income Statement section of the worksheet
  for JTs Consulting Services lists five
  expense accounts.
• Salaries Expense 7,000
• Utilities Expense 500
• Supplies Expense 1,000
• Rent Expense 3,500
• Depreciation Expense 367
• Since expense accounts have debit balances,
  enter a credit in each account to reduce its
  balance to zero.
• This closing entry transfers total expenses to
  the Income Summary account.

10
Step 2 Close Expenses

• The five expense account balances are reduced to
  zero.

• The total, 12,367 of expenses are transferred
  to the temporary owners equity account, Income
  Summary.

11
0
JTs Consulting Services Worksheet Month Ended
December 31, 2007
JTs Consulting Services Worksheet Month Ended
December 31, 2007
JTs Consulting Services Worksheet Month Ended
December 31, 2007
JTs Consulting Services Worksheet Month Ended
December 31, 2007
22,633
22,633
It has a credit balance of 35,000.
It has a debit balance of 12,367.
120,000
35,000
120,000
120,000
35,000
35,000
120,000
12
Step 2 Close Expenses
Income Summary
Salaries Expense
Bal 7,000
- Closing 7,000
Bal 35,000
Closing 12,367
Bal 22,633
Utilities Expense
Supplies Expense
Bal 1000
- Closing 500
- Closing 1,000
Bal 500
Depr. Expense Equip.
Rent Expense
- Closing 3,500
- Closing 367
Bal 3,500
Bal 367
13
Step 2 Close Expenses
14
The Income Summary account reflects all entries
in the Income Statement section of the worksheet.
Income Summary
Net Income
15
Step 3 Close Net Income to Owners Capital

• The journal entry to transfer net income to
  owners equity is a debit to Income Summary,
  and a credit to Jason Taylor, Capital because
  Income Summary has a credit balance of 22,633.
• The balance of Income Summary is reduced to
  zero the owners capital account is increased
  by the amount of net income.

16
Step 3 Close Net Income to Capital

• The Income Summary account is reduced to zero.
• The net income amount, 22,633, is transferred
  to the owners capital account. Jason Taylor,
  Capital is increased by 22,633.

Wooohoooo! I made some money this month!
17
Step 3 Close Net Income to Capital
Income Summary
Jason Taylor, Capital
Bal 90,000
Bal 22,633
Closing 22,633
Closing 22,633
18
Step 3 Close Net Income to Capital
19
Step 4 Close Drawing to Capital

• The drawing account balance is reduced to zero.
• The balance of the drawing account, 4,000, is
  transferred to the owners capital account.

Remember that withdrawals appear in the statement
of owners equity as a deduction from capital.
20
Step 4 Close Drawing to Capital
Jason Taylor, Drawing
Jason Taylor, Capital
- Closing 4,000
Bal 112,633
- Closing 4,000
Bal 4,000
Bal 108,633
The new balance of the Jason Taylor, Capital
account agrees with the amount listed on the
balance sheet.
21
Step 4 Close Drawing to Capital
22
Summary of Closing Entries
GENERAL JOURNAL
PAGE 4 POST. DATE
DESCRIPTION REF. DEBIT
CREDIT 2007 Closing Entries

STEPS
Dec. 31 Fees Income 401
35,000 Income Summary
309 35,000
1. CLOSE REVENUE
2. CLOSE EXPENSE ACCOUNTS
31 Income Summary
309 12,367
Salaries Expense 511
7,000
Utilities Expense 514
500
Supplies Expense 517
1,000
Rent Expense 520
3,500
Depr. Expense-Equip. 523
367
31 Income Summary
309 22,633 Jason
Taylor, Capital 301
22,633
3. CLOSE INCOME SUMMARY
31 Jason Taylor, Capital
301 4,000 Jason
Taylor , Draw. 302
4,000
4. CLOSE DRAWING ACCOUNT
23
Posting the Closing Entries

• Closing is entered in the Description column
  of the ledger accounts.
• The ending balances of the drawing, revenue,
  and expense accounts are zero.

All journal entries are posted to the general
ledger accounts.
24
Dec. 31 Closing J4
35,000
0
25
Dec. 31 Closing J4
35,000 35,000
26
Preparing the Postclosing Trial Balance

• Proves that total debits equal total credits
• Verifies that revenue, expense, and drawing
  accounts have zero balances
• Only permanent accounts appear on the postclosing
  trial balance (assets, liabilities and owners
  capital).

27
Postclosing Trial Balance
JTs Consulting Services
Postclosing Trial Balance
December 31, 2007 ACCOUNT NAME
DEBIT CREDIT
Cash 83,500 Accounts Receivable
5,000 Supplies

2,000 Prepaid Rent 3,500
Equipment 22,000 Accumulated
DepreciationEquipment 367
Accounts Payable
7,000 Jason Taylor, Capital _______
108,633 Totals 116,000 116,000
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Interpret financial statements.
29
Consider the financial statements for JTs
Consulting Services at the end of the accounting
period.

• What is the cash balance?
• How much do customers owe the business?
• How much does the business owe suppliers?
• What is the profit or loss?

30
JTs Consulting Services Balanc
e Sheet December 31, 2007 Assets

Cash

83,500 Accounts
Receivable

5,000 Supplies

2,000 Prepaid Rent

3,500 Equipment

22,000 Less Accumulated Depreciation
lt367gt
21,633 Total Assets

115,633 Liabilities and Owners
Equity Liabilities Accounts Payable

7,000 Owners Equity
Jason Taylor, Capital

108,633 Total Liabilities and Owners Equity
115,633
What is the cash balance?
31
JTs Consulting Services Balanc
e Sheet December 31, 2007 Assets

Cash

83,500 Accounts
Receivable

5,000 Supplies

2,000 Prepaid Rent

3,500 Equipment

22,000 Less Accumulated Depreciation
lt 367gt
21,633 Total Assets

115,633 Liabilities and Owners
Equity Liabilities Accounts Payable

7,000 Owners Equity
Jason Taylor, Capital

108,633 Total Liabilities and Owners Equity
115,633
How much do the customers owe the business?
32
JTs Consulting Services Balanc
e Sheet December 31, 2007 Assets

Cash

83,500 Accounts
Receivable

5,000 Supplies

2,000 Prepaid Rent

3,500 Equipment

22,000 Less Accumulated Depreciation
lt 367gt
21,633 Total Assets

115,633 Liabilities and Owners
Equity Liabilities Accounts Payable

7,000 Owners Equity
Jason Taylor, Capital

108,633 Total Liabilities and Owners Equity
115,633
How much does the business owe its suppliers?
33
JTs
Consulting Services Income Statement
Month Ended December 31,
2007 Revenue

Fees Income

35,000
Expenses Salaries Expense

7,000 Utilities Expense

500 Supplies Expense
1,000
Rent Expense
3,500
Depr. Expense--Equipment
367 Total
Expenses

lt 12,367gt Net Income for the Month

22,633
What is the profit?
34
The Accounting Cycle
Step 1 Analyze transactions
Step 1 Analyze transactions

• Analyze the source documents.
• Sales slips
• Purchase invoices
• Credit memorandums
• Check stubs

35
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 2 Journalize the data about transactions
Step 1 Analyze transactions
Record the effects of the transactions in a
journal.
36
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Transfer data from the journal to the general
ledger accounts.
37
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 4 Prepare a worksheet
Step 1 Analyze transactions

• Prepare a worksheet with five sections.
• Trial Balance
• Adjustments
• Adjusted Trial Balance
• Income Statement
• Balance Sheet

38
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions

• Prepare financial statements.
• Income Statement
• Statement of Owners Equity
• Balance Sheet

Step 5Prepare financial statements
Step 5Prepare financial statements
39
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions
Step 5Prepare financial statements
The adjusting entries are a permanent record of
the changes in account balances shown on the
worksheet.
Step 6 Journalize and post adjusting entries
Step 6 Journalize and post adjusting entries
40
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions

• Transfer net income or net loss to
  owners equity.
• Reduce the balances of the
• temporary accounts to zero.

Step 5Prepare financial statements
Step 6 Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 7 Journalize and post closing entries
41
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions

• Confirm that the general ledger is in
  balance.
• Confirm that the revenue, expense, and drawing
  accounts have zero balances.

Step 5Prepare financial statements
Step 6 Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
Step 8 Prepare a postclosing trial balance
42
The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 4 Prepare a worksheet
Step 1 Analyze transactions
Step 5Prepare financial statements
Use financial statements to understand and
communicate the financial information and to make
decisions.
Step 6 Journalize and post adjusting entries
Step 9 Interpret the financial information
Step 9 Interpret the financial information
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
43
Flow of Data Through a Simple Accounting System
Source Documents
Source documents
General journal
General ledger
Worksheet
Financial statements
Source documents are analyzed.
44
Flow of Data Through a Simple Accounting System
General journal
Transactions are recorded in the general journal.
45
Flow of Data Through a Simple Accounting System
General ledger
Transactions are posted from the general journal
to the general ledger.
46
Flow of Data Through a Simple Accounting System
Worksheet
Financial information is proved, adjusted, and
summarized on the worksheet.
47
Flow of Data Through a Simple Accounting System
Financial statements
Financial information is reported on financial
statements.