Closing Entries and The Post-Closing Trial Balance Chapter 5

Learning Outcomes

 List the steps of the accounting cycle  Journalize and post closing entries  Prepare a post-closing trial balance

9 Steps of Accounting Cycle

1.

Analyze transactions and record in journal (Chapters 1 and 2) 2.

Post journal entries to the ledger accounts (Chapter 3) 3.

Prepare a trial balance (Chapter 3) 4.

Gather adjustment data and record in worksheet (Chapter 4)

9 Steps of Accounting Cycle

5.

6.

7.

8.

9.

Complete the worksheet (Chapter 4) Prepare financial statements from worksheet (Chapter 4) Journalize and post the adjusting entries from worksheet (Chapter 4) Journalize and post the closing entries (Chapter 5) Prepare a post-closing trial balance (Chapter 5)

Closing Entries

 Purpose: to clear the “temporary” or “nominal” accounts   Revenue Expenses   Drawing Income Summary  We “close” the books because this information pertains to only one fiscal period

Closing Entries

   These accounts provide information for   Income Statement Statement of Owner’s Equity “Permanent” or “real” accounts provide information for the balance sheet Real/Permanent accounts are:    Assets Liabilities Owner’s Equity

New Account For Closing

 Income Summary  Used only for closing accounts and adjusting for merchandise (later on)  You “zero out” the account you are closing with a debit or a credit (the opposite of which side the account’s balance is on) and the second entry is to the Income Summary account

Steps in Closing Accounts (1)

 Close Revenue  to Income Summary Normal balance of revenue accounts is credit   Debit the revenue account the same amount making balance zero Credit Income Summary Income from Services Income Summary $5,000 $5,000 (normal balance side) $5,000

Steps in Closing Accounts (2)

 Close each Expense Account Income Summary  to Normal balance of each Expense account is debit   Credit the expense account the same amount making balance zero debit Income Summary Utilities Expense $350 (normal balance side) $350 Income Summary $350 $5,000

Bal: $4,650

Steps in Closing Accounts

 Close each Expense Account Income Summary  to Normal balance of each Expense account is debit   Credit the expense account the same amount making balance zero debit Income Summary Depreciation Expense, Equipment $550 (normal balance side) $550 Income Summary $350 $5,000 $550

Bal: $4,100

Steps in Closing Accounts

 Close each Expense Account Income Summary  to Normal balance of each Expense account is debit   Credit the expense account the same amount making balance zero debit Income Summary Salary Expense $1,000 (normal balance side) $1,000 Income Summary $350 $550 $5,000

Bal: $3,100

$1,000

Steps in Closing Accounts

 Close each Expense Account Income Summary  to Normal balance of each Expense account is debit   Credit the expense account the same amount making balance zero debit Income Summary Rent Expense $1,200 (normal balance side) $1,200 Income Summary $350 $550 $1,000 $1,200 $5,000

Bal: $1,900

Steps in Closing Accounts (3)

 Close Income Summary    to Capital Normal balance of Income Summary account is credit (if you show Net Income) Debit the Income Summary amount making balance zero account the same Credit the Capital account by the same amount Capital

Previous balance: 20,000

$1,900

New balance: 21,900

Income Summary

$1,900

$1,900

Bal: $1,900

(Normal balance side) New balance = $0

Steps in Closing Accounts (4)

 Close Drawing   to Capital Normal balance of Drawing is debit (contra) Credit the Drawing account the same amount, making balance zero  Debit the Capital account to “reduce” it by how much the owner took out of the business Drawing $1,000 (normal balance side) $1,000 Capital $1,000

Previous balance $21,900

(new balance: $20,900)

Next, Journalize the Closing Entries

   Center the title “ Closing Entries ” on a line in the Journal No explanation is necessary after each entry Debits must equal credits

Chapter 5

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 DATE

2005 June 30

DESCRIPTION

Closing Entries Income from Services Income Summary 30 Income Summary Utilities Expense Depreciation Expense, Equipment Salary Expense Rent Expense 30 Income Summary R. Gentry, Capital 30 R. Gentry, Capital R. Gentry, Drawing

GENERAL JOURNAL POST. REF.

DEBIT

5 0 0 0 00 3 1 0 0 00 1 9 0 0 00 1 0 0 0 00

PAGE____4_____ CREDIT

5 0 0 0 1 1 3 5 0 2 5 5 0 0 0 0 0 0 1 9 0 0 1 0 0 0 00 00 00 00 00 00 00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Next, Post the Closing Entries

   Post the journal closing entries to the ledger accounts. Cross reference your journal and ledger page numbers.

Draw a line through both the debit column and the credit column to show that the balance is zero.

Lastly, prepare the Post-Closing Trial Balance

   This is to make sure the “books” are ready for the new fiscal period List

only those accounts that have balances

Debits must equal credits

R. Gentry Consulting Services Post-Closing Trial Balance June 30, 2005 ACCOUNT NAME

Do not list

the accounts shown here in red – they will not have balances after they are closed.

The difference (net income) is shown on the Income Statement.

1 2 3 4 5 6 7 8 9 10 11 12

Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation, Equipment Accounts Payable Wages Payable R. Gentry, Capital R. Gentry, Drawing Fees Income Salary Expense Rent Expense Utilities Expense Depreciation Expense, Equipment

13 14

21 2 15 0 1 3 4

DEBIT

6 0 0 0 0 3 0 0 0 0 0 00 00 00 00 00

CREDIT

1 0 0 0 00 12 5 20 0 7 2 9 0 0 9 0 0 0 0 0 00 00 00 00 5 0 0 0 00 1 1 0 2 3 5 0 0 5 5 0 0 0 0 00 00 00 00

R. Gentry Consulting Services Post-Closing Trial Balance June 30, 2005 ACCOUNT NAME 1

Cash Accounts Receivable

2

Supplies Prepaid Insurance

3

Equipment

4

Accumulated Depreciation, Equipment

5

Accounts Payable Wages Payable

6

R. Gentry, Capital

13 14

21 2 15 38 3 0 0 1 4

DEBIT

6 0 0 0 0 0 8 3 0 9 0 0 0 00 00 00 00 00 00 12 5 20 38 0 7 2 9 8

CREDIT

0 0 9 0 9 0 0 0 0 0 00 00 00 00 00

Chapter 5 Demonstration Problems



Monday, October 8

E 5-1 E 5-3 

Wednesday, October 10

E 5-4 E 5-7 P 5-1A

Chapter 5 Homework

 

Problem 5-2A

(E-20)

(textbook - page 168-169 + working papers - pages 109-110)

Problem 5-3A

(E-20)

(textbook - page 169 + working papers - pages 112-113, 116-119)

due October 17

Next Week:

     Monday: In-class Assignment #3 (Look at textbook pages 178 through 180 – could you do this problem?) Journalize transactions Post transactions to ledger accounts Prepare a Trial Balance Complete the work sheet with adjustments (continued)

In-Class Assignment (continued)

      Prepare the Income Statement Prepare the Statement of Owner’s Equity Prepare the Balance Sheet Journalize the adjusting entries Post adjusting entries to ledger accounts Journalize closing entries (continued)

In-Class Assignment (continued)

  Post the closing entries to the ledger accounts Prepare a post-closing Trial Balance You will have all class period on Monday, 10/15 – plus class time after quiz on Wednesday, 10/17 – plus all class period the following Monday (if needed)

Midterm (Ch. 1-5) on

Wednesday, October 24 (100 points) Monday Wednesday