Closing Entries Completing the accounting cycle Accounting Cycle

Closing Entries Completing the accounting cycle

Accounting Cycle Summarized 1 Analyze business transactions 9 Prepare post adjusting trial balance 2 Journalize the transactions 8 Journalize & post closing entries 3 Post to ledger accounts 7 Prepare financial statements 4 Prepare a trial balance 6 Prepare adjusted trial balance 5 Journalize & post adjusting entries

Closing Entries Final stage of accounting cycle to prepare the accounts for the next fiscal period (remember the TIME PERIOD CONCEPT GAAP? ) l Some accounts have balances that continue from one period to the next and some do not l

Real Accounts Have balances that continue into the next fiscal period l Also referred to as permanent accounts l All asset, liability and owner’s capital accounts l i. e. Bank, Truck, Accounts Payable l

Nominal Accounts Balances do not continue into the next fiscal period l Also referred to as temporary accounts l Revenue, Expense, and drawings accounts l Nominal accounts (with the exception of drawings) are related to the income statement which deals only with a single fiscal period l

Income Summary Account Summarizes the revenues and expenses of the period l Used only during closing entry process l Temporary balance in this account presents either the amount of net income or net loss l

End of Period Procedure 1. 2. 3. Bring accounts up to date by journalizing and posting adjusting entries Close nominal accounts to prepare them for next fiscal period Take off a post-closing trial balance

Closing Temporary (Nominal) Accounts To determine current Owner’s Equity l Put all accounts back together l

Closing Entries l l All revenues and expenses must be reduced to zero to allow new entries next period Use the REID formula: l l R: close revenues to Income Summary E: close expenses to Income Summary I: close Income Summary to Capital D: close Drawings to Capital http: //download. elearningontario. oise. utoronto. ca/r epository/1092460000/BAF 3 MPU 04 A 05/mme/BAF 3 MPU 04 A 05 journal 01. swf

The Closing Process (Individual) Expenses Dr. (normal balance) Cr. to close 0 Owner’s Capital is a permanent account. All other accounts shown here are temporary accounts. 2 2 Close expenses to income summary Income Summary Dr. (normal balance) 0 Cr. to close Dr. to close Cr. (normal balance) 1 Dr. Expenses Cr. Revenue Dr. to close Cr. balance = Net Income Owner’s Drawings (Individual) Revenues 0 3 Close income summary to Owner’s Capital 4 4 Close Owner’s Drawings to Owner’s Capital 0 1 Close revenues to income summary 3 Owner’s Capital Drawings Net Income Cr. (normal balance)

Close Revenues Dr Fees Income Dr Management Revenue 30000 20000 Cr Income Summary 50000 Close Expenses Dr Income Summary 40000 Cr Advertising Expense Wages General Expense 10000 15000

Close Income Summary Dr Income Summary 10000 Cr J. Schmoo, Capital 10000 Close Drawings Dr J. Schmoo, Capital 5000 Cr J. Schmoo, Drawings 5000

Post-Closing Trial Balance WHY? - To ensure we have closed out the accounts correctly l Last stage in the accounting cycle l