CLOSING ENTRIES CLOSING ENTRIES We need to prepare

CLOSING ENTRIES

CLOSING ENTRIES • We need to prepare accounts for the next fiscal period (according the time period concept) • Some accounts have balances which continue into the next fiscal period and some do not… • Can you guess which ones do not?

REAL VS. NOMINAL ACCOUNTS • Real Accounts (Permanent) – Have balances that continue into the next period • Nominal (Temporary) – Have balances that do not continue into the next period – Each nominal account begins a fiscal period with a zero balance – These accounts are closed.

EXAMPLES • Real Accounts (Permanent) • Nominal Accounts (Temporary) • Assets • Liabilities • Revenue • Capital • Expenses • Drawings

CLOSING OUT THE NOMINAL ACCOUNTS • All nominal accounts (revenue, expenses, drawings) balances are moved to capital. • This updates the capital figure to show the final equity figure (recall the expanded owner’s equity section on the balance sheet) • A new account called “income summary” is used for this process

EG. DAVE’S MOLLY MAID SERVICE • Dave, Drawings $1, 500 • Dave, Capital $ 50, 000 • Maid Service Revenue $22, 300 • Cleaning Supplies Expense $1, 000 • Vacuum Repairs Expense $1, 100 • Uniform Cleaning Expense $220

EG. DAVE’S MOLLY MAID SERVICE • Dave, Drawings $1, 500 • Dave, Capital $ 50, 000 • Maid Service Revenue $22, 300 • Cleaning Supplies Expense $1, 000 • Vacuum Repairs Expense $1, 100 • Uniform Cleaning Expense $220

EG. DAVE’S MOLLY MAID SERVICE Closing Entry #1 – Revenues Dec. 31 Maid Service Revenue Income Summary 22, 300 To close the balance of revenue To close out the revenue account for the current period, such that it is zero for the beginning of the following period

EG. DAVE’S MOLLY MAID SERVICE • Dave, Drawings $1, 500 • Dave, Capital $ 50, 000 • Maid Service Revenue • Cleaning Supplies Expense $22, 300 $1, 000 • Vacuum Repairs Expense $1, 100 • Uniform Cleaning Expense $220

EG. DAVE’S MOLLY MAID SERVICE Closing Entry #2 – Expenses Dec. 31 Income Summary 2, 320 Cleaning Supplies Expense 1, 000 Vacuum Repairs Expense 1, 100 Uniform cleaning expense 220 To close the expense accounts To zero out all expense accounts, to ensure they are empty for the beginning of the new period

EG. DAVE’S MOLLY MAID SERVICE Closing Entry #3 – Income (or Loss) Dec. 31 Income Summary 19, 980 Dave, Capital To close the income summary account and transfer the net income to capital To close out the existing balance in income summary 19, 980

EG. DAVE’S MOLLY MAID SERVICE • Dave, Drawings $1, 500 • Dave, Capital $ 50, 000 • Maid Service Revenue $22, 300 • Cleaning Supplies Expense $1, 000 • Vacuum Repairs Expense $1, 100 • Uniform Cleaning Expense $220

EG. DAVE’S MOLLY MAID SERVICE • Closing Entry #4 – Drawings Dec. 31 Dave, Capital 1, 500 Dave, Drawings To close the drawings account and transfer its balance to capital. • By reducing capital by the amount of drawings we are ensuring that the Capital balance is fully representative of the current claims of the owners 1, 500

WHAT IS HAPPENING IN THE LEDGER? • Notice Capital account again reveals what you learned earlier with expanded owner’s equity section • Beginning Capital + Net Income – Drawings = Ending Capital 50, 000 1/13 f Dec 31/13 1, 500 19, 980 31/13 64, 480 Jan Dec

POST CLOSING TRIAL BALANCE Last step in the accounting cycle • Make sure the debits still match the credits so that you know you have properly closed out all of the nominal accounts into the capital account.

ACCOUNTING CYCLE REVISITED 1. Transaction Occurs 4. Trial Balance & Interim Financial Statements Prepared 5. Worksheet Prepared 6. Formal Financial Statement s Prepared 8. Post Closing Trial Balance 7. Ledger Accounts Adjusted and closed 3. Journal Posted to Ledger Accounts 2. Transactions Recorded in Journal

HOMEWORK