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Year-EndYear-EndClosingClosing

The procedures given in this slideshow refer to a company using a PERIODIC Inventory System.

Why closing entries are necessary. 3 Year-End Closing in Simply 4

1. Close Ending Inventory and temporary accounts with credit balances 8

2. Close Beginning Inventory and temporary accounts with debit balances 9

3. Transfer the balance of the Income Summary account to the owner’s capital account 11

Starting a New Fiscal Year 13

1. Close the Withdrawals account to the Owner’s Capital Account 14

2. Reverse Prior-Year Accrued Expenses 15

3. Update Inventory Accounts 16

Trial Balance for the New Fiscal Year 17

ContentsContents

Slideshow 10Slideshow 10

Why Closing Entries are Why Closing Entries are NecessaryNecessary

Year-end closing procedure is commonly referred to as “closing the books” because you are virtually closing off the fiscal year.

The slides that follow illustrate year-end closing procedures for a sole proprietorship using the Periodic Inventory method. Refer to your Accounting textbook for information on closing entries for corporations.

Click and study why closing entries are necessary.

Click to continue.

1. Revenue increases owner’s equity, whereas expenses and drawings (withdrawals) decrease owner’s equity. During an accounting period, these increases and decreases are recorded in the revenue, expenses, and withdrawals accounts, but are not reflected in the Capital account.

By transferring the effects of revenues, expenses, and drawings to the owner’s capital account, the correct capital account will be reflected in the beginning financial statements of the new fiscal period.

2. Because the revenue, expenses and drawings accounts must accumulate information for only one period, they must start from zero balances at the beginning of each new accounting period. Closing entries clear the balances of the revenue, expenses and withdrawals accounts to zero.

3. In order that correct inventory values are used at the start of the new fiscal year, the correct Beginning Inventory must be established.

Why closing entries are necessary:Why closing entries are necessary:

Year-End Closing in SimplyYear-End Closing in Simply

Study the Trial Balance after year-end adjustment entries had been recorded. This is where you would start year-end closing procedures as follows:

1. Close the current fiscal year, then

2. Record journal entries to start the new fiscal year.

These procedures affect the asset Inventory account (purple arrow), revenue accounts (gold bracket), cost of goods sold (COGS) accounts (green bracket), expense accounts (blue bracket), and

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… Drawings account is closed to the Capital account (red arrows).

Click to continue.

Year-End Closing in SimplyYear-End Closing in Simply(continued)(continued)

To close the current fiscal year in Simply, you would select Start New Year from the Maintenance Menu.

Click Start New Year now.

Simply will give you a chance to back up. Read the warning window.

Click Yes.

Year-End Closing in SimplyYear-End Closing in Simply(continued)(continued)

In the Backup File Name box, you can specify the folder name where you wish to save the backup.

Click OK.

If the folder does not exist, Simply will create it for you automatically.

Simply would also confirm clearing of old data. For example, if the current year is 2014, “old data” refers to data for 2013. If you select Yes, Simply would delete 2013 data and move 2014 data in its place.

Click Yes.

Year-End Closing in SimplyYear-End Closing in Simply(continued)(continued)

Simply would then remind you to update the locking date.

Click.

This refers to the date you have entered in the Company System Setting page when you first set up the company records.

When you set up the System locking date for the old year in order that no transactions could be entered previous to that date.

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When starting a new year, the new locking date should be the first day of the new fiscal year. In this case, the first day of the new fiscal year is Jan 01, 2015. Updating the Locking Date to this date will prevent posting entries to the previous year 2014.

Click to continue.

Current Locking Date

Locking Date for the New Year

Closing Entries:Closing Entries:

Procedure #1: Close Ending Procedure #1: Close Ending Inventory and temporary accounts Inventory and temporary accounts with credit balances.with credit balances.

When Simply performs year-end closing procedures, it does not generate journal entries; therefore, closing entries would not appear in the General Journal Entry Listing at the end of the year. The procedures illustrated here are designed to help you understand the theory behind the closing procedures that Simply automatically performs.

Click and study closing Procedure #1, based on information on the Trial Balance above it.

This procedure closes Sales – All, Ending Inventory, Purchase Returns and Purchase Discounts to zero and transfers the balances of these accounts to Income Summary, a temporary clearing account (which you will not see on the Trial Balance). Remember, Simply automatically does this procedure when you start a new year.

Click to continue.

Procedure #1: Close Ending Inventory and temporary accounts with credit balances.

DR Sales – All 327,600.00

DR Ending Inventory 55,850.00

DR Purchase Returns 5,260.00

DR Purchase Discounts 1,942.00

CR Income Summary 390,652.00

Closing Entries:Closing Entries:

Procedure #2: Close Procedure #2: Close Beginning Inventory and Beginning Inventory and temporary accounts with debit temporary accounts with debit balances.balances.

This procedure (which Simply does automatically when you start a new year) closes COGS accounts Beginning Inventory and Purchases (green arrows), temporary revenue accounts that have debit balances (Sales Returns and Sales Discounts - gold arrows), and all expense accounts (purple bracket).

Click and study Procedure #2 based on the partial Trial Balance shown.

Click to continue.

Bottom Bottom half of half of Trial Trial BalanceBalance

Procedure #2: Procedure #2: Close Beginning Close Beginning Inventory and Inventory and temporary accounts temporary accounts with with debitdebit balances.balances.

DR Income Summary 370,310.80

CR Beginning Inventory 48,680.00

CR Sales Returns & Allowances 3,980.00

CR Sales Discounts 5,725.00

CR Purchases 140,370.00

CR Rent Expense 24,000.00

CR Wages Expense 88,109.00

CR EI Expense 3,452.00

CR CPP Expense 3,193.00

CR Office Supplies Expense 2,170.00

CR Telephone Expense 4,000.80

CR Advertising Expense 15,137.00

CR Amortization Expense – All 11,915.00

CR Bad Debts Expense 2,438.00

CR Water/Hydro Expense 4,908.00

CR Bank Charges Expense 1,413.00

CR Bank Interest on Loan 1,680.00

CR Insurance Expense 2,400.00

CR Automobile Expense 2,900.00

CR Automobile Lease 3,840.00

Closing Entries:Closing Entries: ( (continued)continued)

Study the summary of the relevant (not all) accounts after Procedures 1 and 2 (see below). T. Bal means Trial Balance before closing procedures, Proc. means Procedure.

The T-accounts at the right show a credit $20,341.20 balance for Income Summary. This amount represents net profit (revenue – expenses) and should be transferred to the owner’s capital account, Capital Nathan Kafa (see next slide).

Expenses (All) represents all individual expense accounts.

Procedure #1: Close Ending Inventory and temporary accounts with credit balances.

Procedure #2: Close Beginning Inventory and temporary accounts with debit balances.

Click to continue.

Income Summary Sales – All

Proc. #2 370,310.80 Proc. #1 390,652 Proc. #1 327,600 T. Bal 327,600

Balance 20,341.20 Balance 0

Sales Returns Sales Discounts

T. Bal 3,980 Proc. #2 3,980 T. Bal 5,725 Proc. #2 5,725

Balance 0 Balance 0

Beginning Inventory

T. Bal 48,680 Proc. #2 48,680

Balance 0

Expenses (All)

Proc. #2 171,555 T. Bal 171,555

Balance 0

Purchase Returns Purchase Discounts Purchase Discounts

Proc. # 1 5,260 T. Bal 5,260 Proc. #1 1,942 T. Bal 1,942Proc. # 1 5,260 T. Bal 5,260 Proc. #1 1,942 T. Bal 1,942

Balance 0 Balance 0Balance 0 Balance 0

Closing Entries Closing Entries (continued)(continued)

Review the post-closing Trial Balance.

To prepare the company files for the next fiscal year, there are three adjustments that need to be made:

Click.

1. The balance of the Drawings account needs to be closed to the owner’s Capital account.

Click.

2. Some of the accruals need to be reversed.

Click.

3. The balance of Inventory of Goods should be moved to Beginning Inventory.

Click to continue.

Closing Entries Closing Entries (continued)(continued)

Procedure #3: Transfer the Procedure #3: Transfer the balance of the Income balance of the Income Summary account to the Summary account to the owner’s Capital accountowner’s Capital account

Study closing Procedure #3. It transfers the balance of the temporary clearing account Income Summary to the owner’s Capital account.

Click to see the balances of Income Summary and Capital after Procedure #3.

Click to continue.

Procedure #3: Transfer the balance of the Income Procedure #3: Transfer the balance of the Income Summary account to the owner’s Capital account.Summary account to the owner’s Capital account.

DR Income Summary 20,341.20 CR Capital Nathan Kafa 20,341.20

Income Summary Capital Nathan Kafa

Proc. #2 370,310.80 Proc. #1 390,652 T. Bal 86,641.00

Proc. #3 20,341.20 Proc. #3 20,341.20

Balance 0 Balance 106,982.20

Starting a New Fiscal Starting a New Fiscal YearYear

In Simply, you would enter journal entries to start the new fiscal year in the General Journal. Be sure to enter appropriate comments for the audit trail. See sample at right.

Click to continue.

Starting the New Fiscal Year:Starting the New Fiscal Year:

Entry #1: Close the Drawings Entry #1: Close the Drawings account to the owner’s account to the owner’s Capital Account.Capital Account.

The post-closing Trial Balance shows a $10,000 balance in the Drawings account. This amount should be entered as a debit to the owner’s Capital account, therefore reducing the Capital account by the Drawings amount.

Click and study Entry #1 to start the new fiscal year.

Click again to see the effect of Entry #1 to the Drawings and Capital accounts.

Click to continue.

Entry #1: Close the Drawings account to the Owner’s Entry #1: Close the Drawings account to the Owner’s Capital Account.Capital Account.

DR Capital Nathan Kafa 10,000 CR Drawings Nathan Kafa 10,000

Starting a New Fiscal Year:Starting a New Fiscal Year:

Entry #2: Reverse Entry #2: Reverse Accrued and Estimated Accrued and Estimated AdjustmentsAdjustments

In the last chapter, you posted period-end adjustments. To start the new fiscal year, some, not all of these entries need to be reversed.

Adjustments to PREPAID EXPENSES (insurance and office supplies) do not need to be reversed because the expenses were incurred and paid in the previous period. Likewise, amortizations are not reversed because the asset reduction (depreciation) occurred in the previous period. See right for entries that are not reversed.

Click.

Adjustments that had not been paid at period-end (accrued or estimated), although incurred in the previous period, need to be restored in the records; otherwise, when the expenses need to be paid, the account balance will not reflect the full amount of the invoice due.

Click to see the reversing entries.

Click to continue.

Insurance Expense Adjustment at Year-EndInsurance Expense Adjustment at Year-End

DR Insurance Expense 50.00

CR Prepaid Insurance 50.00

Amortization Adjustment at Year-EndAmortization Adjustment at Year-End

DR Amort. Expense – Computer Equip. 580.00

CR Accrued Liabilities 580.00

Office Supplies Adjustment at Year-EndOffice Supplies Adjustment at Year-End

DR Office Supplies Expense 285.00

CR Prepaid Office Supplies 285.00

Journal Entries that are NOT reversedJournal Entries that are NOT reversed

Adjustment and Accruals at Year-EndAdjustment and Accruals at Year-End

Bank Reconciliation Adjustment at Year-EndBank Reconciliation Adjustment at Year-End

DR Bank Charges Expense 33.00

CR Cash in Bank 33.00

Accrued Wages at Year-EndAccrued Wages at Year-End

DR Wages Expense 1, 809.00 CR Wages Payable 1,809.00

Utility Expense Accrued at Year-EndUtility Expense Accrued at Year-End

DR Water/Hydro Expense 340.00 CR Accrued Liabilities 340.00Reversing EntriesReversing Entries

To reverse Bank Reconciliation Adjustment To reverse Bank Reconciliation Adjustment

DR Cash in Bank 33.00

CR Bank Charges Expense 33.00

To reverse Accrued Wages To reverse Accrued Wages

DR Wages Payable 1,809.00 CR Wages Expense 1,809.00

To reverse Utility Expense Accrued To reverse Utility Expense Accrued

DR Accrued Liabilities 340.00 CR Water/Hydro Expense 340.00

Starting a New Fiscal Year:Starting a New Fiscal Year:

Entry #3: Update Entry #3: Update Inventory AccountsInventory Accounts

You need to update Inventory of Goods and Beginning Inventory in order that the new fiscal year starts with correct balances.

Study the journal entry below. This entry would transfer the balance from Inventory of Goods to Beginning Inventory.

Click.

Ending Inventory remains zero until the end of the first reporting period; e.g., month-end, when INVENTORY is counted and updated.

Click to continue.

Start-of-Fiscal-Year Inventory AdjustmentStart-of-Fiscal-Year Inventory Adjustment

DR Beginning Inventory 55,850.00

CR Inventory of Goods 55,850.00

Trial Balance for the Trial Balance for the New Fiscal YearNew Fiscal Year

Study the Trial Balance for the new fiscal year after the adjustments.

Click.

The balance of Inventory of Goods has been moved to Beginning Inventory.

Click.

The Drawings balance has been closed to the owner’s Capital account.

Click.

Relevant accruals have been reversed.

You are then ready to enter transactions for the new fiscal year.

Click to continue.

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