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. Complete the worksheet (Chapter 4) 6. Prepare financial statements from worksheet (Chapter 4) 7. Journalize and post the adjusting entries from worksheet (Chapter 4) 8. Journalize and post the closing entries (Chapter 5) 9. 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 Owners Equity

Permanent or real accounts provide information for the balance sheet Real/Permanent accounts are:
Assets Liabilities Owners 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 accounts 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 $5,000 $5,000
(normal balance side)

Income Summary $5,000

Steps in Closing Accounts (2)

Close each Expense Account to Income Summary
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)

Income Summary $350 $5,000

Bal: $4,650

$350

Steps in Closing Accounts

Close each Expense Account to Income Summary
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)

Income Summary
$350

$550

$5,000
Bal: $4,100

$550

Steps in Closing Accounts

Close each Expense Account to Income Summary
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)

Income Summary
$350 $550

$1,000

$5,000
Bal: $3,100

$1,000

Steps in Closing Accounts

Close each Expense Account to Income Summary
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)

Income Summary
$350 $550 $1,000

$1,200

$5,000
Bal: $1,900

$1,200

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 account the same amount making balance zero Credit the Capital account by the same amount

Capital
Previous balance: 20,000

Income Summary $1,900 $1,900

Bal: $1,900
(Normal balance side)

$1,900
New balance: 21,900

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)

Capital $1,000
Previous balance $21,900

$1,000

(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
GENERAL JOURNAL

PAGE____4_____ POST. REF.

DATE 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 30 30 30 2005 June 30

DESCRIPTION

DEBIT

CREDIT 1

Closing Entries
Income from Services Income Summary 5 0 0 0 00 5 0 0 0 00

2 3 4

Income Summary Utilities Expense Depreciation Expense, Equipment Salary Expense Rent Expense

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

5 6 7 8 9 10

Income Summary R. Gentry, Capital

00 1 9 0 0 00

11 12 13

R. Gentry, Capital R. Gentry, Drawing

00 1 0 0 0 00

14 15

16

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 DEBIT
1

CREDIT 0 0 0 00 00 00

Cash Accounts Receivable

21 2

4 0 1

6 0 0

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.

Supplies

Prepaid Insurance
3

3
15 0

3
0

0
0

00
00 12 5 0 7 0 0 0 0 00 00

Equipment Accumulated Depreciation, Equipment Accounts Payable

4
5

Wages Payable
6 7 8 9 10 11 12 13

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

9
0

0
0

00
00

R. Gentry, Capital R. Gentry, Drawing Fees Income Salary Expense Rent Expense Utilities Expense Depreciation Expense, Equipment

00

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

CREDIT 0 0 0 0 0 00 00 00 00 00 12 5 0 7 2 20 9 8 0 0 9 0 9 0 0 0 0 0 00 00 00 00 00

Cash Accounts Receivable

21 2

4 0 1 3

6 0 0 3 0

Supplies Prepaid Insurance

3 4 5

Equipment Accumulated Depreciation, Equipment Accounts Payable Wages Payable

15

6 13 14

R. Gentry, Capital 38 8 9 0 00

38

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 Owners 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)

Wednesday, October 24 (100 points)

Monday Wednesday

Midterm (Ch. 1-5) on