49
6-1
6-1
Closing Entries
and the Postclosing
Trial Balance
Section 1: Closing Entries
Chapter
6
Section Objectives
1. Journalize and post closing
entries.
McGraw-Hill © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
6-3
The Closing Process
6-4
The Accounting Cycle
Step 7
Journalize and
post closing
entries
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entriesStep 8
Prepare a
postclosing
trial balance
Step 9
Interpret
the financial
information
Step 3
Post the
data about
transactions
The seventh step in the accounting cycle is to journalize
and post closing entries.
Step 7
Journalize and
post closing
entries
6-5
Closing entries are journal entries
that transfer the results of
operations (net income or net loss)
to owner‟s equity and reduce the
revenue, expense, and drawing
account balances to zero.
ANSWER:
QUESTION:
What are closing entries?
6-6
The Income Summary Account
6-7
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.
ANSWER:
QUESTION:
What is the Income Summary account?
6-8
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
6-9
Objective 1
Journalize and post closing entries.
6-10
Steps in the Closing Process
6-11
2. Transfer the expense account balances to the
Income Summary account.
There are four steps in the closing
process:
4. Transfer the balance of the drawing account to the owner‟s capital account.
3. Transfer the balance of the Income Summary
account to the owner‟s capital account.
1. Transfer the balance of the revenue account to
the Income Summary account.
Step 1: Transfer Revenue Account Balances
6-13
On December 31 the worksheet for JT „s
Consulting Services shows one revenue
account, Fees Income.
6-14
Net Income
CREDIT
BALANCE SHEETINCOME STMT.
DEBIT CREDIT DEBIT
83,500
5,000
2,000
22,000
3,500
367
7,000
90,000
4,000
35,000
7,000
500
1,000
367
3,500
35,000 97,36712,367 120,000
367
120,583
TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS
DEBIT CREDIT CREDIT DEBIT CREDIT
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accum. Depr.—Equip.
Jason Taylor, Cap.
Accounts Payable
Jason Taylor, Draw.
Fees Income
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Exp.—Equip.
Totals
DEBIT
83,500
7,000
90,000
4,000
35,000
7,000
500
22,000
7,000
5,000
3,000
83,500
5,000
22,000
4,000
7,000
500
2,000
7,000
90,000
35,000
1,000
367
3,500
132,000 132,000 4,083 4,083
(c) 367
(a) 1,000
(b) 3,500
(c) 367
(a) 1,000
(b) 3,500 3,500
120,583
22,633 22,633
35,000 35,000 120,000120,000
JT‟s Consulting Services
Worksheet
Month Ended December 31, 2007
It has a credit balance
of $35,000.
6-15
The Fees Income account is closed to the Income
Summary account.
Step 1: Close Revenue
6-16
The revenue account, Fees Income, is decreased by
$35,000 to zero.
The $35,000 is transferred to the temporary owner‟s
equity account, Income Summary.
Step 1: Close Revenue
6-17
Revenue Account
Record
decreases
Income Summary
No normal balance
Step 1: Close Revenue
6-18
Which account is debited?
For what amount?
Which account is credited?
For what amount?
Step 1: Close Revenue
6-19
Fees Income
Closing 35,000
Balance 35,000
Income Summary
Closing 35,000
Step 1: Close Revenue
6-20
The words “Closing Entries” are written in the
Description column of the general journal.
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDITREF.
2007 Closing Entries
Dec. 31 Fees Income 35,000
Income Summary 35,000
Step 1: Close Revenue
Step 2: Transfer Expense Account Balances
6-22
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.
Step 2: Close Expenses
6-23
The five expense account balances are reduced to
zero.
Step 2: Close Expenses
The total, $12,367 of
expenses are transferred to
the temporary owner’s equity
account, Income Summary.
6-24
Income Summary Expense Accounts
Record
decreases
Step 2: Close Expenses
No normal balance
6-25
Which accounts are debited?
For what amounts?
Which accounts are credited?
For what amounts?
Step 2: Close Expenses
6-26
Income Summary
Step 2: Close Expenses
Salaries Expense
Closing 12,367
BAL 35,000
Closing 7,000
Balance 7,000
Utilities Expense Supplies Expense
Balance 500 Balance 1000
Closing 1000Closing 500
Depr. Expense – Equip.Rent Expense
Closing 3,500
Balance 3,500 Balance 367
Closing 367
6-27
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDITREF.
2007 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
Step 2: Close Expenses
6-28
The Income Summary account reflects all
entries in the Income Statement section of
the worksheet.
Income Summary
Dr.
Closing 12,367
Cr.
Balance 22,633
Closing 35,000
Net Income
Step 3: Transfer Net Income or Net Loss to Owner’s Equity
6-30
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.
Step 3: Close Net Income to Capital
6-31
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.
Step 3: Close Net Income to Capital
6-32
Which account is debited?
For what amount?
Which account is credited?
For what amount?
Step 3: Close Net Income to Capital
6-33
Income Summary Jason Taylor, Capital
Closing 22,633
Balance 22,633Balance 90,000
Step 3: Close Net Income to Capital
Closing 22,633
6-34
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
Step 3: Close Net Income to Capital
Step 4: Transfer the Drawing Account Balance to Capital
6-36
Withdrawals appear in the statement of owner‟s
equity as a deduction from capital.
The drawing account is closed directly to the capital
account.
Step 4: Close Drawing to Capital
6-37
The drawing account balance is reduced to zero.
The balance of the drawing account, $4,000, is transferred to the owner‟s capital account.
Step 4: Close Drawing to Capital
6-38
Which account is debited?
For what amount?
Which accounts is credited?
For what amount?
Step 4: Close Drawing to Capital
6-39
Jason Taylor, Capital Jason Taylor, Drawing
Closing 4,000
Balance 112,633
Closing 4,000
Balance 4,000
Step 4: Close Drawing to Capital
6-40
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
Step 4: Close Drawing to Capital
6-41
The new balance of the Jason Taylor, Capital account
agrees with the amount listed on the balance sheet.
Jason Taylor, CapitalJason Taylor, Drawing
Closing 4,000
Cr.Dr.
Balance 4,000
Balance 0
Cr.
Balance 90,000
Net Inc. 22,633
Balance 108,633
Dr.
Drawing 4,000
Jason Taylor, Capital
6-42
Summary of Closing Entries
GENERAL JOURNAL PAGE 4
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
2007 Closing Entries
Dec. 31 Fees Income 401 35,000.00
Income Summary 309 35,000.00
31 Income Summary 309 12,367.00
Salaries Expense 511 7,000.00
Utilities Expense 514 500.00
Supplies Expense 517 1,000.00
Rent Expense 520 3,500.00
Depr. Expense-Equip. 523 367.00
31 Income Summary 309 22,633.00
Jason Taylor, Capital 301 22,633.00
31 Jason Taylor, Capital 301 4,000.00
Jason Taylor , Draw. 302 4,000.00
STEPS
1. CLOSE
REVENUE
2. CLOSE
EXPENSE
ACCOUNTS
3. CLOSE
INCOME
SUMMARY
4. CLOSE
DRAWING
ACCOUNT
6-43
All journal entries are posted to the general
ledger accounts.
6-44
“Closing” is entered in the Description column of
the ledger accounts.
The ending balances of the drawing, revenue,
and expense accounts are zero.
Posting the Closing Entries
6-45
GENERAL JOURNAL PAGE 4
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
2007 Closing Entries
Dec. 31 Fees Income 401 35,000.00
Income Summary 309 35,000.00
31 Income Summary 309 12,367.00
Salaries Expense 511 7,000.00
Utilities Expense 514 500.00
Supplies Expense 517 1,000.00
Rent Expense 520 3,500.00
Depr. Expense-Equip. 523 367.00
31 Income Summary 309 22,633.00
Jason Taylor, Capital 301 22,633.00
31 Jason Taylor, Capital 301 4,000.00
Jason Taylor, Draw. 302 4,000.00
STEPS
1. CLOSE
REVENUE
2. CLOSE
EXPENSE
ACCOUNTS
3. CLOSE
INCOME
SUMMARY
4. CLOSE
DRAWING
ACCOUNT
ACCOUNT Fees Income ACCOUNT NO. 401
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT
2007
Dec. 31 J2 26,000.00 26,000.00
Dec. 31 J2 9,000.00 35,000.00
Dec. 31 Closing J4 35,000.00 – 0 –
6-46
GENERAL JOURNAL PAGE 4
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
2007 Closing Entries
Dec. 31 Fees Income 401 35,000.00
Income Summary 309 35,000.00
31 Income Summary 309 12,367.00
Salaries Expense 511 7,000.00
Utilities Expense 514 500.00
Supplies Expense 517 1,000.00
Rent Expense 520 3,500.00
Depr. Expense-Equip. 523 367.00
31 Income Summary 309 22,633.00
Jason Taylor, Capital 301 22,633.00
31 Jason Taylor, Cap 301 4,000.00
Jason Taylor, Draw. 302 4,000.00
STEPS
1. CLOSE
REVENUE
2. CLOSE
EXPENSE
ACCOUNTS
3. CLOSE
INCOME
SUMMARY
4. CLOSE
DRAWING
ACCOUNT
ACCOUNT Income Summary ACCOUNT NO. 309
POST. BALANCE
DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT
2007
Dec. 31 Closing J4 35,000.00 35,000.00
R
E
V
I
E
W
_____________ transfer the results of
operations to owner‟s equity and reduce
the revenue, expense, and drawing
account balances to zero.
The Income Summary account is classified
as a(n) _________ _____________
account.
The first step in the closing process is to
transfer _______ account balances.revenue
temporary
Closing entries
Complete the following sentences:
owner‟s equity
SECTION
R
E
V
I
E
W
The journal entry to close the drawing
account is debit ______ and credit
________.
After the closing entries are posted, the
Income Summary account has a(n) ____
balance.
After the closing entries are posted, all
_________ accounts have zero balances.temporary
zero
Capital
Complete the following sentences:
Drawing
SECTION
6-49
Thank Youfor using
College Accounting, 11th Edition
Price • Haddock • Brock
