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Closing Entries

and the Postclosing

Trial Balance

Section 1: Closing Entries

Chapter

6

Section Objectives

1. Journalize and post closing

entries.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

6-3

The Accounting Cycle

Step 7

Journalize and

post closing

entries

Step 1

Analyze

transactions

Step 2

Journalize the

data about

transactions

Step 4

Prepare

a

worksheet

Step 5

Prepare

financial

statements

Step 6

Journalize and

post adjusting

entriesStep 8

Prepare a

postclosing

trial balance

Step 9

Interpret

the financial

information

Step 3

Post the

data about

transactions

The seventh step in the accounting cycle is to journalize

and post closing entries.

Step 7

Journalize and

post closing

entries

6-4

The Income Summary account is a

special owner’s equity account that

is used only in the closing process

to summarize the results of

operations.

ANSWER:

QUESTION:

What is the Income Summary account?

6-5

Income Summary Account

Classified as a temporary owner’s equity account.

Does not have a normal balance.

Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

6-6

2. Transfer the expense account balances to the

Income Summary account.

4. Transfer the balance of the drawing account to the owner’s capital account.

3. Transfer the balance of the Income Summary

account to the owner’s capital account.

1. Transfer the balance of the revenue account to

the Income Summary account.

Objective 1 Journalize and post closing entries

There are four steps in the closing

process:

6-7

Net Income

CREDIT

BALANCE SHEETINCOME STMT.

DEBIT CREDIT DEBIT

83,500

5,000

2,000

22,000

3,500

367

7,000

90,000

4,000

35,000

7,000

500

1,000

367

3,500

35,000 97,36712,367 120,000

367

120,583

TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS

DEBIT CREDIT CREDIT DEBIT CREDIT

ACCOUNT NAME

Cash

Accounts Receivable

Supplies

Prepaid Rent

Equipment

Accum. Depr.—Equip.

Jason Taylor, Cap.

Accounts Payable

Jason Taylor, Draw.

Fees Income

Salaries Expense

Utilities Expense

Supplies Expense

Rent Expense

Depr. Exp.—Equip.

Totals

DEBIT

83,500

7,000

90,000

4,000

35,000

7,000

500

22,000

7,000

5,000

3,000

83,500

5,000

22,000

4,000

7,000

500

2,000

7,000

90,000

35,000

1,000

367

3,500

132,000 132,000 4,083 4,083

(c) 367

(a) 1,000

(b) 3,500

(c) 367

(a) 1,000

(b) 3,500 3,500

120,583

22,633 22,633

35,000 35,000 120,000120,000

JT’s Consulting Services

Worksheet

Month Ended December 31, 2010

Fees Income has a credit

balance of $35,000.

6-8

Fees Income

Closing 35,000

Balance 35,000

Income Summary

Closing 35,000

Step 1: Close Revenue

6-9

The words “Closing Entries” are written in the

Description column of the general journal.

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDITREF.

2010 Closing Entries

Dec. 31 Fees Income 35,000

Income Summary 35,000

Step 1: Close Revenue

6-10

The Income Statement section of the worksheet for

JT’s Consulting Services lists five expense accounts.

Since expense accounts have debit balances, enter a

credit in each account to reduce its balance to zero.

This closing entry transfers total expenses to the

Income Summary account.

Step 2: Close Expenses

6-11

The five expense account balances are reduced to

zero.


The total, $12,367 of

expenses are transferred to

the temporary owner’s equity

account, Income Summary.

6-12

Income Summary


Salaries Expense

Closing 12,367

BAL 35,000

Closing 7,000

Balance 7,000

Utilities Expense Supplies Expense

Balance 500 Balance 1000

Closing 1000Closing 500

Depr. Expense – Equip.Rent Expense

Closing 3,500

Balance 3,500 Balance 367

Closing 367

6-13


DATE DESCRIPTION POST. DEBIT CREDITREF.


Dec. 31 Income Summary 12,367.00

Salaries Expense 7,000.00

Utilities Expense 500.00

Supplies Expense 1,000.00

Rent Expense 3,500.00

Depreciation Exp.-Equip. 367.00


6-14

The Income Summary account reflects all

entries in the Income Statement section of

the worksheet.

Income Summary

Dr.

Closing 12,367

Cr.

Balance 22,633

Closing 35,000

Net Income

6-15

The journal entry to transfer net income to owner’s

equity is a debit to Income Summary, and a credit

to Jason Taylor, Capital.

The balance of Income Summary is reduced to

zero; the owner’s capital account is increased by

the amount of net income.

Step 3: Close Net Income to Capital

The Income Summary account is reduced to zero.

The net income amount, $22,633, is transferred to the

owner’s capital account. Jason Taylor, Capital is

increased by $22,633.

6-16

Income Summary Jason Taylor, Capital

Closing 22,633

Balance 22,633Balance 90,000


Closing 22,633

6-17


DATE DESCRIPTION POST. DEBIT CREDIT

REF.

Closing Entries

Dec. 31 Income Summary 22,633.00

Jason Taylor, Capital 22,633.00


6-18

•Withdrawals appear in the statement of owner’s

equity as a deduction from capital.

•The drawing account is closed directly to the capital

account.

•The drawing account balance is reduced to zero.

•The balance of the drawing account, $4,000, is

transferred to the owner’s capital account.

Step 4: Close Drawing to Capital

6-19

Jason Taylor, Capital Jason Taylor, Drawing

Closing 4,000

Balance 112,633

Closing 4,000

Balance 4,000


6-20


DATE DESCRIPTION POST. DEBIT CREDIT

REF.

Closing Entries

Dec. 31 Jason Taylor, Capital 4,000.00

Jason Taylor, Drawing 4,000.00


6-21

The new balance of the Jason Taylor, Capital

account agrees with the amount listed on the

balance sheet.

Jason Taylor, CapitalJason Taylor, Drawing

Closing 4,000

Cr.Dr.

Balance 4,000

Balance 0

Cr.

Balance 90,000

Net Inc. 22,633

Balance 108,633

Dr.

Drawing 4,000

Jason Taylor, Capital

6-22

Summary of Closing Entries


POST.

DATE DESCRIPTION REF. DEBIT CREDIT


Dec. 31 Fees Income 401 35,000.00

Income Summary 309 35,000.00

31 Income Summary 309 12,367.00

Salaries Expense 511 7,000.00

Utilities Expense 514 500.00

Supplies Expense 517 1,000.00

Rent Expense 520 3,500.00

Depr. Expense-Equip. 523 367.00


Jason Taylor, Capital 301 22,633.00

31 Jason Taylor, Capital 301 4,000.00

Jason Taylor , Draw. 302 4,000.00

STEPS

1. CLOSE

REVENUE

2. CLOSE

EXPENSE

ACCOUNTS

3. CLOSE

INCOME

SUMMARY

4. CLOSE

DRAWING

ACCOUNT

6-23

“Closing” is entered in the Description column of

the ledger accounts.

The ending balances of the drawing, revenue,

and expense accounts are zero.

Posting the Closing Entries

All journal entries are posted to the general

ledger accounts.

6-24


POST.



Dec. 31 Fees Income 401 35,000.00










31 Jason Taylor, Capital 301 4,000.00

Jason Taylor, Draw. 302 4,000.00

STEPS

1. CLOSE

REVENUE

2. CLOSE

EXPENSE

ACCOUNTS

3. CLOSE

INCOME

SUMMARY

4. CLOSE

DRAWING

ACCOUNT

ACCOUNT Fees Income ACCOUNT NO. 401

POST. BALANCE

DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2010

Dec. 31 J2 26,000.00 26,000.00

Dec. 31 J2 9,000.00 35,000.00

Dec. 31 Closing J4 35,000.00 – 0 –

6-25


POST.



Dec. 31 Fees Income 401 35,000.00










31 Jason Taylor, Cap 301 4,000.00

Jason Taylor, Draw. 302 4,000.00

STEPS

1. CLOSE

REVENUE

2. CLOSE

EXPENSE

ACCOUNTS

3. CLOSE

INCOME

SUMMARY

4. CLOSE

DRAWING

ACCOUNT

ACCOUNT Income Summary ACCOUNT NO. 309

POST. BALANCE

DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2010

Dec. 31 Closing J4 35,000.00 35,000.00

Closing Entries

and the Postclosing

Trial Balance

Section 2: Using Accounting

Information

Chapter

6

2. Prepare a postclosing trial

balance.

3. Interpret financial statements.

4. Review the steps in the

accounting cycle.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

6-27

Step 1

Analyze

transactions

Step 2

Journalize the

data about

transactions

Step 7

Journalize and

post closing

entries

Step 3

Post the

data about

transactions

Step 4

Prepare

a

worksheet

Step 5

Prepare

financial

statements

Step 6

Journalize and

post adjusting

entriesStep 8

Prepare a

postclosing

trial balance

Step 9

Interpret

the financial

information


Step 8

Prepare a

postclosing

trial balance

Step 9

Interpret

the financial

information

6-28

What is the postclosing trial balance

A postclosing trial balance is a statement

that is prepared to prove the equality of

total debits and credits after the closing

process is completed. It verifies that

revenue, expense, and drawing accounts

have zero balances.

QUESTION:

ANSWER:

6-29

JT’s Consulting Services

Postclosing Trial Balance

December 31, 2010

ACCOUNT NAME DEBIT CREDIT

Cash 83,500.00

Accounts Receivable 5,000.00

Supplies 2,000.00

Prepaid Rent 3,500.00

Equipment 22,000.00

Accumulated Depreciation–Equipment 367.00

Accounts Payable 7,000.00


Totals 116,000.00 116,000.00

Postclosing Trial Balance

6-30

If the postclosing trial balance does not

balance, the accounting records contain

errors.

Use the audit trail to trace data through

the accounting records.

Finding and Correcting Errors

6-31

Objective 3

Interpret financial

statements.

6-32

JT’s Consulting ServicesBalance Sheet

December 31, 2010Assets

Cash $83,500.00


Supplies 2,000.00


Equipment $ 22,000.00

Less Accumulated Depreciation 367.00 21,633.00

Total Assets $ 115,633.00

Liabilities and Owner’s Equity

Liabilities

Accounts Payable $ 7,000.00

Owner’s Equity


Total Liabilities and Owner’s Equity $115,633.00

What is the

cash balance?How much do the

customers owe the

business?

6-33

JT’s Consulting ServicesBalance Sheet

December 31, 2010Assets

Cash $83,500.00


Supplies 2,000.00


Equipment $ 22,000.00

Less Accumulated Depreciation 367.00 21,633.00

Total Assets $ 115,633.00

Liabilities and Owner’s Equity

Liabilities

Accounts Payable $ 7,000.00

Owner’s Equity


Total Liabilities and Owner’s Equity $115,633.00

How much does the business

owe its suppliers?

6-34

JT’s Consulting ServicesIncome Statement

Month Ended December 31, 2010

Revenue

Fees Income 35,000.00

Expenses

Salaries Expense 7,000.00

Utilities Expense 500.00

Supplies Expense 1,000.00

Rent Expense 3,500.00

Depr. Expense--Equipment 367.00

Total Expenses 12,367.00

Net Income for the Month 22,633.00

What is the profit?

6-35


Step 1

Analyze

transactions

Step 2

Journalize the

data about

transactions

Step 3

Post the

data about

transactions

Step 4

Prepare

a

worksheetPrepare financial statements.

Income Statement

Statement of Owner’s Equity

Balance Sheet

Step 5

Prepare

financial

statements

Step 5

Prepare

financial

statements

Review the steps in the

accounting cycleObjective 4

6-36


Step 1

Analyze

transactions

Step 2

Journalize the

data about

transactions

Step 3

Post the

data about

transactions

Step 4

Prepare

a

worksheet

Step 5

Prepare

financial

statements

Step 6

Journalize and

post adjusting

entries

Transfer net income or net loss

to owner’s equity.

Reduce the balances of the

temporary accounts to zero.

Step 7

Journalize and

post closing

entries

Step 7

Journalize and

post closing

entries

6-37


Step 1

Analyze

transactions

Step 2

Journalize the

data about

transactions

Step 3

Post the

data about

transactions

Step 4

Prepare

a

worksheet

Step 5

Prepare

financial

statements

Step 6

Journalize and

post adjusting

entriesStep 7

Journalize and

post closing

entries

Step 8

Prepare a

postclosing

trial balance

Step 9

Interpret

the financial

information

Step 9

Interpret

the financial

information Step 8

Prepare a

postclosing

trial balance

Step 5

Prepare

financial

statements

Step 4

Prepare

a

worksheet

Step 3

Post the

data about

transactions

Step 2

Journalize the

data about

transactionsStep 1

Analyze

transactions

Step 6

Journalize and

post adjusting

entriesStep 7

Journalize and

post closing

entries

6-38

Flow of Data Through a Simple Accounting System

Source

documents

Source documents are analyzed.

General

journal

General

ledger

Worksheet Financial

statements

Source

Documents

6-39

Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina