Closing Entries, Post-closing Trial

Balance, Reversing entries

Permanent Accounts – Balance sheet accounts (assets, liabilities, and owner’s
equity)
Temporary or Nominal Accounts – Income statement accounts (revenue and
expenses) They are closed at the end of the accounting period.
Why do we prepare closing entries: To bring the accounts to ZERO balances.
Income Summary account – use to close revenue and expenses, and later will be
closed to capital account.
Closing Entries:
1. Income or revenues – Revenue xxx
Income Summary xxx
2. Expenses - Income Summary xxx
Expenses (itemize) xxx
3. Income summary - to capital account. Prepare T-account for Income
Summary, balance is close to capital account.
Income Summary xxx
Capital xxx
OR
Capital xxx
Income Summary xxx
4. Drawing account - to capital account
Capital xxx
Drawing xxx
Post closing trial balance
• Balance sheet accounts (permanent accounts)
• The opening balance for the succeeding accounting period.
Balance sheet – Statement of financial
position (assets, liabilities, owner’s equity)
• Account form;
Reversing entries- bookkeeping technique to simplify
recording of transactions in the next accounting period.
• Optional step in the accounting cycle.
• On the first day of the next accounting period.
• What do we reverse: adjusting entries that increases asset or liability account; all accruals
(expense and revenue), prepaid expense (expense method), unearned revenue (income method).
Ex. Adjusting entry: salaries expense (dec. 28-dec. 31)
accrued salaries (liability)

Jan 1 – Jan 3 payroll period: Salaries expense xxx

Dec 28-dec. 31 Adj Accrued salaries xxx
Cash xxxx
or
Salaries expense on dec 31- was closed (closing entry)
Accrued salaries (a liability) with balance.
If reverse: Accrued salaries xxx
Salaries expense xxx
Salaries expense will have a credit balance & will be closed on the next
payroll entry.
12/31 ADJ: accrued salaries (liability) has a credit balance
and if reverse will have a ZERO balance.
SO: Jan 3payroll entry: Salaries expense xxx
Cash xxx
Because of the reversing entry- no worry about the accrued salaries,
- recording of salaries for Jan is made simpler.
balance sheet – Statement of financial position
• Report form