Chapter 8Adjusting

and Closing Entries

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1. Analyze Transactions2. Journalize3. Post4. Prepare the work sheet5. Prepare Financial Statements6. Journalize Adjusting and Closing Entries7. Post Adjusting and Closing Entries8. Prepare Post-Closing Trial Balance

Steps of the Accounting CycleSteps of the Accounting Cycle

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How is an account balance changed?

By journalizing a transaction and posting the entry to the account.– Remember, when we prepared a

work sheet, we only planned the adjusting entries.

– No account balances were actually changed when making the work sheet.

8-1 Recording Adjusting Entries

Adjusting Entries: journal entries recorded to update general ledger accounts at the end of the fiscal period.

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ADJUSTING ENTRY FOR SUPPLIES

page 202

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ADJUSTING ENTRY FOR PREPAID INSURANCE

page 204

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Audit Your UnderstandingWhy are adjustments journalized?

The accounts are not up to date until the entries on the work sheet are journalized and posted to the ledger accounts.

Where is the information obtained from to journalize the adjusting entries? The work sheet adjustments column.Remember—just copy them from the work sheet

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Work TogetherOn website

8-2 Recording Closing EntriesPermanent Accounts: accounts used to accumulate information from one fiscal period to the next. •Examples: Asset and Liability Accounts and the Owner’s Capital Account

Temporary Accounts: accounts used to accumulate information until it is transferred to the owner’s capital account.•Examples: Examples include: Revenue, expense, owner’s drawing, and the income summary account.

Closing Entries: journal entries used to prepare temporary accounts for a new fiscal period.

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Closing Entries, Continued

To close a temporary account, an amount equal to its balance is recorded in the account on the side opposite its balance. Example: Sales has a credit balance of $4,000 A debit of $4,000 is recorded to close the Sales account.– Once the entry is posted, the Sales account

balance = 0

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Income Summary Account--Continued

Remember: debits must equal credits

If an account is debited for $4,000 to close it, some other account must be credited for the same amount.

Income Summary is a temporary account used to summarize the closing entries for the revenue and expense accounts.

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Entry to close Income Statement Accounts with credit balances. (S) Entry to close Income Statement Accounts with debit balances. (E) Entry to record net income (or net loss) and close the Income Summary Account. (N) Entry to close the owner’s drawing account.

(D)

Four Closing Entries:

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CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE (Sales) page 208

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CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES (expenses)

page 209

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Remember...Purpose of closing entries is to bring the balance of temporary accounts to zero.Debits must equal credits—So the Income Summary account is the other account used in the closing entry for revenues and expenses.

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CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT (Net Income or Loss)

page 210

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CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT

page 211

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Audit Your UnderstandingWhat do the ending balances of permanent accounts for one fiscal period represent at the beginning of the next fiscal period?

Beginning BalancesWhat do the balances of temporary accounts show?

Changes in the owner’s capital for a single fiscal period.

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8-3 Preparing a Post-Closing Trial Balance

Post-Closing Trial Balance: a trial balance prepared after the closing entries are posted. (The last step in the cycle)Accounting Cycle: the series of accounting activities included in recording financial information for a fiscal period.

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Why do this report?After the closing entries are recorded and posted, the business is almost ready to start recording transactions for the new accounting period. Before this is done, it is important to check if debits still equal credits.

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GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED

page 213

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POST-CLOSING TRIAL BALANCEpage 216

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Audit Your Understanding

Which accounts go on the post-closing trial balance? Permanent Accounts: Assets, Liabilities, and the Owner’s Capital Account

Why are temporary accounts omitted from a post-closing trial balance? Because they are closed and have zero balances.

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Work Together

Textbook Page 219 – Workbook page 167–Only permanent accounts are listed.

– Total debits must equal the total credits.

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The End!