1 Chapter 8 Recording Adjusting and Closing Entries

1 Chapter 8: Recording Adjusting and Closing Entries for a Service Business Objectives: n Define accounting terms related to adjusting and closing entries for a service business organized as a proprietorship n Identify accounting concepts and practices related to adjusting and closing entries for a service business organized as a proprietorship n Record adjusting entries for a service business organized as a proprietorship n Record closing entries for a service business organized as a proprietorship n Prepare a post-closing trial balance for a service business organized as a proprietorship CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

LESSON 8 -1: Recording Adjusting Entries—journal entries recorded to update general ledger accounts at the end of a fiscal period • Adjusting entries are recorded on the next journal page following the page on which the last daily transactions for the month are recorded. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

3 ADJUSTING ENTRY FOR SUPPLIES 1 3 2 4 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning page 202 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 4. Write the title of the account credited. Record the credit amount. LESSON 8 -1

4 ADJUSTING ENTRY FOR PREPAID INSURANCE page 204 1. Write the date. 2. Write the title of the account debited. Record the debit amount. 3. Write the title of the account credited. Record the credit amount. 1 2 3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

5 ADJUSTING ENTRIES page 202 • There is no document associated with adjusting entries; therefore, the Doc. No. column is left blank. • The entry must be posted to the general ledger accounts before the account balance changes. • Once the entry is posted, the supplies account balance will reflect the amount of supplies on hand at the end of the period. • Once the entry is posted, the prepaid insurance account balance will reflect the amount of prepaid insurance premium that remain at the end of the period. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

6 Lesson 8 -1 Let’s do Work Together 8 -1 and On Your Own 8 -1 on textbook page 205 using Aplia. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

LESSON 8 -2: Recording Closing Entries Permanent accounts—accounts used to accumulate information from one fiscal period to the next • Also referred to as real accounts • Include the asset and liability accounts and the owner’s capital account • The ending account balances of permanent accounts for one fiscal period are the beginning account balances for the next fiscal period. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

8 Temporary Accounts Temporary accounts—accounts used to accumulate information until it is transferred to the owner’s capital account • Also referred to as nominal accounts • Include the revenue, expense, and owner’s drawing accounts plus the income summary account • Shows changes in the owner’s capital for a single fiscal period. • At the end of a fiscal period, the balances of temporary accounts are summarized and transferred to the owner’s capital account. • The temporary accounts begin a new fiscal period with zero balances. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

9 Need for Closing Temporary Accounts Closing Entries—journal entries used to prepare temporary accounts for a new fiscal period • “Why Closing Entries”—to bring temporary accounts to a zero balance and to transfer the balance of each account to another account • The temporary account balances must be reduced to zero at the end of each fiscal period. This procedure prepares the temporary accounts for recording information about the next fiscal period. • To close a temporary account, an amount equal to its balance is recorded in the account on the side opposite to its balance. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

10 NEED FOR THE INCOME SUMMARY ACCOUNT page 207 The Income Summary account is used to summarize the closing entries for the revenue and expense accounts. Income Summary does not have a normal balance side. Whether the balance of the income summary account is a credit or debit depends upon whether the business earns a net income or a net loss. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

11 More about Closing Entries and Income Summary There are four closing entries: 1. Close income statement accounts with credit balances 2. Close income statement accounts with debit balances 3. Record net income or net loss and close Income Summary 4. Close the owner’s drawing account Information needed to record the four closing entries is found in the Income Statement and Balance Sheet columns of the work sheet. A closing entry must have equal debits and credits. The other account used for closing revenue and expense accounts is titled Income Summary. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -1

12 CLOSING ENTRY FOR AN INCOME STATEMENT page 208 ACCOUNT WITH A CREDIT BALANCE (Debit to close) 2 1 3 4 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 4. Write the title of the account credited. Record the credit amount. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

13 CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES 1. 2. 3. 4. page 209 Date Income Summary Credit Debit amount (Credit to close) 1 2 4 3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT 14 page 210 1. Date 2. Debit 3. Credit (Capital: credit to record net income) (Income Summary: debit to close) 1 2 3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

15 CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT page 211 1. Date 2. Debit 3. Credit (Credit to close) 1 2 3 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

16 Lesson 8 -2 Let’s do Work Together 8 -2 and On Your Own 8 -2 on textbook page 212 using Aplia. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -2

17 Lesson 8 -3: GENERAL LEDGER ACCOUNTS AFTER page 213 ADJUSTING AND CLOSING ENTRIES ARE POSTED When an account has a zero balance, lines are drawn in both the Balance Debit & Credit columns. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -3

LESSON 8 -3: Preparing a Post-Closing Trial Balance Post-closing trial balance—a trial balance prepared after the closing entries are posted • Only general ledger accounts with balances are listed • Should be assets, liabilities, and owner’s capital accounts • It is important to prove that debits must equal credits at the close of the fiscal period. You want to make sure that the work is correct before starting a new fiscal period so errors are not carried forward. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

19 POST-CLOSING TRIAL BALANCE 4 1 3 2 6 5 7 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning page 216 1. Heading 2. Account titles 3. Account balances 4. Single rule 5. Compare totals 6. Totals 7. Record totals 8. Double rule 8 LESSON 8 -3

20 ACCOUNTING CYCLE FOR A SERVICE BUSINESS 1 2 8 3 7 4 6 5 Accounting Cycle—series of accounting activities included in recording financial information for a fiscal period; all businesses complete the accounting cycle each fiscal period page 217 1. 2. 3. 4. 5. Analyzes transactions Journalize Post Prepare work sheet Prepare financial statements 6. Journalize adjusting and closing entries 7. Post adjusting and closing entries 8. Prepare post-closing trial balance CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -3

21 Lesson 8 -3 Let’s do Work Together 8 -3 and On Your Own 8 -3 on textbook page 219 using Aplia CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 8 -3

22 Chapter 8 Assignments Study Guide Application Problem 8 -1 Application Problem 8 -2 Application Problem 8 -3 Mastery Problem 8 -4 Challenge Problem 8 -5 CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning