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Chapter Five

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Post journal entries to the ledger accounts. Prepare a trial balance ... Create financial reports from data in work sheet. Journalize and post the adjusting entries ... – PowerPoint PPT presentation

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Title: Chapter Five


1
Chapter Five
  • Closing Entries and the Post-Closing Trial Balance

2
Performance Objectives
  1. List the steps in the accounting cycle
  2. Journalize and post closing entries for a service
    enterprise
  3. Prepare a post-closing trial balance
  4. Define the following methods of accounting
    accrual basis and modified cash basis
  5. Prepare interim statements

3
List The Steps In The Accounting Cycle
  • Analyze source documents record business
    transactions in a journal
  • Post journal entries to the ledger accounts
  • Prepare a trial balance
  • Gather adjustment data and record adjustments in
    the work sheet
  • Complete the work sheet
  • Create financial reports from data in work sheet
  • Journalize and post the adjusting entries
  • Journalize and post the closing entries
  • Prepare the post-closing trial balance

Chapter 3
Chapter 4
Chapter 5
4
Closing Entries
  • Entries made at the end of a fiscal period to
    close off the revenue, expense, and drawing
    accountsthat is, to make the balances of the
    temporary-equity accounts equal to zero
  • Also called clearing the accounts

5
Purpose of Closing Entries
6
Purpose of Closing Entries
  • To close out balances that relate to one fiscal
    period and start fresh in the next period
  • To zero out the following ledger accounts
  • Revenue
  • Expenses
  • To update the owners Capital account

7
Balances on the Financial Statements
8
Revenue - Expenses Net IncomeNet Income
Statement of Owners Equity
9
Withdrawals Statement of Owners Equity
10
Ending Capital Balance Sheet
11
Revenues, Expenses, Withdrawals Ending
Capital
12
Start Fresh for Next Period, July 1 To July 31,
2005
See all the zeros?
All Revenues, Expenses, and Withdrawals from
last period are reflected in the Capital account
13
Nominal or Temporary-Equity Accounts
  • Accounts that apply to only one fiscal period and
    that are to be closed at the end of that fiscal
    period, such as revenue, expense, Income Summary,
    and Drawing accounts
  • May also be described as all accounts except
    assets, liabilities, and the Capital account

14
Real or Permanent Accounts
  • The accounts that remain open (assets,
    liabilities, and the Capital account in owners
    equity) and that have balances that will be
    carried over to the next fiscal period

15
Lets Look at Closing with T Accounts


Assets
Liabilities
Owner's Equity

-
-

-

DR
CR
DR
CR
DR
CR
-

Expenses
Revenues

-
-

DR
CR
DR
CR
Nominal AccountsTemporary Equity Accounts
-

Drawing
Capital

-
-

DR
CR
DR
CR
16
After Closing


Assets
Liabilities
Owner's Equity

-
-

-

DR
CR
DR
CR
DR
CR
Revenues, Expenses, Drawings Closed Put Here

Capital
-

DR
CR
17
Closing Using T-Accounts
  • Closing Procedure
  • Close revenue account(s) into Income Summary
  • Close expense accounts into Income Summary
  • Close Income Summary into Capital
  • Close Drawing into Capital

18
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19
Income Summary
  • An account brought into existence to have a debit
    and credit for each closing entry
  • It does not have plus or minus sign, just debits
    and credits
  • Revenue and expense account balances are
    transferred to this account to allow calculation
    of net income and net loss
  • Serves as the in-between account, or holding
    tank, before net income or net loss transferred
    to the Capital account

20
Step 1 Close Revenue Accounts into Income Summary
21
Step 2Close Expense Accounts into Income Summary
22
Step 3 Close Income Summary into Capital
23
Step 4 Close Drawing into Capital Account
24
Closing Entries
  • Entries into the journal made at the end of a
    fiscal period to close off the revenue, expense,
    and Drawing accountsthat is, to make the
    balances of the temporary-equity accounts equal
    to zero
  • Closing is also called clearing the accounts

25
Journalize the Closing Entries
  • Close the revenue accounts into Income Summary
  • Close the expense accounts into Income Summary
  • Close the Income Summary account into the Capital
    account (transferring net income or net loss to
    the Capital account)
  • Close the Drawing account into Capital

Be sure to label the entries Closing Entries
before you begin to enter them into the journal
26
Journalize Steps 12
27
Journalize Steps 14
28
Closing Hints
  • When you want revenue and expense accounts to go
    to zero
  • Create an offsetting debit or credit in Income
    Summary to balance it off
  • When closing Income Summary into Capital
  • Net income is a credit to Capital
  • Net loss is a debit to Capital
  • When closing Drawing into Capital
  • Drawing is a debit to Capital
  • Remember withdrawals are not expenses

29
Creating Journal Entries Directly from the Work
Sheet
  • Revenue and expenses come from the Income
    Statement columns
  • Withdrawals come from the Balance Sheet debit
    column
  • Automatic check if your closing number from
    Income Summary to Capital is not the same as net
    income, you made a mistake

30
Post the Closing Entries
  • Revenue, expense, and Drawing accounts should end
    up with zero balances
  • Draw a line through both the debit and credit
    balance columns to indicate that they have been
    zeroed and closed
  • Capital will more than likely have some net
    change for the period

Be sure to write Closing in the Item column of
the ledger account
31
Posting Step 1 for Arch Copy Co.
32
Posting Steps 1-3 for Arch Copy Co.
33
Post-Closing Trial Balance
  • The listing of the final balances of the real
    accounts at the end of the fiscal period
  • The opening balances for the next period

34
Post-Closing Trial Balance
  • Accountant uses the post-closing trial balance to
    make sure that DR CR
  • Have you done all the work correctly?

35
Errors Post-Closing Trial Balance
  • If DR ? CR
  • Columns added correctly?
  • Correct amounts transferred from the ledger
    accounts?
  • Adjusting entries posted correctly? New balances
    correct?
  • Closing entries posted correctly? New balances
    correct?
  • All nominal accounts closed?

36
Performance Objective 4
  • Define the following methods of accounting
    accrual basis and modified cash basis

37
Accrual Basis
  • An accounting method under which revenue is
    recorded when it is earned, regardless of when
    the cash is received, and expenses are recorded
    when they are incurred, regardless of when they
    are paid

38
Modified Cash Basis
  • An accounting method under which revenue is
    recorded only when it is received as cash
  • Most expenses are recorded only when they are
    paid in cash
  • However, exceptions are made for expenditures on
    items having a useful life of more than one year
    and for certain prepaid items

39
Modified Cash Basis Exceptions
  • Expenditure for insurance premiums can be
    prorated, or spread out, over the fiscal periods
    covered
  • Expenditures for long-lived items are recorded as
    assets and later depreciated as expenses over
    their useful lives

40
Interim Statements
  • Financial statements prepared during the fiscal
    year, covering a period of time less than twelve
    months

41
Prepare Interim Statements
42
Prepare Interim Statements
  • Accountant prepares financial statements from the
    work sheet
  • Accountant does not journalize and post the
    adjusting or closing entries until the end of the
    fiscal year

43
Demonstration Problem
  • On the following page is the completed work sheet
    for
  • We are going to complete the following tasks
  • Journalize the closing entries
  • Create the post-closing trial balance

44
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45
Closing Step 1
46
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47
Closing Step 2
48
Closing Step 3
49
Check Number for Step 3 Closing Entry
50
Closing Step 4
51
Post In Order To Get Information Into Ledger
Accounts
52
Post Reference!
53
Create Post-Closing Trial Balance
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