McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
6–1
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 1: Closing Entries
Section Objectives
1.
Journalize and post closing
entries.
6–2
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
The seventh step in the accounting cycle is to journalize
and post closing entries
6–3
Income Summary Account

Classified as a temporary owner’s equity account.

Does not have a normal balance.

Has a zero balance after the closing process and remains with
a zero balance until after the closing procedure for the next
period.
6–4
Objective 1 Journalize and post closing entries
There are four steps in the closing
process:
1. Transfer the balance of revenue account
balances to the Income Summary account.
2. Transfer the expense account balances to the
Income Summary account.
3. Transfer the balance of the Income Summary
account to the owner’s capital account.
4. Transfer the balance of the drawing account to the
owner’s capital account.
6–5
Step 2: Close Expenses

The Income Statement section of the worksheet for
Wells’ Consulting Services lists five expense accounts.

Since expense accounts have debit balances, enter a
credit in each account to reduce its balance to zero.

This closing entry transfers total expenses to the
Income Summary account.
6–6
Step 3: Close Net Income to Capital

The journal entry to transfer net income to owner’s
equity is a debit to Income Summary, and a credit
to Carolyn Wells, Capital.

The balance of Income Summary is reduced to
zero; the owner’s capital account is increased by
the amount of net income.

The Income Summary account is reduced to zero.

The net income amount, $33,667, is transferred to the
owner’s capital account. Carolyn Wells, Capital is
increased by $33,667.
6–7
Step 4: Close Drawing to Capital
•Withdrawals appear in the statement of owner’s
equity as a deduction from capital.
•The drawing account is closed directly to the capital
account.
•The drawing account balance is reduced to zero.
•The balance of the drawing account, $5,000, is
transferred to the owner’s capital account.
6–8
Summary of Closing Entries
GENERAL JOURNAL
STEPS
1. Close
Revenue
Account
DATE
2013
Dec. 31
2. Close
Expense
Accounts
31
3. Close
Income
Summary
31
4. Close
Drawing
Account
31
DESCRIPTION
Closing Entries
POST.
REF.
PAGE
DEBIT
Fees Income
Income Summary
401
309
47,000.00
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense-Equip.
Income Summary
Carolyn Wells, Capital
309
511
514
517
520
523
309
301
13,333.00
Carolyn Wells, Capital
Carolyn Wells, Draw.
301
302
4
CREDIT
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
33,667.00
33,667.00
5,000.00
5,000.00
6–9
Posting the Closing Entries
All journal entries are posted to the general
ledger accounts.

“Closing” is entered in the Description column of
the ledger accounts.

The ending balances of the drawing, revenue,
and expense accounts are zero.
6–10
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 2: Using Accounting
Information
2.
Prepare a postclosing trial
balance.
3.
Interpret financial statements.
4.
Review the steps in the
accounting cycle.
6–11
QUESTION:
What is the postclosing trial balance
ANSWER:
A postclosing trial balance is report that
is prepared to prove the equality of total
debits and credits after the closing
process is completed. It verifies that
revenue, expense, and drawing accounts
have zero balances.
6–12
Wells’ Consulting Services
Postclosing Trial Balance
December 31, 2013
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation–Equipment
Accounts Payable
Carolyn Wells, Capital
Totals
DEBIT
CREDIT
111,350.00
5,000.00
1,000.00
4,000.00
11,000.00
132,350.00
183.00
3,500.00
128,667.00
132,350.00
6–13
Wells’ Consulting Services
Partial Balance Sheet
December 31, 2013
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
What is the
cash balance?
How much do the customers
owe the business?
6–14
Wells’ Consulting Services
Balance Sheet
December 31, 2013
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
$ 3,500.00
128,667.00
$132,167.00
How much does the business owe its suppliers?
6–15
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2013
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense--Equipment
Total Expenses
Net Income for the Month
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
13,333.00
33,667.00
What is the profit?
6–16
Flow of Data Through a Simple
Accounting System
Source
Documents
General
journal
General
ledger
Worksheet
Financial
statements
Source documents are analyzed
6–17