Transcript MGT430 LECTURE 10.ppt

THE ACCOUNTING
CYCLE:
Closing Entries
1
Previous Lecture
•
•
•
•
•
•
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Income statement
Balance Sheet
All above together in one sheet is called work
sheet
• Statement of Retained Earnings
2
Adjusting and Closing Entries
If a work sheet has been
prepared, the data for
these entries are in the
Adjustments columns.
3
Closing the Books
• Closing entries
– Transfer the temporary account
balances to update the retained
earnings account
– Reduce the balances in the
temporary accounts to zero to
prepare for the next period’s
postings
4
Temporary
Permanent
All revenue accounts
All asset accounts
All expense accounts
All liability accounts
Dividends account
Shareholders’ equity
accounts
5
Individual Revenues
Individual Expenses
2
Income Summary
1
3
Retained Earnings
4
Dividends
6
Retained Earnings is
a permanent account;
the others shown here
are temporary
Post-Closing Trial Balance
• Proves the equality of total debit balances and
total credit balances after the closing entries
have been made
• Should contain only permanent accounts
7
The Closing Process
Income Summary
2
Expenses are
transferred to
Income Summary
1
Revenues are
transferred to
Income Summary
Net Income or Net Loss is
transferred to Retained Earnings
3
RETAINED EARNINGS
4
Dividends are transferred to
Retained Earnings
8
The Closing Process
Income Summary
2
Expenses are
transferred to
Income Summary
1
Revenues are
transferred to
Income Summary
The
Summary
Net Income
Income or
Net Loss is
account
does not
appear Earnings
on
transferred
to Retained
the financial statements.
3
RETAINED EARNINGS
4
Dividends are transferred to
Retained Earnings
9
The Closing Process
Fees Earned
Wages Expense
Bal.
Income Summary
4,525
Rent Expense
Bal.
Bal. 16,840
Rent Revenue
1,600
Bal.
120
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
Retained Earnings
985
Bal. 25,000
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Dividends
Miscellaneous Expense
Bal.
455
Bal.
4,000
Note: The
balances shown
are adjusted
balances before
closing. The
following
sequence
demonstrates the
closing process.
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The Closing Process
Fees Earned
Wages Expense
Bal.
Income Summary
4,525
16,960
Rent Expense
Bal.
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Depreciation Expense
Bal.
50
Utilities Expense
Bal.
Retained Earnings
985
Supplies Expense
Bal.
2,040
Insurance Expense
Bal.
100
Dividends
Miscellaneous Expense
Bal.
455
Bal.
4,000
Debit each revenue
account for the
amount of its
balance, and credit
Income Summary
for the total
revenue. 11
The Closing Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
Rent Expense
Bal.
1,600
16,960
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
Retained Earnings
985
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455
Dividends
Bal.
4,000
Debit Income
Summary for the
total expenses and
credit each expense
account for its
balance.
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The Closing Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
16,960
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
Retained Earnings
985
7,205
Supplies Expense
Bal.
2,040
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455
Dividends
Bal.
4,000
Debit Income
Summary for the
amount of its
balance (in this
case, the net
income) and credit
Retained Earnings.
13
The Closing Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
9,775
Rent Expense
Bal.
1,600
16,960
7,205
1,600
16,840 Bal. 16,840
Rent Revenue
120 Bal.
120
Depreciation Expense
Bal.
50
50
Utilities Expense
Bal.
985
Retained Earnings
985
4,000
Supplies Expense
Bal.
2,040
7,205
2,040
Insurance Expense
Bal.
100
100
Miscellaneous Expense
Bal.
455
455
Dividends
Bal.
4,000
4,000
Debit Retained
Earnings for the
balance of
Dividends and
credit Dividend for
the same amount.
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Review of the Closing Process
Fees Earned
Wages Expense
Bal.
4,525
Income Summary
4,525
4,525
9,775
7,205
Rent Expense
Bal.
1,600
1,600
1,600
16,960
16,960
16,480 Bal. 16,840
16,840
Rent Revenue
120 Bal.
120
120
Depreciation Expense
Bal.
50
50
50
Utilities Expense
Bal.
985
Retained Earnings
985
985
4,000
4,000
Supplies Expense
Bal.
2,040
7,205
2,040
2,040
Close Revenues
Close Expenses
Close Income Summary
Insurance Expense
Bal.
100
Miscellaneous Expense
Bal.
455
Close Dividends
100
100
455
445
Dividends
Bal.
4,000
4,000
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After the closing entries
are posted, all of the
temporary accounts have
zero balances.
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Post-closing Trial Balance
NetSolutions
Post-Closing Trial Balance
December 31, 2005
Cash
2 065 00
Accounts Receivable
2 720 00
Supplies
760 00
Prepaid Insurance
2 300 00
Land
20 000 00
Office Equipment
1 800 00
Accumulated Depreciation
50 00
Accounts Payable
900 00
Wages Payable
250 00
Unearned Rent
240 00
Capital Stock
25 000 00
Retained Earnings
3 205 00
29 645 00 29 645 00
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Closing the Temporary Equity Accounts
Close Revenue accounts
to Income Summary.
Close Expense accounts
to Income Summary.
The closing process
gets the temporary
accounts ready for the
next accounting
period.
Close Income Summary
account to Retained
Earnings.
Close Dividends to
Retained Earnings.
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JJ’s Lawn Care Service would make the
these closing entries.
19
Closing Entries for Revenue Accounts
Since Sales Revenue has a credit balance, the
closing entry requires a debit to the Sales Revenue
account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Sales Reveune
Income Summary
Debit
Credit
750
750
To close the revenue account.
20
Closing Entries for Revenue Accounts
Income Summary
750
Sales Revenue
750
750
-
750
21
Closing Entries for Expense Accounts
Since expense accounts have a debit balance, the
closing entry requires a credit to the expense
accounts.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Income Summary
Debit
Credit
350
Gasoline Expense
50
Depreciation Exp.: Tools & Equipment
50
Depreciation Exp.: Truck
To close the expense accounts.
250
22
Closing Entries for Expense Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipment
50
50
-
Depr. Exp.: Truck
250
250
-
Income Summary
350
750
400
Net Income
23
Closing the Income Summary Account
Since Income Summary has a $400 credit balance,
the closing entry requires a debit to Income
Summary.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Income Summary
Retained Earnings
Debit Credit
400
400
To close Income Summary.
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Closing the Income Summary Account
Retained
Earnings
400
400
Income Summary
350
750
400
The balance in Income
Summary is now zero.
25
Closing the Dividends Account
Since the Dividends account has a debit balance,
the closing entry requires a credit to the Dividends
account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Retained Earnings
Dividends
Debit Credit
200
200
To close the Dividends account.
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Closing the Dividends Account
Dividends
200
200
-
Retained
Earnings
200
400
200
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JJ's Lawn Care Service
After-Closing Trial Balance
May 31, 2003
Cash
Accounts receivable
Tools & equipment
Accumulated depr.:
tools & equipment
Truck
Accumulated depr.:
truck
Notes payable
Accounts payable
Capital stock
Retained earnings
Total
$ 3,925
75
2,650
$
After all
closing
entries are
made, JJ’s
After-Closing
Trial Balance
looks like
50
this.
15,000
250
13,000
150
8,000
200
$ 21,650 $ 21,650
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Evaluating the Business
Evaluating
Profitability
Evaluating
Solvency
Did the business earn a
profit or loss in the
current period?
Does the business have
assets available to pay
debts as they are due?
What is the business’s
future potential for a
profit?
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Evaluating the Business
Focusing
Management’s
Attention
Are product lines
profitable?
Are resources being
used efficiently?
Are production
processes efficient?
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Preparing Financial Statements Covering
Different Periods of Time
Many companies prepare financial statements at
various points throughout the year.
Annually
Interim
Financial
Statements
Quarterly
Monthly
Jan. 1
Dec. 31
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Required Steps in the Accounting
Cycle
1. Analyze business transactions
2. Journalize the transactions
3. Post to general ledger accounts
4. Prepare a trial balance
5. Journalize and post adjusting entries
(prepayments and accruals)
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Required Steps in the Accounting
Cycle
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
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The Accounting Cycle
Journalize
transactions.
Post entries to
the ledger
accounts.
Prepare after closing
trial balance.
Prepare trial
balance.
Journalize and Prepare financial
post closing
statements.
entries.
Make end-ofyear
adjustments.
Prepare adjusted
trial balance.
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What we did in this lecturer
• Closing the Books
• Temporary Accounts
– All Revenue Accounts
– All Expenses Accounts
– All Dividend Accounts
• Permanent Accounts
– All Assets Accounts
– All Liabilities Accounts
– Shareholder Equity Accounts
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End of Chapter 5
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