Recording Adjusting Entries
•Journal entries recorded to update general ledger accounts at the end
of a fiscal period are called adjusting entries.
•TechKnow Consulting prepares a work sheet at the end of each fiscal
period to summarize the general ledger information needed to prepare
financial statements.
•Adjusting entries are recorded on the next journal page following the
page on which the last daily transactions for the month are recorded.
Supplies Expense
Adj. (a) 715.00
Supplies
Bal. 1,025.00
New Bal. 310.00
Adj.(a) 715.00
Recording Closing Entries
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Vocabulary
Accounts used to accumulate
information from one fiscal
period to the next are called
permanent accounts.
Accounts used to accumulate information until it
is transferred to the owner’s capital account are
called temporary accounts.
Journal entries used to prepare
temporary accounts for a new fiscal
period are called closing entries.
Permanent Accounts
•Also referred to as real accounts.
•Include the asset and liability accounts
and the owner’s capital account.
•The ending account balances of
permanent accounts for one fiscal period
are the beginning account balances for
the next fiscal period.
Temporary Accounts
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Are also referred to as nominal accounts.
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Include the revenue, expense, and owner’s drawing
accounts plus the income summary account.
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Show changes in the owner’s capital for a single fiscal
period.
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At the end of a fiscal period, the balances of temporary
accounts are transferred to the owner’s capital account,
these accounts begin with a zero balance.
To close a temporary account, an amount equal to its
balance is recorded in the account on the side opposite to
its balance.
• For example, if an account has a credit balance of
$3,565.00, a debit of $3,565.00 is recorded to close the
account.
• Whenever a temporary account is closed, the closing
entry must have equal debits and credits.
Recording Closing Entries Cont.
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The income summary account is unique because it
does not have a normal balance side. The balance is
determined by the amounts posted to the account at the
end of a fiscal period.
When revenue is greater than (>) total expenses, the
result is net income.
When expenses are greater than (>) revenue, the result
is net loss.
Income Summary
Income Summary
Debit
Credit
Debit
Credit
Total expenses
Revenue>expense
Total expenses
Revenue
Net income
> Rev. (net loss)
Closing Order
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All temporary accounts must be brought to a “zero”
balance and transferred to another account (Income
Summary, etc.)
The closing order:
(1) Sales (Revenue) (debit) transfer to I.S. (credit)
(2) All expenses (credit) transfer to I.S. (debit)
(3) Income Sum. (N.I.#) (debit) transfer to capital
(credit)
(4) Drawing (credit) transfer to capital account
(debit)
Post-Closing Trial Balance
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A trial balance prepared after closing entries are posted is
called a post-closing trial balance.
The series of accounting activities included in recording
financial information for a fiscal period is called an
accounting cycle.
Label account numbers on General Journal
Label general journal page number on post. Ref. section of
general ledger.
Do not forget to label the dates before every entry, even if
it is the same day every time!
Make sure to label adjusting entries on supplies, prepaid
insurance and their expenses.
Noticing and crossing out accounts on the ledger that may
not be used in closing entries is good practice.
Finally, make sure debits ALWAYS equal credits!