Transcript Chapter 4 - Weygandt, Keiso, Kimmel 5th Edition

The Closing Process
STUDY OBJECTIVES
After studying this chapter, you should understand:
The closing process
The post-closing trial The classified balance
balance
sheet
THE CLOSING PROCESS
Closing entries transfer net income/loss
and dividends to retained earnings.
Journalizing and posting closing entries
is a required step in the accounting cycle
A temporary account, Income Summary,
is used in closing revenue and expense accounts.
TEMPORARY VS. PERMANENT
ACCOUNTS
TEMPORARY (NOMINAL)
These accounts are closed
PERMANENT (REAL)
These accounts are not closed
All revenue accounts
All asset accounts
All expense accounts
All liability accounts
Dividends
Equity accounts
CLOSING PROCESS
CORPORATION
(INDIVIDUAL)
REVENUES
(INDIVIDUAL)
EXPENSES
2
1
INCOME
SUMMARY
1 Debit each revenue account for its balance, and credit
Income Summary for total revenues.
2 Debit Income Summary for total expenses, and credit each
expense account for its balance.
CLOSING PROCESS
CORPORATION
INCOME
SUMMARY
3
RETAINED
EARNINGS
3 Debit (credit) Income Summary and credit (debit)
Retained Earnings for the amount of net income (loss).
CLOSING PROCESS
CORPORATION
RETAINED
EARNINGS
4
DIVIDENDS
4 Debit retained earnings for the balance in the dividends
account and credit dividends for the same amount.
JOURNALIZING
CLOSING ENTRIES
GENERAL JOURNAL
Date
Account Titles and Explanation
2006
Oct. 31 Service Revenue
Income Summary
(To close revenue account)
Date
2006
Oct. 31
INCOME SUMMARY
Explanation
Debit
Credit
10,600
No. 400
Balance
10,600
Date
2006
Oct. 31
Ref.
400
350
Debit
Credit
10,600
10,600
SERVICE REVENUE
Explanation
Debit
10,600
Credit
No. 350
Balance
10,600
–0–
JOURNALIZING
CLOSING ENTRIES
GENERAL JOURNAL
Date
2006
Oct. 31
Account Titles and Explanation
Income Summary
Salaries Expense
Advertising Supplies Expense
Rent Expense
Insurance Expense
Interest Expense
Depreciation Expense
(To close expense
accounts)
Date
2006
Oct. 31
31
INCOME SUMMARY
Explanation
Debit
Credit
10,600
7,740
Ref.
Debit
350 7,740
726
631
729
722
905
911
No. 350
Balance
10,600
2,860
Credit
5,200
1,500
900
50
50
40
JOURNALIZING
CLOSING ENTRIES
GENERAL JOURNAL
Date
2006
Oct. 31
Date
2006
Oct. 31
31
31
Account Titles and Explanation
(3)
Income Summary
Retained Earnings
(To close net income to
retained earnings)
INCOME SUMMARY
Explanation Debit
Ref.
Debit
350
301
2,860
Credit
2,860
No. 350
RETAINED EARNINGS
No. 301
Credit Balance Date
Explanation Debit Credit Balance
Oct 31
10,600
10,600
7,740
2,860
2,860
2860
2,860
–0–
JOURNALIZING
CLOSING ENTRIES
GENERAL JOURNAL
Date
2006
Oct. 31
Date
2006
Oct. 31
31
Account Titles and Explanation
(4)
Retained Earnings
Dividends
(To close dividends to
retained earnings )
Dividends
Explanation Debit
Credit
500
500
No. 350
Balance
500
–0–
Date
2006
Oct. 31
31
Ref.
350
301
Debit
Credit
500
500
Retained Earnings
Explanation
Debit
Credit
2860
No. 301
Balance
2860
500
2,360
REVIEW QUESTION
CLOSING ENTRIES
Which of the following accounts will have a zero balance
after the closing process?
1. Unearned Revenue
2. Advertising Supplies
3. Prepaid Insurance
4. Rent Expense
ANSWER
Rent Expense is a temporary account.
All temporary accounts are closed and thus
have a zero balance after the closing process.
POST-CLOSING ENTRIES
AFTER CLOSING ENTRIES ARE POSTED
1. All temporary accounts have zero balances.
2. The balance in retained earnings represents the
accumulated undistributed earnings at the end of the
accounting period.
The income summary account is used only in the
closing process. No entries are journalized or
posted to this account during the year.
The permanent accounts are not closed.
POSTING
CLOSING ENTRIES
Salaries Expense
726
4,000
(2)
5,200
1,200
5,200
Advertising Supplies
Expense
1500
(2)
Rent Expense
900
(2)
5,200
(1)
1
2
Service Revenue
10,600
10,000
400
200
10,600
10,600
631
1,500
(2)
(3)
729
900
Income Summary
7,740
(1)
10,600
2,860
10,600
350
10,600
3
Insurance Expense
(2)
50
722
50
(4)
2
Retained Earnings
301
500
0
(3)
2,860
2360
Interest Expense
905
50
(2)
50
4
Depreciation Expense
40
(2)
40
711
DIVIDENDS
500
(4)
306
500
400
STUDY OBJECTIVE 3
POST-CLOSING TRIAL BALANCE
• Prepared after all closing entries have been
journalized and posted.
• Purpose is to prove the equality of the
permanent account balances.
POST-CLOSING TRIAL BALANCE
PIONEER ADVERTISING AGENCY
Post -Closing Trial Balance
October 31, 2006
Cash
The post-closing trial
Accounts Receivable
balance is prepared from the
Advertising Supplies
permanent accounts in the
Prepaid Insurance
ledger.
Office Equipment
Accumulated Depreciation — Office Equipment
Notes Payable
Accounts Payable
The post-closing trial balance
Unearned Revenue
provides evidence that the
Salaries Payable
journalizing and posting of
Interest Payable
closing entries has been
Common stock
properly completed.
Retained Earnings
Debit
15,200
200
1,000
550
5,000
21,950
Credit
40
5,000
2,500
800
1,200
50
10000
2,360
21,950
$ 21,950 $ 21,950
STEPS IN THE ACCOUNTING CYCLE
1
2
3
4
5
6
7
8
9
Analyze transactions
Journalize transactions
Post to ledger
Prepare trial balance
Journalize & post adjustments
Prepare adjusted trial balance
Prepare financial statements
Journalize & post closing entries
Prepare post-closing trial balance
CLASSIFIED BALANCE SHEET
A classified balance sheet usually contains the following elements
ASSETS
Current assets
Long-term investments
LIABILITIES &
STOCKHOLDERS EQUITY
Current liabilities
Long-term liabilities
Property, plant & equipment Stockholders’ equity
Intangible assets
CURRENT ASSETS
• Current assets are cash and other resources
expected to be realized in cash, sold, or
consumed within one year of the balance
sheet date or the company’s operating cycle,
whichever is longer.
• Listed on B/S in order of liquidity.
• Examples:
Cash
Accounts Receivable
Inventory
LONG-TERM INVESTMENTS
• Long-term investments are resources that can be
converted to cash.
• Conversion is not expected within one year or the
operating cycle, whichever is longer.
• Examples:
Bond Investments
Long-term receivables
Land held for resale
10 shares
XYZ stock
PROPERTY, PLANT & EQUIPMENT
• Tangible resources of a relatively permanent nature
used in the business and not intended for sale are
classified as property, plant, and equipment.
• Examples: Buildings
Machinery
Equipment
INTANGIBLE ASSETS
• Intangible assets are non-current
resources lacking physical substance.
• Examples:
Patents
Trademarks
Copyrights
CURRENT LIABILITIES
Obligations expected to be
• paid from existing current assets, or
• by creation of another current liability,
within one year/operating cycle, whichever is longer.
Examples:
Accounts Payable
Interest Payable
Wages Payable
LONG-TERM LIABILITIES
Obligations expected to be paid after one year.
Examples:
Long term notes payable
Bonds payable
Mortgages payable
Lease obligations
STOCKHOLDERS’ EQUITY
• The content of the owner’s equity section varies with the
form of business organization.
Proprietorship
Partnership
Partner 1
Capital
Corporation
Partner 2
Capital
Capital Stock
Owners Capital
Retained
Earnings
CLASSIFED BALANCE SHEET
PIONEER ADVERTISING AGENCY
Balance Sheet
October 31, 2006
Assets
Current assets
Cash
Accounts receivable
Advertising supplies
Prepaid insurance
Total current assets
Property, plant, and equipment
Office equipment
Less: Accumulated depreciation
Total assets
$ 15,200
200
1,000
550
16,950
$5,000
40
4,960
$21,910
A classified balance sheet helps the financial statement user determine 1 the
availability of assets to meet debts as they come due and 2 the claims of
short- and long-term creditors on total assets.
CLASSIFED BALANCE SHEET
Liabilities and Owner’s Equity
Current liabilities
Notes payable
Accounts payable
Interest payable
Unearned revenue
Salaries payable
Total current liabilities
Long-term liabilities
Notes payable
Total liabilities
Stockholders’ Equity
Common stock
Retained earnings
$1,000
2,500
50
800
1,200
5,550
4,000
9,550
$10,000
2,360
Total stockholders’ equity
Total liabilities and owner’s equity
The balance sheet is most often presented in the report form,
with the assets above liabilities and owner’s equity.
12,360
$21,910