Unit 2 The Basic Accounting Cycle Chapter 3

Unit 2 The Basic Accounting Cycle Chapter 3 Business Transactions and the Accounting Equation Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 6 Recording Transactions in a General Journal Chapter 7 Posting Journal Entries to General Ledger Accounts Chapter 8 The Six-Column Work Sheet Chapter 9 Financial Statements for a Sole Proprietorship Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship Chapter 11 Cash Control and Banking Activities Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 0

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship What You’ll Learn § Explain why it is necessary to update accounts through closing entries. § Explain the purpose of the Income Summary account. § Explain the relationship between the Income Summary account and the capital account. § Analyze and journalize the closing entries. § Post the closing entries to the general ledger. § Prepare a post-closing trial balance. § Define the accounting terms introduced in this chapter. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1

Chapter 10, Section 1 Preparing Closing Entries What Do You Think? Why is it important to transfer the temporary account balances to the permanent owner’s capital account? Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 2

Preparing Closing Entries SECTION 10. 1 Main Idea Closing entries transfer the temporary account balances to the owner’s capital account. You Will Learn § § the last two steps of the accounting cycle. the purpose of closing entries. the purpose of the Income Summary account. how to journalize the closing entries. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3

SECTION 10. 1 Preparing Closing Entries Key Terms § closing entries § Income Summary account § compound entry Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 4

SECTION 10. 1 Preparing Closing Entries Completing the Accounting Cycle Closing entries are journal entries made at the end of an accounting period to zero the balances in the temporary accounts and transfer the net income or loss to the capital account. After closing entries are made, the trial balance can be prepared. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 5

SECTION 10. 1 Preparing Closing Entries Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries The events leading up to the closing process are: § Net income or loss is calculated on the work sheet. § The income statement is completed. § The capital account ending balance is calculated on the statement of changes in owner’s equity. § The ending balance of the capital account appears on the balance sheet. § The capital account balance in the general ledger does not equal the amount on the balance sheet. Closing entries must be journalized and posted. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 6

SECTION 10. 1 Preparing Closing Entries Glencoe Accounting Unit 2 Chapter 10 Copyright ©

SECTION 10. 1 Preparing Closing Entries The Income Summary Account The Income Summary account: § serves as a simple income statement in the general ledger. § is used to accumulate revenue and expenses for the period. § equals the net income or loss for the period. It is a temporary account that: § is used only at the end of the accounting period to summarize revenue and expense balances. § does not have a normal balance. § has a zero balance before and after the closing. § does not appear on any financial statement. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 8

SECTION 10. 1 Preparing Closing Entries Closing Revenue to Income Summary To record closing entries in the general journal: § Enter Closing Entries in the Description column. § Enter the last day of the accounting period. § Enter the name(s) and amount(s) of the account(s) to be debited. § Enter Income Summary as the name of the account to be credited and the amount to be credited. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 9

SECTION 10. 1 Preparing Closing Entries Closing Expenses to Income Summary A journal entry with two or more debits or credits is a compound entry. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 10

SECTION 10. 1 Preparing Closing Entries Closing Expenses to Income Summary A journal entry with two or more debits or credits is a compound entry. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 11

SECTION 10. 1 Preparing Closing Entries Closing Income Summary to Capital This entry transfers the balance of the Income Summary account to the capital account. An example of this closing entry can be seen here: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 14

SECTION 10. 1 Preparing Closing Entries Closing Income Summary to Capital This entry transfers the balance of the Income Summary account to the capital account. An example of this closing entry can be seen here: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 15

SECTION 10. 1 Preparing Closing Entries Closing Income Summary to Capital This entry transfers the balance of the Income Summary account to the capital account. An example of this closing entry can be seen here: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 16

SECTION 10. 1 Preparing Closing Entries Closing Income Summary to Capital This entry transfers the balance of the Income Summary account to the capital account. An example of this closing entry can be seen here: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 17

SECTION 10. 1 Preparing Closing Entries Closing Withdrawals to Capital This entry transfers the balance of the withdrawals account to the capital account. An example of this closing entry is shown below: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 18

SECTION 10. 1 Preparing Closing Entries Closing Withdrawals to Capital This entry transfers the balance of the withdrawals account to the capital account. An example of this closing entry is shown below: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 19

SECTION 10. 1 Preparing Closing Entries Closing Withdrawals to Capital This entry transfers the balance of the withdrawals account to the capital account. An example of this closing entry is shown below: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 20

SECTION 10. 1 Preparing Closing Entries Closing Withdrawals to Capital This entry transfers the balance of the withdrawals account to the capital account. An example of this closing entry is shown below: Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 21

SECTION 10. 1 Preparing Closing Entries Key Terms Review § closing entries Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account. § Income Summary account The general ledger account used to summarize the revenue and expenses for the period. § compound entry A journal entry with two or more debits or two more credits. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 22

Chapter 10, Section 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance What Do You Think? What do you think a post-closing trial balance is? Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 23

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance Main Idea After the closing entries are posted, a post-closing trial balance is prepared to verify that debits equal credits. You Will Learn § how to post the closing entries to the general ledger. § how to prepare a post-closing trial balance. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 24

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance Key Term § post-closing trial balance Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 25

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance Completing the Eighth Step in the Accounting Cycle: Posting the Closing Entries to the General Ledger The next step in the closing process is to post closing entries to general ledger accounts. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 26

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance Glencoe Accounting

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance Preparing a post-closing trial balance is the final step in the accounting cycle. It is prepared after the closing entries are posted in order to verify total debits equal total credits. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 28

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 29

SECTION 10. 2 Posting Closing Entries and Preparing a Post-Closing Trial Balance Key Term § post-closing trial balance A list of the permanent general ledger account balances; it is prepared to prove the ledger after the closing entries are posted. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 30

CHAPTER 10 Chapter 10 Review Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2, 250 and a credit of $4, 125. (a) What does the debit of $2, 250 represent? (b) What does the credit of $4, 125 represent? List the process to use to complete third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 31

CHAPTER 10 Chapter 10 Review Answer 1 Step 1: Calculate the balance of the Income Summary account. Credits are more than debits; therefore, $4, 125 - $2, 250 = $1, 875 credit balance, which indicates a net income. (continued) Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 32

CHAPTER 10 Chapter 10 Review Answer 1 Step 2: Identify the accounts affected. The accounts Income Summary and Scott Jones, Capital are affected. (continued) Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 33

CHAPTER 10 Chapter 10 Review Answer 1 Step 3: Classify the accounts affected. Income Summary is a temporary owner’s equity account; Scott Jones, Capital is the permanent owner’s capital account. (continued) Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 34

CHAPTER 10 Chapter 10 Review Answer 1 Step 4: Are the accounts increased or decreased? The Income Summary account is decreased by its balance, $1, 875, to zero. Scott Jones, Capital is increased by $1, 875. (continued) Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 35

CHAPTER 10 Chapter 10 Review Answer 1 Step 5: Apply the debit/credit rule. To reduce the Income Summary account to zero, debit Income Summary $1, 875. To increase the capital account, credit Scott Jones, Capital for $1, 875. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 36

CHAPTER 10 Chapter 10 Review Question 2 Why are all of the temporary accounts reset to zero at the end of the fiscal year? Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 37

CHAPTER 10 Chapter 10 Review Answer 2 All revenues increase owner’s equity, and all expenses reduce owner’s equity. These transactions are separated from capital so the business can analyze how a profit or loss was made during the year. At the end of the year, the accumulation of these revenues and expenses are transferred into the capital account. The temporary accounts are reset to zero, which allows the business to compare the revenue and expense data from one period to the next. Glencoe Accounting Unit 2 Chapter 10 Copyright © by The Mc. Graw-Hill Companies, Inc. All rights reserved. 38