Closing Entries

Reminder

• For those that were not here on Friday, please remember that your third major test is on THURSDAY or FRIDAY (depending on Assembly)

• It will cover– HST Payable & Recoverable– The Classified Balance Sheet– The Worksheet– Adjusting Entries (Supplies, Prepaids, Depreciation)– Closing Entries

THE ACCOUNTING CYCLE

Closing Entries Concepts

• At the end of each fiscal period, the company wants to clear out certain accounts, so that they have zero balances carrying forward– This is done after financial statements have been

prepared (there must be totals in all accounts to do this process)

• The business will clear out the Nominal Accounts and leave the Real Accounts alone

Closing Entries Concepts

WHY DO WE CLOSE OUT ACCOUNTS?WHY DO WE CLOSE OUT ACCOUNTS? Closing various accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts.

• You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts. – Easier to analyze the numbers if we know we

made x amount of money in 2011 and spent y.

Closing Entries

• REAL ACCOUNTS – balances that continue into the next fiscal periodex. Bank, trucks, accounts payable etc.

• NOMINAL ACCOUNTS – have balances that do not continue into the next fiscal periodONLYONLY Expenses, drawing and revenue

Closing Entries Concepts

• CLOSING OUT AN ACCOUNT – means to make it have no balance. Nominal accounts are closed out at the end of the fiscal period.

• INCOME SUMMARY ACCOUNT – – summarizes the revenues and expenses of the period. Represents either the net income or net loss for the fiscal period– A temporary account that aids us in the closing entry process– This will never have a balance at the end of the month,

therefore is not necessary to classify as an asset, liability, expense or revenue account

Closing Entries Concepts

HOW DO WE DO THIS?HOW DO WE DO THIS? At the end of each month, there is an order in which we close out accounts

1. Close out the revenue account(s) to the Income Summary account

2. Close out the expense account(s) to the Income Summary account

3. Close out the Income Summary account to the Capital account

4. Close out the Drawing account to the Capital account

Journalizing and Posting the Closing Entries

• Closing Entry #1: Close out the revenue account(s) to the Income Summary account

JournalDec 31 Shipping Revenue 213821

Income Summary 213821

Because revenue is a CR balance account, a DR entry is needed to close it off

Journalizing and Posting the Closing Entries

• Closing Entry #2: Close out the expense account(s) to the Income Summary account

JournalDec 31 Income Summary 146984.91

Bank Charges Expense3500

…(all exp listed here)Insurance Expense

2494Because expenses are a DR balance account, a CR entry is needed to close them off

Journalizing and Posting the Closing Entries

• Closing Entry #3: Close out the Income Summary account to the Capital account

JournalDec 31 Income Summary 66836.09

P. Lovett, Capital66836.09

If the Income Summary account has a CR balance, then a DR entry is needed to close it. (profit capital increases)

If the Income Summary account has a DR balance, then a CR entry is needed to close it. (loss capital decreases)

Journalizing and Posting the Closing Entries

• Closing Entry #4: Close out the Drawing account to the Capital account

JournalDec 31 P. Lovett, Capital 42000

P. Lovett, Drawings42000

Because Drawings is a DR balance account, a CR entry is needed to close it

Journalizing and Posting the Closing Entries

• Post-Closing Trial Balance– Checks the accuracy of the ledger after the

adjusting and closing entries have been done– Example shown on page 249

• Homework– Page 252 - #11 & #12