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Accounting

Chapter 10

The Accounting Cycle

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.

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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.


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.

The Income Summary Account

Journalizing Closing Entries

• Transfer the balances of all revenue accounts to the credit side of the Income Summary account.

• Transfer all expense account balances to the debit side of the Income Summary account.

• Transfer the balance of the Income Summary account to the capital account (net income on the credit side; net loss to the debit side).

• Transfer the balance of the withdrawals account to the debit side of the capital account.




Assignment

• Complete Problems 10.1 and 10.2 in your workbook.

Aim: How do I journalize the closing entries?

Do Now:

• Write the Aim in your notebook.

• Under the Aim, answer:

1. What is the purpose of the Income Summary account?

2. What personal financial activities involve “closing”?

• Take out your Chapter 10 packet

Journalizing 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.

Closing Expenses to Income Summary

A journal entry with two or more debits or credits is a compound entry.

Aim: How do I journalize the closing entries?

Do Now:

• Think About It: 1. To close a revenue or expense account, the balance

must be reduced to .

2. When closing a revenue account, Income Summary is for the total amount of revenue. • (credited or debited)

• Take out Problem 10.1

• Take out your Chapter 10 packet and the packet from Wednesday.

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:

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:

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.

Aim: How do I post the closing entries to the general ledger and prepare a post-closing trial balance?

Do Now:

• Write the Aim in your notebook.

• Under the Aim, answer:

1. What are the FOUR accounts that are closed at the end of the accounting period?


Closing Entries






Do Now:

• Take out your HW – Reinforce the Main Idea

• Take out your notebook (we will be writing notes underneath yesterday’s Aim)


Do Now:

• Take out your notebook (we will be writing notes underneath the Aim from last class)


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.

• The posting procedure is the same as for any other general journal entry, with ONE EXCEPTION.

– The words Closing Entries are written in the Description column of the general ledger account.

• Page 260 & 261

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.

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.

The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance

Assignment

• In your workbook complete:

–Problem 10.5 – Preparing a Post-Closing Trial Balance

–Problem 10.6 – Journalizing Closing Entries

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