CLOSING THE BOOKS Preparing Closing Entries and a
CLOSING THE BOOKS Preparing Closing Entries and a Post-Closing Trial Balance
Closing Entries Concept The final stage of the accounting cycle is to prepare the accounts for the next fiscal period To do this, you must understand which accounts have balances that continue from one period to the next and which do not
Permanent vs. Temporary Accounts Permanent accounts have balances that continue into the next fiscal period • e. g. Asset accounts, Liability accounts, and Capital Temporary accounts have balances that do not continue into the next fiscal period (all nominal accounts begin a fiscal period with a zero balance) • e. g. Income Statement accounts (Revenues and Expenses), Income Summary, and Drawings
Closing the Books By closing the books, you are updating the Owner’s Equity (updating the Capital account) • To update the Owner’s Equity, Net Income must be added to Capital or Net Loss must be subtracted from Capital • In addition, Drawings must be subtracted from Capital
Introducing a New Account Income Summary • Revenue and Expense accounts are closed by transferring their balances to an account called Income Summary • When the Revenue and Expense account balances have been transferred to Income Summary, the balance of the Income Summary account should equal the Net Income or Net Loss amount
Steps in Closing the Books 1. Close Revenue accounts into the Income Summary account GENERAL JOURNAL DATE PARTICULARS Page 25 PR DEBIT CREDIT 20 -Dec. 31 Sales Income Summary To close the revenue account 2 000. 00
2. Close Expense accounts into the Income Summary account GENERAL JOURNAL DATE PARTICULARS Page 25 PR DEBIT CREDIT 20 -Dec. 31 Income Summary 1 500. 00 General Expense 800. 00 Rent Expense 700. 00 To close the expense accounts
3. Close the Income Summary account into the Capital account GENERAL JOURNAL DATE PARTICULARS Page 25 PR DEBIT CREDIT 20 -Dec. 31 Income Summary J. Pat, Capital To close the income summary account and transfer the net income into the capital account 500. 00
4. Close the Drawings account into the Capital account GENERAL JOURNAL DATE PARTICULARS Page 25 PR DEBIT CREDIT 20 -Dec. 31 J. Pat, Capital J. Pat, Drawings To close the Drawings account 300. 00
Post-Closing Trial Balance The Post-Closing Trial Balance is prepared after the closing entries have been posted to the General Ledger This means that all Expense accounts, Revenue accounts, and Drawings will not be on the Post-Closing Trial Balance
Post-Closing Trial Balance Example J. Pat’s Electical Post-Closing Trial Balance December 31, 20 -Cash 100 $ 3 000. 00 Supplies 110 2 200. 00 Equipment 120 6 000. 00 Accounts Payable 200 $ 1 000. 00 Bank Loan 210 2 500. 00 J. Jones, Capital 300 7 700. 00 Totals $ 11 200. 00
ACCOUNTING CYCLE Business Transactio ns New Accounting Period Begins Post. Closing Trial Balance Journalizing Ledger Journal Posting Ledger Work Sheet, Including Trial Balance Prepared Proof Financial Statement s Financial Statements Prepared Work Sheet Closing Entries and Adjustments are Posted Journal Closing Entries and Adjustments Journalized
- Slides: 14