Chapter 8
Recording Adjusting and Closing
Entries for a Service Business
Objectives





Define accounting terms
Identify accounting concepts and practices
Record adjusting entries
Record closing entries
Prepare a post-closing trial balance
Concepts



Accounting period cycle-when changes in
financial info are recorded for a specific period of
time in the form of financial statements
Adequate disclosure-when financial statements
contain all info necessary to understand a
business’s financial condition
Matching expenses with revenue-when revenue
and expenses associated with earning that
revenue are recorded in the same accounting
period
Work Sheet

A work sheet is prepared at the end the
fiscal period to summarize the general
ledger and prepare financial statements
8-1
Adjusting Entries

Adjusting Entries - Journal entries
recorded to update general ledger accounts
at the end of the fiscal period.


Recorded on the next journal page following
the page on which the last daily transactions
for the month are recorded.
Entered in the General Debit and General
Credit columns of a journal.
Adjusting Entry for Supplies

Supplies expense has an up-to-date balance
of $715.00, which is the value of supplies
used during the fiscal period.
Supplies Expense
Adj. (a)
715.00
Supplies
Bal.
(New Bal.)
1,025.00
310.00
Adj. (a)
715.00
Adjustments
Account Title
Debit
Credit
Supplies
(a)
Supplies Expense
(a)
715.00
715.00
 Debit
Journal
PAGE
1
Account
Title
Date
Doc
No.
Post
Ref
2
General
Dr
Cr
 Adjusting Entries

20--
Aug
31
Supplies Expense
Supplies



715.00
 715.00
Credit
3
Sales
Credit
4
3
5
Cash
Dr
Cr
Adjusting Prepaid Insurance

Insurance expense has an up-to-date
balance of $100, which is the value of
insurance used during the financial period
Insurance Expense
Adj. (b)
100.00
Prepaid Insurance
Bal.
1,200.00
(New Bal.) 1,100.00
Adj. (b)
100.00
Adjustments
Account Title
Debit
Credit
Prepaid Insurance
(b)
Insurance Expense
(b)
100.00
Journal
PAGE
1
Account
Title
Date
Adjusting Entries
Doc
No.
Post
Ref
2
3
General
Dr
Cr
 Debit
20--
Aug
31
715.00
Supplies Expense
715.00
Supplies

31

Insurance Expense 
Prepaid Insurance 
100.00
100.00
Credit
100.00
Sales
Credit
4
3
5
Cash
Dr
Cr
8-2 Recording Closing Entries

Permanent Accounts-accounts used to
accumulate info from one fiscal period to
the next (real accounts)
Assets
Liabilities
Capital
Temporary Accounts-accounts
used to
accumulate info until it transferred to the
owner’s capital account (nominal accounts)
Revenue
Expenses
Drawing
Income Summary
New Fiscal Period

Permanent accounts maintain the balance
they had from the previous fiscal period

Temporary accounts always begin a new
fiscal period with zero balances
Need for Closing Temporary Accounts


Closing Entries-Journal entries used to
prepare temporary accounts for a new
fiscal period (zero out temporary accounts)
To close a temporary account, an amount
equal to its balance is recorded in the
account on the side opposite of its balance
Example


If rent expense has a debit balance of
$4,411 then the account must be credited
for the same amount in order to close the
account out.
Since you need an equal debit, the Income
Summary account will be used.
Need for Income Summary Account



Used only to close out temporary accounts
Used to summarize the closing entries for the
revenue and expenses
Does not have a normal balance side



When revenue is greater than total expenses (net
income) Income Summary account will have a
credit balance
When total expenses are greater than revenue (net
loss) Income Summary has a debit balance
Because Income Summary is also a temporary
account, it too must be closed out (into capital)
Income Summary
Debit
Total expenses
Credit
Revenue (greater than expenses)
(Credit balance is the net income.)
Debit
Total expenses Income Summary
Debit
Total expenses (greater than revenue)
(Debit balance is the net loss.)
Credit
Revenue
TechKnow Consulting records four closing entries:
1.
An entry to close income statement accounts with credit balances;
2.
An entry to close income statement accounts with debit balances;
3.
An entry to record net income or net loss and close Income Summary; and
4.
An entry to close the owner’s drawing account.
Closing Entry for an Income
Statement Account with a Credit Balance
Account Title
Income Statement
Debit
Credit
Sales
3,565.00
Journal
PAGE
1
Account
Title
Date
 Closing Entries

31
Sales
Doc
No.
Post
Ref
2
3
General
Dr
Cr
 Debit

 3,565.00
Income Summary 
 3,565.00
Credit
4
Sales
Credit
3
5
Cash
Dr
Cr
Closing Entry for Income Statement Accounts with Debit Balances
Account Title
Income Statement
Debit
Credit
Advertising Expense
213.00
Insurance Expense
100.00
Miscellaneous Expense
(Credit
to close)
28.00
Rent Expense
300.00
Supplies Expense
715.00
Utilities Expense
110.00
Journal
PAGE
1
Account
Title
Date
31
Income Summary
Doc
No.
Post
Ref
2
General
Dr
Cr
1,466.00
Advertising Expense
213.00
Insurance Expense
100.00
Miscellaneous Expense
28.00
Rent Expense
300.00
Supplies Expense
715.00
Utilities Expense
110.00
3
Sales
Credit
4
3
5
Cash
Dr
Cr
Income Summary
Closing (expenses)
Advertising Expense
Bal.
213.00
(New Bal. zero)
Closing
3,565.00
2,099.00
213.00
Bal.
300.00
(New Bal. zero)
Closing
Closing
Closing
300.00
Supplies Expense
100.00
Miscellaneous Expense
Bal.
28.00
(New Bal. zero)
Closing (revenue)
(New Bal.
Rent Expense
Insurance Expense
Bal.
100.00
(New Bal. zero)
1,466.00
28.00
Bal.
715.00
(New Bal. zero)
Closing
715.00
Utilities Expense
Bal.
110.00
(New Bal. zero)
Closing
110.00
Closing Entry to Record Net Income for Loss
And Close the Income Summary Account
Account Title
Income Statement
Debit
Credit
1,466.00
Net Income
3,565.00
2,099.00
3,565.00
Capital: credit to
record net income)
3,565.00
(Income Summary:
debit to close)
 Debit
Journal
PAGE
1
Account
Title
Date

31
Doc
No.
Income Summary
Post
Ref
2
3
General
Dr
Cr
2,099.00
Kim Park, Capital
2,099.00
 Credit
4
Sales
Credit
3
5
Cash
Dr
Cr
Income Summary
Closing (expenses) 1,466.00
Closing
2,099.00
Bal.
Net Income
(New Bal.
5,000.00
2,099.00
6,474.00)
Kim Park, Capital
Bal.
Closing (net inc.)
(New Bal.
5,000.00
2,099.00
7,099.00)
Closing Entry for the Owner’s Drawing Account
Account Title
Income Statement
Debit
Credit
Kim Park, Capital
5,000.00
Kim Park, Drawing
625.00
(Credit to close)
 Debit
Journal
PAGE
1
Account
Title
Date

31
Doc
No.
Kim Park, Capital
Post
Ref
2
3
General
Dr
Cr
625.00
Kim Park, Drawing
625.00
 Credit
4
Sales
Credit
3
5
Cash
Dr
Cr
Kim Park, Capital
Closing (drawing) 625.00
Bal.
Net Income
(New Bal.
5,000.00
2,099.00
6,474.00)
Kim Park, Drawing
Bal.
(New Bal. zero)
625.00
Closing
625.00
Closing Entries Summary


Account
Date
After journalizing the closing entries, you
need post the entries into the general ledger
All temporary accounts should now have a
zero balance. Put lines through both
Balance Debit and Balance Credit Columns
of the ledger
Rent Expense
Item
Account No. 540
Post
Ref
Aug 12
1
Aug 31
3
Debit
Credit
Balance
Debit
250
Credit
250
250 --------------
-------------
8-3 Preparing a Post-Closing Trial Balance



A trial balance prepared after the closing entries are posted
Used to verify that debits still equal credits in the general ledger
accounts after closing entries are made
Only accounts with balances are included on this (unlike the Work
Sheet which lists ALL accounts) so only assets, liabilities, and capital
are listed
General Ledger Accounts After Adjusting and
Closing Entries are Posted
Account
Cash
Date
Account No. 110
Post
Ref
Item
Debit
Credit
Balance
Debit
Credit
2006
Aug.
31
2
31
2
Account
Petty Cash
Date
Item
8,315.00
8,315.00
3,351.00
4,964.00
Account No. 120
Post
Ref
Debit
Credit
Balance
Debit
2006
Aug.
17
1
100.00
100.00
Credit
Post-Closing Trial Balance
TechKnow Consulting
Post-Closing Trial Balance
August 31, 20-Cash


4,964.00
Petty Cash
100.00
Accounts Receivable—Oakdale School
150.00
Accounts Receivable—Campus Internet Cafe
100.00
Supplies
310.00
Prepaid Insurance
1,100.00
Accounts Payable—Supply Depot
200.00
Accounts Payable—Thomas Supply Co.
0.00
Kim Park, Capital
Totals


6,474.00

6,724.00

6,724.00


Accounting Cycle

The series of accounting activities (steps)
included in recording financial info for a
fiscal period
FYI: The word post means after. The Post-Closing Trial
Balance is prepared after closing entries.
Accounting Cycle
For a Service Business
Analyze
Transactions
Prepare Post-Closing
Trial Balance
1
2
8
Post Adjusting &
Closing Entries
Journalize
Post
3
7
*adjusting entries
*closing entries
Journalize Adjusting
and Closing Entries
*adjusting entries
*closing entries
4
6
5
Prepare
Work Sheet
Prepare Financial
Statements
*Income Statement
*Balance Sheet
Remember the Steps
Always Jump Past Water For Just Plain Power!








Analyze
Journalize
Post
Worksheet
Financial Statements
Journalize
Post
Post-Closing Trial Balance
Ch 1 & 2
Ch 3
Ch 5
Ch 6
Ch 7
Ch 8
Ch 8
Ch 8
Permanent or Temporary
Accounts?
Cash
Misc.
Rent
Sales
Expense
A/R Joe’s Place
Supplies
A/P Office Max
Karen Denney, Capital
Karen Denney, Drawing
Expense
Prepaid
Insurance
Insurance Expense
Income Summary
Petty Cash
A/P Quality Services
REVIEW

Four closing entries:




Close income statement accounts with credit
balances (revenue)
Close income statement accounts with debit
balances (expenses)
Record net income or net loss by closing
Income Summary into Capital
Close drawing account into Capital

After closing entries are posted, the
owner’s capital account balance should be
the same as shown on the Balance Sheet
for the fiscal period
Review

The only accounts listed on the PostClosing Trial Balance are those with
balances after closing entries have been
posted (assets, liabilities, capital)


Info needed for journalizing the adjusting
entries is obtained from the work sheet’s
Adjustments columns
Info needed for recording the closing
entries is obtained from the work sheet’s
Income Statement (revenue & expenses)
and Balance Sheet (drawing) columns



The ending account balances of permanent
accounts for one fiscal period are the
beginning account balances for the next
fiscal period.
Temporary accounts must start each fiscal
period with a zero balance
Income summary has no normal balance