Chapter 5
1
Closing Entries and
the Post-Closing
Trial Balance
College Accounting
10th Edition
McQuaig
McQuaig
Bille
Bille
Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
5–1
© 2011 Cengage Learning
Steps in the Accounting Cycle
Step 1.
Step 2.
Analyze
source
documents
and record
business
transactions in
a journal.
End of the
accounting
period
Post journal
entries to the
accounts in
the ledger.
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Step 3.
Prepare the trial balance.
Step 4.
Gather adjustment data and record the adjusting
entries on a work sheet.
Step 5.
Complete the work sheet.
End of the
accounting
period
To the income
statement
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Step 6.
Prepare
financial
statements
from the data
on the work
sheet.
From work sheet
To journalize
adjusting entries
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Step 7. Journalize
and post the
adjusting entries
from the data on the
work sheet.
Step 8. Journalize
and post the closing
entries.
Step 9. Prepare a
post-closing trial
balance.
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Purpose of Closing Entries
 The purpose of closing entries is to close
(or zero) the temporary-equity or nominal
accounts, especially Revenue, Expenses,
and Drawing accounts.
 Closing entries are made after the last
adjusting entry and after the financial
statements have been prepared.
 Closing entries update the owner’s capital
account.
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Procedure for Closing
The procedure for closing is simply to balance
off the account; in other words, to make the
balance equal to zero.
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Steps in the Closing Procedure
Step 1. Close the revenue account(s) into
Income Summary.
Step 2. Close the expense accounts into
Income Summary.
Step 3. Close the Income Summary account
into the Capital account, transferring
the net income or net loss to the
Capital account.
Step 4. Close the Drawing account into the
Capital account.
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Closing the Accounts for Conner’s
Whitewater Adventure
Step 1. Close the revenue account(s) into
Income Summary.
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Step 2. Close the expense account(s) into
Income Summary.
to Income Summary
Utilities Expense
Balance
+
225
‒
Closing
Insurance Expense
+ ‒
Balance
625 Closing
225
625
Depreciation Expense, Equipment
+ ‒
Balance
512 Closing
512
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Step 2. Close the expense account(s) into
Income Summary.
Wages Expense
Income Summary
Balance
+
2,832
‒
Closing
2,832
Balance
Rent Expense
+ ‒
1,250 Closing
1,250
Supplies Expense
+ ‒
Balance
675 Closing
675
Advertising Expense
+ ‒
Balance
620 Closing
620
+
(Expenses) 6,739
‒
(Revenue) 23,320
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Step 3. Close the Income Summary account
into the Capital account, transferring
the net income or net loss to the
Capital account.
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Step 4. Close the Drawing account into the
Capital account.
Balance
3,500
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Closing Entries for Conner’s
Whitewater Adventures
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In case there is a net loss, Income Summary
and Capital are both reduced. Assume J. Doe
Company experienced a $600 net loss.
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The resulting journal entry:
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Closing Entries Taken
Directly from the Work Sheet
 You can gather information for the closing
entries either directly from the ledger
accounts or from the work sheet (figures
for three of the four entries can be taken
from the last four columns) .
 You may plan the closing entries by
balancing off all the figures that appear in
the Income Statement columns.
 In the Item column of the ledger account,
we write the word “Closing.”
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Partial work sheet for Conner’s Whitewater Adventures
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Posting the Closing Entries
 Accountants call the accounts that are to be
closed (such as revenue, expenses, Income
Summary, and Drawing) nominal
(temporary-equity) accounts.
 Accountants call the accounts that remain
open from one fiscal period to the next real
(permanent) accounts.
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5–20
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The Post-Closing Trial Balance
 To verify the balances of the accounts that remain open, a postclosing trial balance is prepared using the final balance figures
from the ledger accounts.
 Note that the accounts listed in the post-closing trial balance are
the real or permanent accounts.
The Post-Closing
Trial Balance
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Tracking Down an Error
If the totals of the post-closing trial balance are not equal,
here’s the recommended procedures for tracking down
the error.
1. Re-add the trial balance columns.
2. Check to see that the figures were correctly transferred
from the ledger accounts to the post-closing trial
balance.
3. Verify the posting of the adjusting entries and the
recording of the new balances.
4. Make sure that the closing entries have been posted
and that all revenues, expense, Income Summary, and
Drawing accounts have zero balances.
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Cash and Accrual Accounting
 Under the cash basis of accounting,
revenue is recorded when it is received in
cash, and generally expenses are recorded
when they are paid in cash.
 Under the accrual basis of accounting,
revenue is recorded when it is earned, and
expenses are recorded when they are
incurred.
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Interim Statements
 Financial statements prepared during the
fiscal year, for periods of less than twelve
months, are called interim statements.
 A business may prepare the financial
statements monthly to provide up-to-date
information about the results of operations.
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