Transcript Chapter 10: Completing the Accounting Cycle for a Sole

Chapter 10: Completing the
Accounting Cycle for a Sole
Proprietor
Accounting I
Ms. Alltucker
Chapter Objectives
 Explain why it is necessary to update accounts through
closing entries.
 Explain the purpose of the Income Summary account.
 Explain the relationship between the Income Summary
account and the capital account.
 Analyze and journalize closing entries.
 Post the closing entries to the general ledger.
 Prepare a post-closing trial balance.
 Define the accounting terms introduced in this chapter.
Section 1: Preparing Closing
Entries
 What you will learn:
 Why temporary capital accounts are closed at the end of the
fiscal year.
 The purpose of the Income Summary account.
 The relationship between the Income Summary account and
the capital account.
 How to analyze and journalize closing entries.
 Why it’s important:
 Closing entries are made to prepare the financial records for
the next fiscal year.
Completing the Accounting Cycle
 At the end of an accounting period, an accountant
transfers the balances of the temporary accounts to the
owner’s capital account to bring it up to date and to
prepare the accounting records for the next period.
 Temporary accounts:
 Revenue
 Expenses
 Withdrawals
8th Step: Journalizing the Closing
Entries
 Closing Entries: journal entries made to close, or reduce
to zero, the balances in the temporary capital accounts
and to transfer the net income or net loss for the period
to the capital account
Purpose of Closing Process
 In your worksheet you found net income or net loss
 Net income or net loss is seen on the Income Statement
 Changes in Owner’s Equity reflects the net income or net
loss.
 General ledger capital account balance does
not equal the amount on the balance sheet.
 Look on page 234 for a visual aid
Income Summary account
 Look on page 73 at the chart of accounts. What type of
account is Income Summary?
The Income Summary Account
 Which general ledger account have you seen that has
not been used yet?
 Income summary: used to accumulate and summarize
the revenue and expenses for the period.
 Serves as a simple income statement in the ledger
 Expenses: debit balances are transferred as debits to the
income summary account as a debit
 Revenue: credit balances are transferred as credits to
Income Summary
 Balance of Income Summary equals the net income or the net
loss for the fiscal period.
 The balance of Income Summary is transferred to the capital
account at the end of the closing process.
Income Summary
 Used only at the end of the fiscal year to summarize the
balances from the revenue and expense accounts
 Balance before and after the closing process is zero
 Does not appear on any financial statement
 Does not have a normal balance
 Does not have an increase or a decrease side
Income Summary
Debit
Credit
Expenses
Revenue
If Revenue > Expenses
If Revenue < Expenses
Balance is net income
Balance is net loss
Preparing Closing Entries
 Four journal entries are prepared to close the temporary
capital accounts
 1. the balance of the revenue account is transferred to
the credit side of the income summary account
 2. The expense account balances are transferred to the
debit side of the Income Summary account.
 3. The balance of the Income Summary account is
transferred to the capital account
 Net income to credit side
 Net loss to debit side
 4. The balance of the withdrawals account is transferred
to the debit side of the capital account.
Closing the Balance of the Revenue
Account to Income Summary
 Balance of the revenue account is found in the Income
Statement of the work sheet
 1. Enter “Closing Entries” in the center of the description
column.
 2. Enter the date (last day of the fiscal period)
 3. Enter the names of the accounts to be debited and
the amounts to be debited.
 4. Enter the name of the account, Income Summary, to
be credit and the amount credited
Closing the Revenue account to Income
Summary
First Closing Entry—Close Revenue to Income Summary
JOURNAL ENTRY
Closing the Expense accounts to
Income Summary
 Balances of the expense accounts are found in the
income statement section of the worksheet
Second Closing Entry—Close Expenses to Income
Summary
JOURNAL ENTRY
Closing the Income Summary
Account to Capital
Income Summary
2650 Closing entry for revenue
Closing entry for expenses 1500
1150
New Balance
If Income Summary has a credit balance net profit
If Income Summary has a debit balance  net loss
Closing the Income Summary
Account to Capital
Fourth Closing Entry—Close Withdrawals to Capital
JOURNAL ENTRY
7.
Closing Withdrawals to Capital
 Withdrawals decrease owner’s equity
 Balance of the withdrawals account is found in the
Balance Sheet section of the work sheet
Fourth Closing Entry—Close Withdrawals to Capital
JOURNAL ENTRY
7.
Thinking Critically
 Why are closing entries for revenue and expense
accounts recorded?
 What is the order in which you journalize closing entries?
 What is the purpose of the Income Summary account?
Section 2:Posting Closing Entries and
Preparing a Post-Closing Trial Balance
 What you will learn:
 How to record closing entries in the general ledger.
 The purpose of a post-closing trial balance.
 How to prepare a post-closing trial balance.
 Why it’s important:
 A post-closing trial balance verifies that the closing entries
are properly recorded in the general ledger and that you are
ready to start the next accounting period.
Completing the Accounting Cycle
 Post the closing entries to the general ledger accounts
 Procedure is exactly the same as other general ledger
postings, with ONE exception.
 “Closing Entries” are written in the Description column of
the general ledger account
Review: Posting to General Ledger Steps
 1. Enter the date of the journal entry in the Date column
 2. Description is usually left blank in general posting
 When doing closing entries write “Closing Entries”
 3. Identify where the journal entry is recorded in post
reference column—Example: G1
 4. Enter the debit amount in the debit column
 5. Compute and record the new account balance in the
appropriate balance column
 6. Return to journal and enter the ledger account
number of the account you just posted
 7. Repeat the same steps for the credit entry
Review: Posting to General Ledger Steps
Posting Closing Entries
Income Summary Balance (credit): $1150
Withdrawal balance: $500
Maria Sanchez, Capital
20
Oct 1
2
31 Closing Entry
31 Closing Entry
301
G1
G1
G3
G3
25000
400
1150
500
25000
25400
26550
26050
You have to do this for every line in the general journal.
DO NOT FORGET TO PUT THE POST REFERENCE IN THE JOURNAL AFTER
YOU HAVE POSTED.
The Ninth Step in the Accounting
Cycle
 Preparing a Post-Closing Trial Balance
 Prepared to make sure total debits equal total credits after
the closing entries are posted.
 Only accounts with balances are listed on the post-closing
trial balance
 Only permanent accounts have balances
 Temporary accounts have zero balances—no need to list
them
Post-Closing Trial Balance
 After the journal entries are posted to the accounts in
the general ledger, the total of all the debit balances
should equal the total of all the credit balances
 Proving the ledger
 Debits = Credits
 Prepared on a two-column accounting stationery
Post Closing Trial Balance
Thinking Critically
 After the closing process, what types of accounts have
balances other than zero, and what types of accounts
have zero balances?
 What is the purpose of the eighth and ninth steps in the
accounting cycle?
 What happens when your debits don’t equal credits in
the post closing trial balance?