Chapter 8
RECORDING ADJUSTING AND
CLOSING ENTRIES FOR A SERVICE BUSINESS
Key terms
• accounting cycle: the series of accounting activities included in
recording financial information for a fiscal period
• adjusting entries: journal entries recorded to update general
ledger accounts at the end of a fiscal period
• closing entries: journal entries used to prepare temporary
accounts for a new fiscal period
Key terms
• permanent accounts: accounts used to accumulate information
from one fiscal period to the next
• post-closing trial balance: a trial balance prepared after the
closing entries are posted
• temporary accounts: accounts used to accumulate information
until it is transferred to the owner’s capital account
Identifying Financial Statement Procedures:
• Income summary is a temporary account.
• Temporary accounts begin each new fiscal period with a zero
balance.
• The journal entry to close Income Summary when there is a net
income is debit Income Summary; credit owner’s capital.
• Accounts used to accumulate information from one fiscal period to
the next are permanent accounts.
Identifying Financial Statement Procedures:
• The journal entry to adjust Supplies is debit Supplies Expense;
credit Supplies.
• When the total expenses are greater then the total revenue, the
income summary account has a debit balance.
• Accounting Period Cycle concept applies when a work sheet is
prepared at the end of each fiscal cycle to summarize the general
ledger information needed to prepare financial statements.
• After the closing entries are posted, the owner’s capital account
balance should be the same as shown on the balance sheet for
the fiscal period.
Identifying Accounting Concepts
and Procedures:
• A source document is prepared for adjusting entries FALSE
• The income summary account has a normal debit balance
FALSE
• The drawing account is a permanent account FALSE (temp)
• Temporary accounts must start each fiscal period with a zero
balance TRUE
Identifying Accounting Concepts
and Procedures:
• A post-closing trial balance verifies the equality of debits and
credits in a general ledger after the closing entries are posted
TRUE
• Journal entries used to prepare temporary accounts for a new
fiscal period are closing entries TRUE
• The balances of the expense accounts must be reduced to zero to
prepare the accounts for the next fiscal period TRUE
• To close a temporary account, an amount equal to its balance is
recorded in the amount on the side opposite to its balance TRUE