Title: Chapter Five
1Chapter Five
- Closing Entries and the Post-Closing Trial Balance
2Performance Objectives
- List the steps in the accounting cycle
- Journalize and post closing entries for a service
enterprise - Prepare a post-closing trial balance
- Define the following methods of accounting
accrual basis and modified cash basis - Prepare interim statements
3List 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
4Closing 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
5Purpose of Closing Entries
6Purpose 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
7Balances on the Financial Statements
8Revenue - Expenses Net IncomeNet Income
Statement of Owners Equity
9Withdrawals Statement of Owners Equity
10Ending Capital Balance Sheet
11Revenues, Expenses, Withdrawals Ending
Capital
12Start 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
13Nominal 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
14Real 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
15Lets 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
16After Closing
Assets
Liabilities
Owner's Equity
-
-
-
DR
CR
DR
CR
DR
CR
Revenues, Expenses, Drawings Closed Put Here
Capital
-
DR
CR
17Closing 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
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19Income 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
20Step 1 Close Revenue Accounts into Income Summary
21Step 2Close Expense Accounts into Income Summary
22Step 3 Close Income Summary into Capital
23Step 4 Close Drawing into Capital Account
24Closing 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
25Journalize 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
26Journalize Steps 12
27Journalize Steps 14
28Closing 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
29Creating 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
30Post 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
31Posting Step 1 for Arch Copy Co.
32Posting Steps 1-3 for Arch Copy Co.
33Post-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
34Post-Closing Trial Balance
- Accountant uses the post-closing trial balance to
make sure that DR CR - Have you done all the work correctly?
35Errors 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?
36Performance Objective 4
- Define the following methods of accounting
accrual basis and modified cash basis
37Accrual 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
38Modified 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
39Modified 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
40Interim Statements
- Financial statements prepared during the fiscal
year, covering a period of time less than twelve
months
41Prepare Interim Statements
42Prepare 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
43Demonstration 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
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45Closing Step 1
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47Closing Step 2
48Closing Step 3
49Check Number for Step 3 Closing Entry
50Closing Step 4
51Post In Order To Get Information Into Ledger
Accounts
52Post Reference!
53Create Post-Closing Trial Balance