Ch4: Completing the accounting cycle.

In this chapter, we will complete the accounting cycle, which is 9 steps cycle as follow:

Until Ch3, we have learned how to make steps from 1 to 7. In Ch4 we will learn steps 8 & 9.

Step 8: Journalize and post closing entries:

- At the end of accounting period (year), the company must make the accounts ready for the
new accounting period. This is called closing the books.
- Company to make closing the books must distinguish between 2 types of accounts, temporary
and permanent accounts.

- Temporary accounts are those accounts that are related to the current or a given
accounting period and these include all income statement accounts and the dividends account.
These include:

1- All revenues accounts.

2- All expenses accounts.

3- Dividend account.

Closing temporary accounts means to make the balance of these accounts equals zero.

Dr - S.Rev + Cr.
31/10/17 clos. 10600 31/10/17) 10,000
31/10/17 adj.) 400
31/10/17 adj.) 200
Zero

Dr. + Salaries Exp. - Cr.

26/10/17) 4,000 31/10/17 clos.) 5200
31/10/17 adj.) 1,200
Bal. 0

- Permanent accounts are those accounts that relate to one accounting period or more and
these accounts are all accounts included in the statement of financial position. Specifically,

1- All assets accounts.

2- All Liabilities accounts.

3- Share capital-ordinary.

4- Retained Earnings.
NO CLOSING ENTRIES FOR THE PERMANENT ACCOUNTS.

NOTES:

The closing entries must be made only at the end of the year, while the adjusting entries must
be made every time we make financial statement (it might be made monthly, quarterly, yearly).

Remember these rules:

- Assets, Exp, and dividends

Increase in Dr. and decrease in Cr. and the normal balance is Dr

- Rev. , Share capital, liabilities, and R.E

Decrease in Dr. and increase in Cr. and the normal balance is Cr.

Preparing the closing Entries:

Usually companies use new temporary account in order to avoid the huge amount of
information in the Retained earnings, since company ultimately closes all of temporary accounts
with R.E. This temporary account is called: Income summary.

1- To close all revenues (to make revenues accounts equal zero) accounts, the following entry
must be journalized:

GJ1

Date Acc. Titles and Explanation Dr Cr

31/12/XX closing. Dr.
X S.Rev. 4000
X Fees Rev. 2000
X subscription Rev. 6000
Cr.
X Income Summary 12000
2- To close all expenses (to make expenses accounts equal zero ) accounts:

Date Acc. Titles and Explanation Dr Cr

31/12/XX closing. Dr.
X Income Summary 15000
Cr
X Salaries exp. 8000
X Rent exp. 2500
X Utilities exp. 1000
X Insurance exp. 2500
X Depreciation exp. 1000
3- to close (to make the account zero) the Income Summary account, this account is closed with
the R.E:

Usually 2 alternative might be exist: one of them you have to apply.

a- when the company has Net income (Rev. > Exp.). This leads to increase the R.E. so the
following entry must be made:

Date Dr.

31/12/XX X Income Summary (Rev – exp) 1000

Cr.

Retained Earnings 1000

OR
b- when the company has Net loss (Rev.<Exp.). This leads to decrease the R.E account and the
following entry must be made:

Date Dr.

31/12/XX Retained Earnings 3000

Cr.

Income Summary (12000 –15000) 3000

4- to close the Dividends account. This decreases the R.E so the following entry must be made:

Date Dr.

31/12/XX Retained Earnings XX

Cr.

Dividends XX
E.g. From Ch3) pioneer company has the following adjusted trial balance as of 31/10/2017
(note: assume this date is the ending of the fiscal year)

Pioneer Co.
Adjusted Trial Balance
For the month ended on 31/10/17
Account title Dr. Cr.
Cash 15,200
A/R 200
Supplies 1,000
Prepaid Insurance 550
Office equipment 5,000
Accumulated Depreciation- Equip. 40
N/P 5,000
A/P 2,500
Unearned S. Rev 800
Salaries payable 1,200
Interest payable 50
Share capital 10,000
Dividend 500
S.Rev 10,600
Salaries Exp. 5,200
Supplies Expenses 1,500
Office rent exp. 900
Insurance Expense 50
Interest expense 50
Depreciation expense 40
Total $30,190 $ 30,190

Instructions:

Journalize and post closing entries.

1- to close Revenue account: GJ(1)

Date Account titles Dr Cr

31/10/17 Clo. Dr
To close Rev X S.Rev 10,600
Cr
X Income Summary 10,600

31/10/17 Clo. Dr
X Income Summary 7,740
Cr
X Salaries Exp. 5,200
To close X Supplies Expenses 1,500
Expenses XOffice rent exp. 900
X Insurance Expense 50
X Interest expense 50
X Depreciation expense 40

31/10/17 Clo. Dr
To close X Income summary (Rev 10,600 – Exp 7,740) 2,860
income Cr
summary X Retained earnings 2,860

31/10/17 Clo. Dr
To close X Retained earnings 500
dividends Cr
X Dividends 500

Dr - S.Rev + Cr.
31/10/17 clo.) 10,600 31/10/17) 10,000
31/10/17 adj.) 400
31/10/17 adj.) 200
Bal. zero
 Dr - Income Summary + Cr.
31/10/17 clos) 7,740 31/10/17 clo.) 10,600
31/10/17 clo.) 2,860

Bal. zero

Dr. + Salaries Exp. - Cr.

26/10/17) 4,000 31/10/17 Clo.) 5,200
31/10/17 adj.) 1,200
Bal. Zero
NOTE: closing entry must be posted for all expenses accounts as we made for the salaries exp
account.

Dr - R.E + Cr.
31/10/17 Clo.) 500 31/10/17 clo.) 2,860

Bal. 2,360

Dr. + Dividend - Cr.

20/10/17 500 31/10/17 Clo.) 500

Bal. zero
Step 9: post-closing Trial balance:
Pioneer Co.
Post-closing Trial Balance
For the month ended on 31/10/17
Account title Dr. Cr.
Cash 15,200
A/R 200
Supplies 1,000
Prepaid Insurance 550
Office equipment 5,000
Accumulated Depreciation- Equip. 40
N/P 5,000
A/P 2,500
Unearned S. Rev 800
Salaries payable 1,200
Interest payable 50
Share capital 10,000
Retained Earnings 2,360
Total $21,950 $ 21,950

Correcting entries:
It is not a step in the accounting cycle because it is an avoidable if our
recording process free of errors.
It must be prepared at the time of discovering the errors.

e.g,
On May 10 X Company Journalize and posted a $50 cash collection on
account from a customer as a debit to Cash $50 and a credit to S.Rev $50.
The company discovered the error on May 20 when the customer paid the
amount in full:
 Incorrect entry Correct entry Correcting entry
Dr Dr Dr
Cash 50 Cash 50 S.Rev 50
Cr Cr Cr
S.Rev 50 A/R 50 A/R 50
Dr Dr Dr
Delivery Truck 45 Office equip. 450 Office equip 450
Cr Cr Cr
Account Payable 45 Account Payable 450 Delivery Truck 45
Account payable 405

Classified Statement of financial Position:

Assets Equity $ Liabilities
Intangible Assets Share capital-Ordinary
Property, Plant, and equipment Retained earnings
Long-Term investments Non-current liabilities
Current assets Current Liabilities

Note: You have to read the classified statement of financial position from
the textbook (Page 178 – 184) (Do it on page 184 is very important).

Assignment

E4-7 page 199

E4-12 201

E4-14 201

P4-3A 204