Closing Entries Chapter 8.3

We’re almost done, let’s finish it up!

Post the Adjusting &

Closing Entries to the

Ledger

Journalize the

Adjusting &Closing

Entries

Prepare the Post-Closing Trial Balance

Step 7Step 8 Step 9

Which accounts will we need in the next financial period?

These accounts are not closed.

“Real” or Permanent

Assets

Liabilities

Capital (OE)

Which accounts will not apply to the next financial period?

Close these accounts

“Nominal” or Temporary

Revenue

Expenses

Drawings

Bring balance to zero!!

Why are Income Statement accounts not required for next fiscal period?

Matching Principle: states Revenue & Expenses must be recorded in same fiscal period to fairly calculate Net income/ loss.

Why do we Prepare the closing Entries?

1. To bring nominal (“RED”) accounts to zero

2. To update Capital

Complete Accounting Cycle

(1) Transactions occur, gather source documents. Chp. 3 & 6

(2) Accounting entries recorded in the journal. Chp. 6

(3) Journal entries posted to the ledger accounts

(4) Ledger balanced by means of a trial balance

(DR= CR Chp.4)

(5) Work sheet prepared

(6) Income statement (chp 5) and balance sheet (chp.2,8)

prepared.

(7) Adjusting entries journalized and posted. Chp. 9.2, 9.5

-supplies-insurance-late bills-depreciation

(9)_____________________________

(8)____________________________________________________

Journalize & Post adjusting and closing Entries Chp. 9.3, 9.4

Post-closing Trial Balance Chp. 9.3

9.4 Journalizing & Posting the Closing Entries

1. The information to prepare the closing entries comes from the worksheet

2) 4 Steps of Closing Entries:1. Closing Entry No. 1

Transfers the balances in the REVENUE account(s) (Income Statement) to a new nominal account called Income Summary

Since R=CR, DR entries are needed to close them out

Therefore: Revenue DR Income Summary

CR 

 

2. Closing Entry No. 2

Closes EXPENSES to Income Summary

Since E=DR, CR entries are needed to close them out

Therefore: Income Summary DR

Expense CR

 

3. Closing Entry No. 3

Closes Income Summary to CAPITAL

if Income Summary account has a CR balance, DR entry is needed to close it

Therefore: Income Summary DR

Owner, Capital CR

 

3. Closing Entry No. 3 cont.

If Income Summary account has a DR balance, CR entry is needed to close it

Therefore: Owner, Capital DR

Income Summary CR

4. Closing Entry No. 4

Closes DRAWINGS to CAPITAL

Since D=DR, CR entries are needed to close them out

Therefore: Owner, Capital DR

Owner, Drawings CR

Let’s Try It!

Complete Exercise #1, 2, 3, 4 p. 298-301 (t), p. 236-241 (w)

Worksheet Pilot Plumbing Month Ended Dec. 31, 2012

             

Accounts Trial Balance   Income Statement   Balance Sheet  

  Dr. Cr. Dr. Cr. Dr. Cr.

             

Bank 12000.00       12000.00  

A/R - Carmen's Restaurants 1200.00       1200.00  

A/R - Willow Apartments 1800.00       1800.00  

Plumbing Supplies 950.00       950.00  

Plumbing Equipment 3050.00       3050.00  

Van 16000.00       16000.00  

Bank Loan   4000.00       4000.00

A/p - Hudson's Plumbing   600.00       600.00

L. Wallace, Capital   26450.00       26450.00

L. Wallace, Drawings 150.00       150.00  

Plumbing Revenue   4500.00   4500.00    

Advertising Expense 100.00   100.00      

Bank Charges Expense 20.00   20.00      

General Expenses 80.00   80.00      

Telephone Expense 50.00   50.00      

Van Repairs 150.00   150.00      

  35550.00 35550.00 400.00 4,500.00 35,150.00 31,050.00

Net Income     4,100.00     4,100.00

      4,500.00 4,500.00 35,150.00 35,150.00