unit 13 – adjusting and closing entries
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Unit 13 – Adjusting and Closing Entries
Previously…
• All adjustments were made on the work sheet. The ledger accounts have not yet been changed. (currently, are incorrect and do not reflect the adjustments made on the work sheet)
• Adjusting entries are used to record the adjustments in the ledger accounts.
Adjusting Entries
• Work sheet• Journal form• Post them to the ledger
General Journal Page 21
Date Particulars P.R. Debit Credit
20_Jan. 31
31
31
31
Supplies Expense SuppliesTo record supplies used in January.
Insurance Expense Prepaid InsuranceTo record insurance for the month.
Rent Expense Prepaid RentTo record rent for one month.
Depreciation Expense – Equipment Acc. Depreciation – EquipmentTo record one month’s depreciation, declining-balance method.
100.00
60.00
1700.00
160.00
100.00
60.00
1700.00
160.00
General Ledger (Before Adjustments)Supplies
Jan.31 1000
Prepaid InsuranceJan.31 720
Prepaid RentJan.31 5100
EquipmentJan.31 12000
Acc. Depreciation – EquipmentJan.31 2400
Supplies Expense
Insurance Expense
Rent Expense
Depreciation Expense - Equipment
General Ledger (After Adjustments)Supplies
Jan.31 1000Balance 900
Jan. 31 100
Prepaid InsuranceJan.31 720Balance 660
Jan. 31 60
Prepaid RentJan.31 5100Balance 3400
Jan. 31 1700
EquipmentJan.31 12000
Acc. Depreciation – EquipmentJan.31 2400 31 160Balance 2560
Supplies Expense
Jan. 31 100
Insurance ExpenseJan. 31 60
Rent ExpenseJan.31 1700
Depreciation Expense - EquipmentJan. 31 160
Adjusting Entries
• Work sheet• Journal form• Post them to the ledger• Adjusted Trial Balance
Closing Entries• Summary
– Income statement: net income or net loss for a specific accounting period. (data found in revenue and expense accounts)
• New accounting period = revenue and expense accounts should show zero balances.
• “Matching principle” – revenue for each accounting period is matched with the expenses for that accounting period to determine net income or loss.
• Closing the books: the process by which revenue and expense accounts are reduced to zero at the end of each accounting period.
Temporary (vs) Permanent Accounts
• Temporary accounts:– Contain information for the current accounting
period only – Balances not carried over to next accounting period– Examples: Revenue & Expense accounts
• Permanent accounts:– Balances are carried forward from one accounting
period to another (they are not closed – put to 0)– Examples: Asset, Liability, & Owner’s Equity accounts
Purpose of Closing the Books
1) Prepare Revenue and Expense accounts for the next accounting period (by reducing them to 0)
2) Updating the Owner’s Equity account- Increase or decrease of capital[Net income/loss, and Drawings]
Income Summary Account
• Closing Revenue & Expense accounts
Income Summary Account
Transfer balances
Expenses
Balance XXX XXX
Revenue
XXXX Balance XXXX
Income Summary
XXXBalance (net loss)
XXXXBalance (net income)
Steps – Closing the Books
1) Close Revenue Accounts into Income summary
2) Close Expense Accounts into Income summary
3) Close Income summary into Capital
4) Close Drawings into Capital
Step 1: Close Revenue Accounts into Income summary
SalesDec. 31 20 000
General Journal PageDate Particulars P.R. Debit Credit20_Dec.
31 Sales Income SummaryTo close the sales account.
20,000.0020,000.00
SalesDec. 31 20 000 Balance 20 000
Income SummaryDec. 31 20 000
Step 2: Close Expense Accounts into Income summary
Advertising ExpenseDec. 31 3 000
General Journal PageDate Particulars P.R. Debit Credit20_Dec.
31 Income Summary Advertising ExpenseTo close Advertising Expense.
3,000.003,000.00
Advertising ExpenseBalance 3 000 Dec. 31 3 000
Income SummaryDec. 31 3 000 Dec. 31 20 000
Compound entry (makes it easier)General Journal Page
Date Particulars P.R. Debit Credit20_Dec.
31 Income Summary Advertising Expense Salaries Expense Telephone Expense General ExpenseTo close the expense accounts.
14,000.00 3,000.0010,000.00 500.00 500.00
Step 3: Close Income Summary into Capital
Income SummaryDec. 31 14 000 Dec. 31 20 000
Balance 6 000
General Journal PageDate Particulars P.R. Debit Credit20_Dec.
31 Income Summary D. Adams, CapitalTo close Income Summary and transfer the net income to Capital.
6,000.006,000.00
Income SummaryDec. 31 14 000 31 6 000
Dec. 31 20 000Balance 6 000
D. Adams, Capital 17 000Dec. 31 6 000
Net incomeCredits > DebitsIncreases OE
Step 4: Close Drawings into Capital D. Adams, Drawings
Balance 2 000
General Journal PageDate Particulars P.R. Debit Credit20_Dec.
31 D. Adams, Capital D. Adams, DrawingsTo close the Drawings account.
2,000.002,000.00
D. Adams, CapitalDec. 31 2 000________________
17 000Dec. 31 6 000Balance 21 000
D. Adams, DrawingsBalance 2 000 Dec. 31 2 000
Closing Books (from work sheet)
• Same process.– (simply retrieving information from the work
sheet)– Example: Page 244-248– See Ledger Accounts (after adjusting and closing
entries have been posted) – Page 246-248
Post-Closing Trial Balance
• Created after adjusting and closing entries have been posted to the general ledger.
• Purpose: prove mathematical accuracy of the general ledger. (debits = credits) … ready for the next fiscal period.
• This trial balance is much shorter.– Only asset, liability, & capital accounts have
balances. (others have been closed)
Post-Closing Trial BalanceManagement Consultant Services
Post-Closing Trial BalanceDecember 31, 20 -
Account Acc. # Debit CreditCashAccounts ReceivableSuppliesEquipmentAccumulated Depreciation – EquipmentAccounts payableBank LoanJ. Turner, Capital
100102131141142200221300
$ 18 000 19 000 1 400 12 000
_________$50 400
$4 320 1 000 3 00042 080$50 400
Example 249-250 (Effect of a net loss) …Decreases Owner’s Equity.
Updated Accounting Cycle
Business Transactions
Journal
Ledger
Journalizing
Posting
Work sheet including Trial Balance Prepared
Work Sheet
Financial Statements Prepared
Financial Statements
Journal
Adjusting and closing entries journalized
Ledger
Adjusting and closing entries posted
Post-closing Trial Balance
ProofNew Accounting Period Begins
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