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5 Completing the Accounting Cycle

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Resets revenue, expense and withdrawal account balances to zero at the end of the period.

Helps summarize a period’s revenues and expenses in the Income Summary account.

Identify accounts for closing.

Record and post closing entries.

Prepare post-closing trial balance.

Closing Process

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Temporary Accounts

Revenues

Income Summary

Exp

ense

s

With

draw

als

Permanent Accounts

Assets

Lia

bili

ties

Ow

ner’s

Cap

ital

The closing process applies only to

temporary accounts.

The closing process applies only to

temporary accounts.

Temporary and Permanent Accounts

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Let’s see how the closing process

works!

Recording and Posting Closing Entries

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Owner’s Capital.

Close Withdrawals to Owner’s Capital.

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Balances before closing.

Income Summary

Owner's Capital30,000

30,000

Revenue Accounts25,000

25,000

Withdrawals Account5,000

5,000

Expense Accounts10,000

10,000

Closing Process for a Proprietorship

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Income Summary25,000

25,000

Close Revenue accounts to Income

Summary.

Owner's Capital30,000

30,000

Revenue Accounts25,000 25,000

-

Withdrawals Account5,000

5,000

Expense Accounts10,000

10,000

Closing Process for a Proprietorship

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Income Summary10,000 25,000

15,000 Owner's Capital30,000

30,000

Revenue Accounts25,000 25,000

-

Withdrawals Account5,000

5,000

Close Expense accounts to Income

Summary.

Expense Accounts10,000 10,000

-

Closing Process for a Proprietorship

The balance in Income Summary equals net

income.

The balance in Income Summary equals net

income.

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Owner's Capital30,000 15,000

45,000

Owner's Capital5,000 30,000

15,000

40,000

Withdrawals Account5,000

5,000

Withdrawals Account5,000 5,000

-

Close Income Summary to

Owner’s Capital.

Revenue Accounts25,000 25,000

-

Expense Accounts10,000 10,000

-

Income Summary10,000 25,000 15,000

-

Closing Process for a Proprietorship

Close Withdrawals account to Owner’s

Capital.

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Using the adjusted trial balance, let’s prepare the

closing entries for

FastForward.

Exh.5.3

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Close Revenue accounts to

Income Summary.

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Prepare the entry to close Revenues by debiting the revenue accounts and crediting

Income Summary.

Prepare the entry to close Revenues by debiting the revenue accounts and crediting

Income Summary.

Now, let’s look at the ledger accounts after posting this closing entry.

Close Revenue Accounts to Income Summary

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Dec. 31 Consulting Revenue 7,850

Rental Revenue 300

Income Summary 8,150

Now, let’s look at the ledger accounts after posting this closing entry.

Close Revenue Accounts to Income Summary

Exh.5.3

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Income Summary7,850

300

8,150

Consulting Revenue7,850 7,850

-

Rental Revenue300 300

-

Close Revenue Accounts to Income Summary

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Close Expense accounts to

Income Summary.

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Prepare the entry to close Expenses by crediting the expense accounts and debiting

Income Summary.

Prepare the entry to close Expenses by crediting the expense accounts and debiting

Income Summary.

Now, let’s look at the ledger accounts after posting this closing entry.

Close Expense Accounts to Income Summary

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Dec. 31 Income Summary 4,365

Depreciation Expense-Equipment 375

Salaries Expense 1,610

Insurance Expense 100

Rent Expense 1,000

Supplies Expense 1,050

Utilities Expense 230

Now, let’s look at the ledger accounts after posting this closing entry.

Close Expense Accounts to Income Summary

Exh.5.3

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Income Summary375 7,850

1,610 300 100

1,000 1,050

230

3,785 Utilities Expense230 230

-

Depreciation Expense- Eq.

375 375 -

Salaries Expense1,610 1,610

-

Insurance Expense100 100

-

Supplies Expense1,050 1,050

-

Rent Expense1,000 1,000

-

Net Income

Close Expense Accounts to Income Summary

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Close Income Summary to

Owner’s Capital.

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Dec. 31 Income Summary 3,785

Chuck Taylor, Capital 3,785

Now, let’s look at the ledger accounts after posting this closing entry.

Close Income Summary to Owner’s Capital

Exh.5.3

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Chuck Taylor, Capital

30,000 3,785

33,785

Income Summary375 7,850

1,610 300 100

1,000 1,050

230 3,785

-

Close Income Summary to Owner’s Capital

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Close Withdrawals to

Owner’s Capital.

Exh.5.3

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GENERAL JOURNAL Page 34Date Description PR Debit Credit

Dec. 31 Chuck Taylor, Capital 600

Chuck Taylor, Withdrawals 600

Now, let’s look at the ledger accounts after posting this closing entry.

Close Withdrawals to Owner’s Capital

Exh.5.3

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Chuck Taylor, Capital

600 30,000 1,785

31,185

Chuck Taylor, Withdrawals

600 600

-

Close Withdrawals to Owner’s Capital

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Let’s look at FastForward’s

post-closing trial balance.

Post-Closing Trial Balance

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

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Exh.5.4

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Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.

Close Dividends Declared to Retained Earnings.

Closing Entries for a Corporation

The first two entries are the same, but the last two are a little different!

The first two entries are the same, but the last two are a little different!

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Let’s close this chapter!

End of Chapter 5