Closing Entries and the Postclosing Trial Balance Section 1: Closing Entries

6-1 Chapter 6 Closing Entries and the Postclosing Trial Balance Section 1: Closing Entries

Section Objectives

1. Journalize and post closing entries.

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

Step 9 Step 6 Interpret Journalize and the financial Step 7 post adjusting information Step 8 Journalize and entries Prepare a post closing postclosing entries trial balance The seventh step in the accounting cycle is to journalize and post closing entries.

6-3 QUESTION:

What is the Income Summary account?

ANSWER:

The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations.

6-4 Income Summary Account

 Classified as a temporary owner’s equity account.

 Does not have a normal balance.

 Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

6-5 Objective 1 Journalize and post closing entries

There are four steps in the closing process: 1. Transfer the balance of the revenue account to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the balance of the Income Summary account to the owner’s capital account. 4. Transfer the balance of the drawing account to the owner’s capital account.

6-6 JT’s Consulting Services Worksheet Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 83,500 83,500 83,500 Accounts Receivable 5,000 5,000 5,000 Supplies 3,000 (a) 1,000 2,000 2,000 Prepaid Rent 7,000 (b) 3,500 3,500 3,500 Equipment 22,000 22,000 22,000 Accum. Depr.—Equip. (c) 367 367 367 Accounts Payable 7,000 7,000 7,000 Jason Taylor, Cap. 90,000 90,000 90,000 Jason Taylor, Draw. 4,000 4,000 4,000 Fees Income 35,000 35,000 35,000 Salaries Expense 7,000 7,000 7,000 Utilities Expense 500 500 500 Supplies Expense (a) 1,000 1,000 1,000 Rent Expense (b) 3,500 3,500 3,500 Depr. Exp.—Equip. (c) 367 367 367 Totals 132,000 132,000 4,083 4,083 120,583 120,583 12,367 35,000 120,000 97,367 Net Income 22,633 22,633 Fees Income has a 35,000credit35,000 120,000120,000 balance of $35,000. 6-7 Step 1: Close Revenue

Fees Income Income Summary

Balance 35,000 Closing 35,000 Closing 35,000

6-8 Step 1: Close Revenue

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Closing Entries Dec. 31 Fees Income 35,000 Income Summary 35,000

The words “Closing Entries” are written in the Description column of the general journal.

6-9 Step 2: Close Expenses

 The Income Statement section of the worksheet for JT’s Consulting Services lists five expense accounts.

 Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero.

 This closing entry transfers total expenses to the Income Summary account.

6-10 Step 2: Close Expenses  The five expense account balances are reduced to zero.

 The total, $12,367 of expenses are transferred to the temporary owner’s equity account, Income Summary.

6-11 Step 2: Close Expenses

Income Summary Salaries Expense BAL 35,000 Balance 7,000 Closing 12,367 Closing 7,000

Utilities Expense Supplies Expense Balance 500 Balance 1000 Closing 500 Closing 1000

Rent Expense Depr. Expense – Equip.

Balance 3,500 Balance 367 Closing 3,500 Closing 367

6-12 Step 2: Close Expenses

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. 2010 Closing Entries Dec. 31 Income Summary 12,367.00 Salaries Expense 7,000.00 Utilities Expense 500.00 Supplies Expense 1,000.00 Rent Expense 3,500.00 Depreciation Exp.-Equip. 367.00

6-13 The Income Summary account reflects all entries in the Income Statement section of the worksheet.

Income Summary

Dr. Cr.

Closing 12,367 Closing 35,000

Balance 22,633

Net Income

6-14 Step 3: Close Net Income to Capital

 The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Jason Taylor, Capital.

 The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income.

 The Income Summary account is reduced to zero.

 The net income amount, $22,633, is transferred to the owner’s capital account. Jason Taylor, Capital is increased by $22,633.

6-15 Step 3: Close Net Income to Capital

Income Summary Jason Taylor, Capital

Balance 22,633 Balance 90,000

Closing 22,633 Closing 22,633

6-16 Step 3: Close Net Income to Capital

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 22,633.00 Jason Taylor, Capital 22,633.00

6-17 Step 4: Close Drawing to Capital

•Withdrawals appear in the statement of owner’s equity as a deduction from capital.

•The drawing account is closed directly to the capital account.

•The drawing account balance is reduced to zero.

•The balance of the drawing account, $4,000, is transferred to the owner’s capital account.

6-18 Step 4: Close Drawing to Capital

Jason Taylor, Capital Jason Taylor, Drawing

Balance 112,633 Balance 4,000 Closing 4,000 Closing 4,000

6-19 Step 4: Close Drawing to Capital

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Jason Taylor, Capital 4,000.00 Jason Taylor, Drawing 4,000.00

6-20 The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet.

Jason Taylor, Drawing Jason Taylor, Capital

Dr. Cr. Dr. Cr.

Balance 4,000 Closing 4,000 Balance 90,000

Net Inc. 22,633 Balance 0 Drawing 4,000 Balance 108,633

Jason Taylor, Capital 6-21 Summary of Closing Entries

GENERAL JOURNAL PAGE 4

POST. STEPS DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries 1. CLOSE Dec. 31 Fees Income 401 35,000.00 REVENUE Income Summary 309 35,000.00 2. CLOSE 31 Income Summary 309 12,367.00 EXPENSE Salaries Expense 511 7,000.00 ACCOUNTS Utilities Expense 514 500.00 Supplies Expense 517 1,000.00 Rent Expense 520 3,500.00 Depr. Expense-Equip. 523 367.00 3. CLOSE 31 Income Summary 309 22,633.00 INCOME Jason Taylor, Capital 301 22,633.00 SUMMARY 4. CLOSE 31 Jason Taylor, Capital 301 4,000.00 DRAWING Jason Taylor , Draw. 302 4,000.00 ACCOUNT 6-22 Posting the Closing Entries All journal entries are posted to the general ledger accounts.

 “Closing” is entered in the Description column of the ledger accounts.

 The ending balances of the drawing, revenue, and expense accounts are zero.

6-23 GENERAL JOURNAL PAGE 4

POST. STEPS DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries 1. CLOSE Dec. 31 Fees Income 401 35,000.00 REVENUE Income Summary 309 35,000.00 2. CLOSE 31 Income Summary 309 12,367.00 EXPENSE Salaries Expense 511 7,000.00 ACCOUNTACCOUNTS Fees Income Utilities Expense ACCOUNT NO.514 401 500.00 Supplies Expense 517 1,000.00 RentPOST. Expense 520 BALANCE 3,500.00 DATE DESCRIPTION Depr.REF. ExpenseDEBIT-Equip. CREDIT 523 DEBIT CREDIT 367.00 20103. CLOSE 31 Income Summary 309 22,633.00 Dec.INCOME 31 Jason J2 Taylor, Capital26,000.00 301 26,000.00 22,633.00 Dec.SUMMARY 31 J2 9,000.00 35,000.00 Dec.4. CLOSE 31 Closing 31 JasonJ4 Taylor, 35,000.00 Capital 301 4,000.00 – 0 – DRAWING Jason Taylor, Draw. 302 4,000.00 ACCOUNT

6-24 GENERAL JOURNAL PAGE 4

POST. STEPS DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries 1. CLOSE Dec. 31 Fees Income 401 35,000.00 REVENUE Income Summary 309 35,000.00 2. CLOSE 31 Income Summary 309 12,367.00 EXPENSE Salaries Expense 511 7,000.00 ACCOUNTS ACCOUNT Income SummaryUtilities Expense ACCOUNT 514 NO. 309 500.00 Supplies Expense 517 1,000.00 POST.Rent Expense 520 BALANCE 3,500.00 DATE DESCRIPTION REF.Depr. ExpenseDEBIT-Equip. CREDIT 523 DEBIT CREDIT 367.00 3. CLOSE 31 Income Summary 309 22,633.00 2010 INCOME Dec. 31 Closing JasonJ4 Taylor, Capital35,000.00 301 35,000.0022,633.00 SUMMARY 4. CLOSE 31 Jason Taylor, Cap 301 4,000.00 DRAWING Jason Taylor, Draw. 302 4,000.00 ACCOUNT

6-25 Chapter 6 Closing Entries and the Postclosing Trial Balance Section 2: Using Accounting Information

2. Prepare a postclosing trial balance. 3. Interpret financial statements. 4. Review the steps in the accounting cycle.

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

StepStep 99 Step 6 InterpretInterpret Journalize and thethe financialfinancial Step 7 post adjusting informationinformation Step 8 Journalize and entries Prepare a post closing postclosing entries trial balance

6-27 QUESTION: What is the postclosing trial balance

ANSWER: A postclosing trial balance is a statement that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances.

6-28 Postclosing Trial Balance JT’s Consulting Services Postclosing Trial Balance December 31, 2010

ACCOUNT NAME DEBIT CREDIT Cash 83,500.00 Accounts Receivable 5,000.00 Supplies 2,000.00 Prepaid Rent 3,500.00 Equipment 22,000.00 Accumulated Depreciation–Equipment 367.00 Accounts Payable 7,000.00 Jason Taylor, Capital 108,633.00 Totals 116,000.00 116,000.00

6-29 Finding and Correcting Errors

If the postclosing trial balance does not balance, the accounting records contain errors.

Use the audit trail to trace data through the accounting records.

6-30 Objective 3 Interpret financial statements.

6-31 JT’s Consulting Services Balance Sheet December 31, 2010 Assets Cash $83,500.00 Accounts Receivable 5,000.00 Supplies 2,000.00 Prepaid Rent 3,500.00 Equipment $ 22,000.00 Less Accumulated Depreciation 367.00 21,633.00 Total Assets $ 115,633.00

What Liabilitiesis the and Owner’s Equity How much do the Liabilitiescash balance? customers owe the Accounts Payable business? $ 7,000.00 Owner’s Equity Jason Taylor, Capital 108,633.00 Total Liabilities and Owner’s Equity $115,633.00

6-32 JT’s Consulting Services Balance Sheet December 31, 2010 Assets Cash $83,500.00 Accounts Receivable How much does the business 5,000.00 Supplies owe its suppliers? 2,000.00 Prepaid Rent 3,500.00 Equipment $ 22,000.00 Less Accumulated Depreciation 367.00 21,633.00 Total Assets $ 115,633.00

Liabilities and Owner’s Equity Liabilities Accounts Payable $ 7,000.00 Owner’s Equity Jason Taylor, Capital 108,633.00 Total Liabilities and Owner’s Equity $115,633.00

6-33 JT’s Consulting Services Income Statement Month Ended December 31, 2010

Revenue Fees Income 35,000.00 Expenses Salaries Expense 7,000.00 Utilities Expense 500.00 Supplies Expense What is the profit? 1,000.00 Rent Expense 3,500.00 Depr. Expense--Equipment 367.00 Total Expenses 12,367.00 Net Income for the Month 22,633.00

6-34 Review the steps in the Objective 4 accounting cycle The Accounting Cycle

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet Prepare financial statements.

 Income Statement Step 5 Prepare  Statement of Owner’s Equity financial statements  Balance Sheet

6-35 The Accounting Cycle

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

 Transfer net income or net loss Step 5 to owner’s equity. Prepare financial  Reduce the balances of the statements temporary accounts to zero. Step 6 Journalize and Step 7 post adjusting Journalize and entries post closing entries

6-36 The Accounting Cycle

Step 2 Step 3 Journalize the Post the Step 1 data about data about Step 4 Analyze transactions transactions Prepare transactions a worksheet

Step 5 Prepare financial statements

6-37 Flow of Data Through a Simple Accounting System

Source General General Worksheet Financial Documentsdocuments journal ledger statements

Source documents are analyzed.

6-38 Thank You for using

College Accounting, 12th Edition

Price • Haddock • Farina

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