Recording Adjusting and Closing Entries for a Service Business

Chapter 10

Terms

Adjusting entries—journalizes the adjustment amounts on the worksheet (2 entries)

Debit amount listed (Supplies Expense) on the first line Credit amount listed on the next line (Supplies)

Permanent accounts—carry a balance into the next fiscal period Temporary accounts—are closed and carry a ZERO balance into the next fiscal

period Closing entries—journal entries used to ZERO out the temporary accounts (4

entries) Post-closing trial balance—prepared after the adjusting and closing entries have

been journalized and posted. Proves you did not make any mistakes as only the permanent accounts will have balances.

Accounting Cycle—Journalize, Post, Worksheet, Financial Reports, Journalize and Post the Adjusting and Closing entries, Post-closing Trial Balance

Recording Adjusting Entries

Adjustments on a worksheet must be journalized so they can be posted to the General Ledger accounts Once you have posted the journal entries, the balance in the

General Ledger for the Supplies account and the Prepaid Insurance account will be the same as shown on the Worksheet’s Balance Sheet debit column

ADJUSTING ENTRY FOR SUPPLIES

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444. Write the title of the

account credited. Record the credit amount.

3. Write the title of the account debited. Record the debit amount.

2. Write the date.

1. Write the heading.Adjustment Columns of a Worksheet

ADJUSTING ENTRY FOR PREPAID INSURANCE

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3. Write the title of the account credited. Record the credit amount.

2. Write the title of the

account debited. Record the debit amount.

1. Write the date.

Adjustment Columns of a Worksheet

Recording Closing Entries

Permanent accounts are used to accumulate information from one fiscal period to the next Assets, Liabilities, Capital Ending balances = beginning balances for next period

Temporary accounts – used to accumulate information until it is transferred to the owner’s capital account Revenue, Expenses, Drawing, Income Summary After the Closing entries are journalized and posted to the

accounts, they will have a ZERO balance

Four Closing Entries

1. An entry to close income statement accounts with credit balances (SALES)

2. An entry to close income statement accounts with debit balances (EXPENSE ACCOUNTS)

3. An entry to close Income Summary to the Capital account

4. An entry to close the owner’s drawing account to capital

Need for Income Summary– A Temporary Account

When temporary accounts are closed the debit amount still must equal the credit amount

The Income Summary account is used to summarize the closing entries for revenue and expenses All revenue accounts will be closed to Income Summary All expense accounts will be closed to Income Summary The balance of Income Summary will be the net income or net

loss that is shown on the Worksheet Revenue-Expenses=Net Income/Net Loss

The Income Summary account will be closed to the Capital account which will transfer the Net Income or the Net Loss to Capital

To Close the Sales Account

Look at the Worksheet’s Income Statement Credit column to get the amount

Sales has a credit balance so you would debit the account to give it a zero balance

Income Summary would be credited for the same amount Sales (credit balance) would be DEBITED Income Summary would be CREDITED

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1. Write the heading.

2. Write the date.

3. Write the title of the account debited. Record the debit amount.

4. Write the title of the account credited. Record the credit amount.

To Close the Sales Account

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4. Debit the total of all the expenses to the Income Summary Account

3. Credit each expense account

2. Income Summary

1. Date

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To Close the Expense Accounts

Balance in Income Summary

Net Income for the period will show in the Income Summary account as a credit balance

Net Loss will show in the Income Summary account as a debit balance

After closing the revenue and expenses into Income Summary it represents the balance of net income or net loss. This now must be closed because income summary is

also a temporary account Close to the Capital Account

CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT

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To Close the Drawing Account

Four Closing Entries

1. Revenue (Sales) closed to the Income Summary account

2. Expenses closed to the Income Summary account

3. Income Summary closed to the Capital account

4. Drawing closed to the Capital acciybt

This information is taken from the income statement and balance sheet columns of a worksheet

Post-Closing Trial Balance

After adjusting and closing entries are journalized and posted, the general ledger account balances are up-to-date

Accounts with ZERO balances have a line drawn through both the debit and credit balance columns (or -0-)

To verify the accuracy that the debits = credits, prepare a post-closing trial balance Only the accounts that currently have a balance (permanent

accounts) are listed on the Post-Closing Trial Balance form The total of the debits will equal the total of the credits This total is the same total that appeared on the Balance Sheet

you prepared in Chapter 9.

The Accounting Cycle for a Service Business

1. Analyze Transactions (Chpt. 2-4)

2. Journalize (Chpt. 5)

3. Post (Chpt. 6)

4. Prepare Worksheet (Chpt. 8)

5. Prepare Financial Statements (Chpt. 9)

6. Journalize Adjusting and Closing Entries (Chpt. 10)

7. Post Adjusting and Closing Entries (Chpt. 10)

8. Prepare Post-closing Trial Balance (Chpt. 10)