Chapter 10
Adjusting and Closing
Entries
Recording Adjusting Entries
In Chapter 8, we learned
about adjustments. We
analyzed how adjustments
affect assets and expenses on
the Worksheet, but we did
not make the adjusting
entries.
Recording Adjusting Entries
 Adjustments must be journalized
so they can be posted to the
general ledger accounts.
 Journal entries recorded to
reflect adjustments to the general
ledger accounts at the end of a
fiscal period are called “adjusting
entries.”
Where do you make adjusting
journal entries?
 Adjusting
entries are made in the
general journal (general debit
and general credit columns of a
journal with special columns), on
the next journal page following
the page on which the last daily
transactions for the month are
recorded.
Recording adjusting entries
Worksheet:
Account
Title
Supplies
Trial Balance
Debit
$1,000
Adjustments
Credit Debit
Credit
(a)$400
***(omitted)
Supplies
Expense
(a)$400
Recording Adjusting Entries
Journal
Date
Account Title
Dec. 31
Adjusting Entries
Supplies Expense
Supplies
Page
3
Doc
Post
No. Ref.
General
Debit Credt
$400
$400
Recording Adjusting Entries
There is no Document No., so
you write the heading
“Adjusting Entries” in the
Journal, one time, before all of
the adjusting entries that
follow.
Recording Adjusting Entries
 Write
the date in the left
hand column.
 Debits go first – debit
“Supplies Expense,”
 Credit “Supplies”
Post to the General Ledger
 Post
each Journal entry to the
General Ledger accounts
(Supplies and Supplies
Expense).
 Put the No. of the General
Ledger account in the Posting
Ref. column of the Journal
Posting to the General Ledger
 Posting
the adjusting entries
to the General Ledger
accounts will adjust these
account balances to the
correct amount, as reflected
on the Worksheet / financial
statements.
Effect of Posting (using T-accounts)
Supplies
$1,000 (a)$400
$600
(End. Bal.)
Supplies Expense
(a)$400
Recording adjusting entries –
Prepaid Insurance
Worksheet:
Account
Title
Prepaid
Insurance
Trial Balance
Adjustments
Debit
Credit Debit
$1,200.00
(b)$500.
00
***(omitted)
Insurance
Expense
Credit
(b)$500
.00
Recording Adjusting Entries
Journal
Page 3
Date
Account Title
Dec. 31
Adjusting Entries
Supplies Expense
Doc Post
No. Ref.
General
Debit Credt
$400
Supplies
31
Insurance Expense
Prepaid Insurance
$400
$500
$500
Recording Adjusting Entries
 Write
the date in the left
hand column.
 Debits go first – debit
“Insurance Expense,”
 Credit “Prepaid Insurance”
Effect of Posting (using T-accounts)
Prepaid Insurance
$1,200 (b)$500
$700
(End. Bal.)
Insurance Expense
(b)$500
Recording Closing Entries
What
is an
Odometer?
How many does a car
have?
Why?
Apply the Trip Odometer Concept
to Accounting:
What would happen if
you kept adding to the
existing accounts in the
new fiscal period?
Closing Entries (continued)
 For
some accounts – it is
necessary to carry forward the
balance from the previous period
 These are permanent accounts.
Exs: Cash, Accounts Receivable,
Accounts Payable – Assets,
Liabilities, and Owner’s Capital are
Permanent Accounts
Closing Entries (continued)
 Other
accounts must be re-set
to zero at the start of the new
fiscal period (just like the trip
odometer) – temporary
accounts
 Temporary Accounts: Revenue
and Expense Accounts, Income
Summary, Drawing Account –
“REID”
Temporary Accounts
 Temporary
accounts track changes in the
owner’s capital during the fiscal period.
 Easier to harvest information about
activity during a fiscal period if you use
temporary accounts (just like a trip
odometer.)
 They must be reset to zero at the end of
the fiscal period (just like a trip
odometer.)
Closing Entries
Journal entries made to close
out temporary accounts at the
end of a fiscal period and
prepare them for a new fiscal
period are called “closing
entries.”
Closing Entries
 The closing entry re-sets the
account to zero, so each fiscal
period’s amounts are kept
separate.
 To close an account, make an
entry on the opposite side,
equal to the amount of the
balance in the account.
Closing Entries (continued)
When you make the closing entries, the entry
must have equal debits and credits.
If you credit an account to close it (e.g.,
expenses have a debit balance), then you
must enter an equal amount of debits.
Use a temporary account called “Income
Summary” to summarize the closing entries
for revenue and expense accounts.
Income Summary Account
The Income Summary account:
 A temporary account
 Does not have a normal balance side
 The balance (debit or credit) is
determined by the amounts posted at the
end of a fiscal period
Income Summary Account
 When
revenue > expenses, there
is net income, and the Income
Summary account has a
_________ balance (CLOR)
 When revenue < expenses, there
is a net loss, and the Income
Summary has a __________
balance (DEAD)
Income Summary
 So, if
Income Summary has a credit
balance, then the amount of the
credit balance is the net income.
 If Income Summary has a debit
balance, then the amount of the
debit balance is the net loss.
Income Summary – Credit Balance
Income Summary
DEBIT
CREDIT
Total Expenses
Total Revenue
(Greater than
Expenses –
Credit Balance is
Net Income)
Income Summary – Debit Balance
Income Summary
DEBIT
CREDIT
Total Expenses
Total Revenue
(Greater than
Revenue –
Debit Balance is a
Net Loss)
4 Closing Entries:
1.
2.
3.
4.
Entries to close Income Statement
accounts that have credit balances
(Revenue / Sales);
Entries to close Income Statement
accounts that have debit balances
(Expenses);
An entry to record Net Income (Loss) and
close the Income Summary account;
An entry to close the Drawing account
Example of Closing Entry – Credit
Balance (Revenue / Sales)
Before closing entry:
Sales /Fees / Income
4,000 (cr)
Closing entry:
Sales/ Fees/ Income
4,000 (dr) 4,000
0
Income Summary
4,000 (cr)
Debit Sales/Fees/Income, and credit
Income Summary.
Example of Closing Entry – Debit
Balance (Expenses)
After adjusting entry, before closing
entry:
Supplies Expense
1,000 (dr)
Closing entry:
Supplies Expense
1,000 1,000 (cr)
0
Income Summary
1,000 (dr)
Credit the Expense, and debit Income
Summary.
Closing entry to close Income
Summary (record net income / loss)
The Income Summary account balance
must be reduced to zero at the end of
the fiscal period (reset the trip
odometer.)
What is the balance in the Income
Summary account? (see slide #26)
Credit balance = Net Income
Debit balance = Net Loss
Closing entry to close Income
Summary (record net income / loss)
We learned in Chapter 9
that Net Income increases
the Owner’s Capital
account, while a Net Loss
decreases the Owner’s
Capital account.
Closing entry to close Income
Summary (record net income / loss)
If you have Net Income (credit balance in
Income Summary), then you debit Income
Summary and credit Owner’s Capital (CLOR).
This will INCREASE Owner’s Capital.
If you have a Net Loss (debit balance in
Income Summary), then you crebit Income
Summary and debit Owner’s Capital (CLOR).
This will DECREASE Owner’s Capital.
Closing entry to close Income
Summary (record net income)
Income Summary
2,500(dr) 4,000(cr)
1,500(bal)
Ben Radlick, Capital
3,000(cr)
Income Summary
1,500 (dr) 1,500
0
Ben Radlick, Capital
3,000
1,500(cr)
4,500(bal)
Closing entry to close Income
Summary (record net loss)
Income Summary
4,500(dr) 4,000(cr)
500(bal)
Ben Radlick, Capital
3,000(cr)
Income Summary
500
500 (cr)
0
Ben Radlick, Capital
500(dr) 3,000
2,500(bal)
Closing entry for Drawing Account
You must reduce the Owner’s
Drawing account (debit
balance) to zero, so you credit
it, but you must balance the
credit with a debit entry -where do you think the entry
to balance it goes? Hint: it does
not affect Income.
Closing entry for Drawing Account
Remember that Withdrawals are
amounts that the Owner takes out
of the business – they reduce the
Owner’s investment in the business,
so they reduce the Owner’s Capital
account. The drawing account is
closed directly to the Owner’s
Capital account.
Closing entry for Drawing account
Ben Radlick, Drawing
400 (dr)
Ben Radlick, Capital
4,500(cr)
Ben Radlick, Drawing
400
400 (cr)
0
Ben Radlick, Capital
400(dr) 4,500
4,100(bal)
Closing entry for Drawing Account