THE ACCOUNTING CYCLE: Closing Entries

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Previous Lecture

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• Unadjusted Trial Balance• Adjustments• Adjusted Trial Balance• Income statement• Balance Sheet• All above together in one sheet is called work

sheet• Statement of Retained Earnings

Adjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing Entries

If a work sheet has been prepared, the data for these entries are in the Adjustments columns.

If a work sheet has been prepared, the data for these entries are in the Adjustments columns.

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Closing the Books

• Closing entries– Transfer the temporary account

balances to update the retained earnings account

– Reduce the balances in the temporary accounts to zero to prepare for the next period’s postings

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TemporaryTemporary PermanentPermanent

All revenue accounts All asset accounts

All expense accounts All liability accounts

Dividends accountShareholders’ equity

accounts

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Retained Earnings is a permanent account; the others shown hereare temporary

Individual Expenses

Retained Earnings

Income Summary

Individual Revenues

Dividends

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Post-Closing Trial Balance

• Proves the equality of total debit balances and total credit balances after the closing entries have been made

• Should contain only permanent accounts

RETAINED EARNINGSRETAINED EARNINGS

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Retained Earnings

44Dividends are transferred to Retained Earnings

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RETAINED EARNINGSRETAINED EARNINGS

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

Income Summary

11Revenues are transferred to Income Summary22

Expenses are transferred to Income Summary

33 Net Income or Net Loss is transferred to Retained Earnings

44Dividends are transferred to Retained Earnings

The The Income Summary Income Summary account does not appear on account does not appear on

the financial statements.the financial statements.

The The Income Summary Income Summary account does not appear on account does not appear on

the financial statements.the financial statements.

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Retained Earnings

Bal. 25,000

Dividends

Bal. 4,000

Income Summary

Note: Note: The The balances shown balances shown

are adjusted are adjusted balances before balances before

closing. The closing. The following following sequence sequence

demonstrates the demonstrates the closing process.closing process.

Note: Note: The The balances shown balances shown

are adjusted are adjusted balances before balances before

closing. The closing. The following following sequence sequence

demonstrates the demonstrates the closing process.closing process.

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

Retained Earnings

Dividends

Bal. 4,000

Income Summary

Debit each revenue account for the amount of its

balance, and credit Income Summary

for the total revenue.

16,840

120

16,960

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Retained Earnings

Dividends

Bal. 4,000

Income Summary

Debit Income Summary for the total expenses and credit each expense

account for its balance.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Retained Earnings

Dividends

Bal. 4,000

Income Summary

Debit Income Summary for the

amount of its balance (in this

case, the net income) and credit

Retained Earnings.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

7,205

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Retained Earnings

Dividends

Bal. 4,000

Income Summary

Debit Retained Earnings for the

balance of Dividends and

credit Dividend for the same amount.

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,840

120

16,9609,775

455

100

2,040

985

50

1,600

4,525

7,205

4,000

4,000

The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process

7,205

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Wages Expense

Bal. 4,525

Rent Expense

Bal. 1,600

Depreciation Expense

Bal. 50

Utilities Expense

Bal. 985

Supplies Expense

Bal. 2,040

Insurance Expense

Bal. 100

Miscellaneous Expense

Bal. 455

Retained Earnings

Dividends

Bal. 4,000

Income Summary

Fees Earned

Bal. 16,840

Rent Revenue

Bal. 120

16,480

120

16,9609,775

445

100

2,040

985

50

1,600

4,525

7,205

7,205

4,000

4,000

Close RevenuesClose Revenues

Close ExpensesClose Expenses

Close Income SummaryClose Income Summary

Close DividendsClose Dividends

16,84016,840

120120

16,96016,960

4,5254,525

1,6001,600

5050

985985

2,0402,040

100100

455455

9,7759,775

7,2057,205

7,2057,205

4,0004,000

4,0004,000

Review of the Closing ProcessReview of the Closing ProcessReview of the Closing ProcessReview of the Closing Process

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After the closing entries are posted, all of the

temporary accounts have zero balances.

After the closing entries are posted, all of the

temporary accounts have zero balances.

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Post-closing Trial BalancePost-closing Trial BalancePost-closing Trial BalancePost-closing Trial BalanceNetSolutions

Post-Closing Trial BalanceDecember 31, 2005

Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Capital Stock 25 000 00Retained Earnings 3 205 00

29 645 00 29 645 00

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Closing the Temporary Equity Accounts

Close Revenue accounts to Income Summary.

Close Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.

Close Dividends to Retained Earnings.

The closing process gets the temporary

accounts ready for the next accounting

period.

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JJ’s Lawn Care Service would make the these closing entries.

JJ’s Lawn Care Service would make the these closing entries.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Sales Reveune 750

Income Summary 750

To close the revenue account.

Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue

account.

Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue

account.

Closing Entries for Revenue Accounts

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Income Summary750

750

Sales Revenue750 750

-

Closing Entries for Revenue Accounts

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GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Income Summary 350

Gasoline Expense 50

Depreciation Exp.: Tools & Equipment 50

Depreciation Exp.: Truck 250

To close the expense accounts.

Since expense accounts have a debit balance, the closing entry requires a credit to the expense

accounts.

Since expense accounts have a debit balance, the closing entry requires a credit to the expense

accounts.

Closing Entries for Expense Accounts

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Closing Entries for Expense Accounts

Income Summary350 750

400

Gasoline Exp.50 50

-

Net Income

Depr. Exp.: Truck250 250

-

Depr. Exp.: Tools & Equipment

50 50 -

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Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income

Summary.

Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income

Summary.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Income Summary 400

Retained Earnings 400

To close Income Summary.

Closing the Income Summary Account

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Retained Earnings

- 400

400

Income Summary350 750 400

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The balance in Income Summary is now zero.

Closing the Income Summary Account

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Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends

account.

Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends

account.

GENERAL JOURNAL

Date Account Titles and ExplanationPRDebit Credit

May 31 Retained Earnings 200

Dividends 200

To close the Dividends account.

Closing the Dividends Account

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Closing the Dividends Account

Retained Earnings200 -

400

200

Dividends200 200

-

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After all closing

entries are made, JJ’s

After-Closing Trial Balance

looks like this.

After all closing

entries are made, JJ’s

After-Closing Trial Balance

looks like this.

Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & equipment 50$ Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Retained earnings 200 Total 21,650$ 21,650$

JJ's Lawn Care ServiceAfter-Closing Trial Balance

May 31, 2003

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Did the business earn a profit or loss in the

current period?

What is the business’s future potential for a

profit?

Evaluating Profitability

Evaluating Profitability

Does the business have assets available to pay debts as they are due?

Evaluating Solvency

Evaluating Solvency

Evaluating the Business

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Are product lines profitable?

Are resources being used efficiently?

Are production processes efficient?

Focusing Management’s

Attention

Focusing Management’s

Attention

Evaluating the Business

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Monthly

Quarterly

Jan. 1 Dec. 31

Annually

Many companies prepare financial statements at various points throughout the year.

Many companies prepare financial statements at various points throughout the year.

Interim Financial

Statements

Preparing Financial Statements Covering Different Periods of Time

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Required Steps in the Accounting Cycle

1. Analyze business transactions

2. Journalize the transactions

3. Post to general ledger accounts

4. Prepare a trial balance

5. Journalize and post adjusting entries (prepayments and accruals)

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Required Steps in the Accounting Cycle

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Journalize and post closing entries

9. Prepare a post-closing trial balance

Journalize transactions. Post entries to

the ledger accounts.

Prepare trial balance.

Make end-of-year

adjustments.

Prepare adjusted trial balance.

Prepare financial statements.

Prepare after closing trial balance.

Journalize and post closing

entries.

The Accounting Cycle

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What we did in this lecturer

• Closing the Books• Temporary Accounts– All Revenue Accounts– All Expenses Accounts– All Dividend Accounts

• Permanent Accounts– All Assets Accounts– All Liabilities Accounts– Shareholder Equity Accounts

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End of Chapter 5

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