Unit 13 – Adjusting and Closing Entries

Previously…

• All adjustments were made on the work sheet. The ledger accounts have not yet been changed. (currently, are incorrect and do not reflect the adjustments made on the work sheet)

• Adjusting entries are used to record the adjustments in the ledger accounts.

Adjusting Entries

• Work sheet• Journal form• Post them to the ledger

General Journal Page 21

Date Particulars P.R. Debit Credit

20_Jan. 31

31

31

31

Supplies Expense SuppliesTo record supplies used in January.

Insurance Expense Prepaid InsuranceTo record insurance for the month.

Rent Expense Prepaid RentTo record rent for one month.

Depreciation Expense – Equipment Acc. Depreciation – EquipmentTo record one month’s depreciation, declining-balance method.

100.00

60.00

1700.00

160.00

100.00

60.00

1700.00

160.00

General Ledger (Before Adjustments)Supplies

Jan.31 1000

Prepaid InsuranceJan.31 720

Prepaid RentJan.31 5100

EquipmentJan.31 12000

Acc. Depreciation – EquipmentJan.31 2400

Supplies Expense

Insurance Expense

Rent Expense

Depreciation Expense - Equipment

General Ledger (After Adjustments)Supplies

Jan.31 1000Balance 900

Jan. 31 100

Prepaid InsuranceJan.31 720Balance 660

Jan. 31 60

Prepaid RentJan.31 5100Balance 3400

Jan. 31 1700

EquipmentJan.31 12000

Acc. Depreciation – EquipmentJan.31 2400 31 160Balance 2560

Supplies Expense

Jan. 31 100

Insurance ExpenseJan. 31 60

Rent ExpenseJan.31 1700

Depreciation Expense - EquipmentJan. 31 160

Adjusting Entries

• Work sheet• Journal form• Post them to the ledger• Adjusted Trial Balance

Closing Entries• Summary

– Income statement: net income or net loss for a specific accounting period. (data found in revenue and expense accounts)

• New accounting period = revenue and expense accounts should show zero balances.

• “Matching principle” – revenue for each accounting period is matched with the expenses for that accounting period to determine net income or loss.

• Closing the books: the process by which revenue and expense accounts are reduced to zero at the end of each accounting period.

Temporary (vs) Permanent Accounts

• Temporary accounts:– Contain information for the current accounting

period only – Balances not carried over to next accounting period– Examples: Revenue & Expense accounts

• Permanent accounts:– Balances are carried forward from one accounting

period to another (they are not closed – put to 0)– Examples: Asset, Liability, & Owner’s Equity accounts

Purpose of Closing the Books

1) Prepare Revenue and Expense accounts for the next accounting period (by reducing them to 0)

2) Updating the Owner’s Equity account- Increase or decrease of capital[Net income/loss, and Drawings]

Income Summary Account

• Closing Revenue & Expense accounts

Income Summary Account

Transfer balances

Expenses

Balance XXX XXX

Revenue

XXXX Balance XXXX

Income Summary

XXXBalance (net loss)

XXXXBalance (net income)

Steps – Closing the Books

1) Close Revenue Accounts into Income summary

2) Close Expense Accounts into Income summary

3) Close Income summary into Capital

4) Close Drawings into Capital

Step 1: Close Revenue Accounts into Income summary

SalesDec. 31 20 000

General Journal PageDate Particulars P.R. Debit Credit20_Dec.

31 Sales Income SummaryTo close the sales account.

20,000.0020,000.00

SalesDec. 31 20 000 Balance 20 000

Income SummaryDec. 31 20 000

Step 2: Close Expense Accounts into Income summary

Advertising ExpenseDec. 31 3 000

General Journal PageDate Particulars P.R. Debit Credit20_Dec.

31 Income Summary Advertising ExpenseTo close Advertising Expense.

3,000.003,000.00

Advertising ExpenseBalance 3 000 Dec. 31 3 000

Income SummaryDec. 31 3 000 Dec. 31 20 000

Compound entry (makes it easier)General Journal Page

Date Particulars P.R. Debit Credit20_Dec.

31 Income Summary Advertising Expense Salaries Expense Telephone Expense General ExpenseTo close the expense accounts.

14,000.00 3,000.0010,000.00 500.00 500.00

Step 3: Close Income Summary into Capital

Income SummaryDec. 31 14 000 Dec. 31 20 000

Balance 6 000

General Journal PageDate Particulars P.R. Debit Credit20_Dec.

31 Income Summary D. Adams, CapitalTo close Income Summary and transfer the net income to Capital.

6,000.006,000.00

Income SummaryDec. 31 14 000 31 6 000

Dec. 31 20 000Balance 6 000

D. Adams, Capital 17 000Dec. 31 6 000

Net incomeCredits > DebitsIncreases OE

Step 4: Close Drawings into Capital D. Adams, Drawings

Balance 2 000

General Journal PageDate Particulars P.R. Debit Credit20_Dec.

31 D. Adams, Capital D. Adams, DrawingsTo close the Drawings account.

2,000.002,000.00

D. Adams, CapitalDec. 31 2 000________________

17 000Dec. 31 6 000Balance 21 000

D. Adams, DrawingsBalance 2 000 Dec. 31 2 000

Closing Books (from work sheet)

• Same process.– (simply retrieving information from the work

sheet)– Example: Page 244-248– See Ledger Accounts (after adjusting and closing

entries have been posted) – Page 246-248

Post-Closing Trial Balance

• Created after adjusting and closing entries have been posted to the general ledger.

• Purpose: prove mathematical accuracy of the general ledger. (debits = credits) … ready for the next fiscal period.

• This trial balance is much shorter.– Only asset, liability, & capital accounts have

balances. (others have been closed)

Post-Closing Trial BalanceManagement Consultant Services

Post-Closing Trial BalanceDecember 31, 20 -

Account Acc. # Debit CreditCashAccounts ReceivableSuppliesEquipmentAccumulated Depreciation – EquipmentAccounts payableBank LoanJ. Turner, Capital

100102131141142200221300

$ 18 000 19 000 1 400 12 000

_________$50 400

$4 320 1 000 3 00042 080$50 400

Example 249-250 (Effect of a net loss) …Decreases Owner’s Equity.

Updated Accounting Cycle

Business Transactions

Journal

Ledger

Journalizing

Posting

Work sheet including Trial Balance Prepared

Work Sheet

Financial Statements Prepared

Financial Statements

Journal

Adjusting and closing entries journalized

Ledger

Adjusting and closing entries posted

Post-closing Trial Balance

ProofNew Accounting Period Begins