Week 6

Need to update certain general ledger accounts at the end of the fiscal period.

Reflect “internal” transactions◦ Supplies used◦ Prepaid Insurance used

Matching principle: capture expenses in same fiscal period in which they helped generate that fiscal period’s revenue.

Business knows how much remains “on hand” which is subtracted from trial balance amount.

Permanent accounts retain their balance from fiscal period to fiscal period◦ Assets, liabilities and owner’s capital (balance sheet)

Temporary accounts have their balances “closed” to a zero balance at the end of the fiscal period.◦ Revenue, expense (income statement) and withdrawals

Recall the temporary accounts were “used up” when preparing the financial statements so their balances can’t be carried forward.

Entry to close income statement accounts with a credit balance (revenue)

Entry to close income statement accounts with a debit balance (expenses)

Entry to record net income or net loss to owner’s capital

Entry to close owner’s drawing account to owner’s capital account

Temporary account used to transfer net income or net loss to owner’s capital account.

Income Summary

Debit Credit

Total Expenses Total Revenue

To close an account with a credit balance, debit it an equal amount. The matching credit goes to the income summary account.

To close an account with a debit balance, credit it an equal amount. The matching debit goes to the income summary account.

Income Summary has a debit and credit amount. The difference should be equal to either net income or net loss calculated on the worksheet.

Income Summary

Debit Credit

Total Expenses Total Revenue

$8,772$5,991

To close Income Summary with net income (credit balance), debit it an equal amount. Where does matching credit go?

Owner’s CAPITAL account is credited (increased).

This is how the net income actually gets placed in the owner’s account.

To close Income Summary with net loss (debit balance), credit it an equal amount. The matching debit goes to owner’s CAPITAL account to reduce it.

To close the drawing account (debit balance), credit it an equal amount then the matching debit is applied to the owner’s CAPITAL account.

As with adjusting entries, all closing entries must be journalized then posted to the affected ledger accounts to update the balances.

All temporary accounts MUST have a zero balance to start the new fiscal period.

Once adjusting and closing entries are complete a post closing trial balance is prepared to make sure debits = credits moving in to the new fiscal period.

Account balances of permanent accounts are listed. Temporary accounts with a zero balances are NOT listed.

The ACCOUNTING CYCLE for the fiscal period is complete.

1. Analyze transactions (source documents)2. Journalize transactions3. Post transaction data to ledger4. Prepare trial balance/worksheet5. Prepare financial statements6. Journalize adjusting and closing entries7. Post adjusting and closing entries8. Prepare post-closing trial balance