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Closing entries transfer the temporary
account balances to the owner’s capital
account. After the closing entries are
posted, a post-closing trial balance is
prepared to verify that debits equal credits.
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Explain why it is necessary to update accounts through closing
entries.
Explain the purpose of the Income Summary account.
Explain the relationship between the Income Summary Account and
the capital account.
Analyze and journalize the closing entries.
Post the closing entries to the general ledger.
Prepare a post-closing trial balance.
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Section 10.1
Preparing Closing
Entries
Key Terms
closing entries
Income Summary account
compound entry
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Completing the
Accounting Cycle
Section 10.1
Preparing Closing
Entries
After the closing entries have been journalized
and posted, a trial balance is prepared.
closing entries
Journal entries made to close, or reduce to zero,
the balances in the temporary accounts and to
transfer the net income or net loss for the period to
the capital account.
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Starting the Eighth Step in the
Accounting Cycle: Journalizing
the Closing Entries
Section 10.1
Preparing Closing
Entries
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The Income
Summary Account
Section 10.1
Preparing Closing
Entries
The Income Summary Account
Serves as a simple income statement
in the general ledger
Used to accumulate revenue and
expenses for the period
Income Summary
account
The general ledger
account used to
summarize the
revenue and
expenses for the
period.
Equals the net income or loss for
the period
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The Income
Summary Account
Section 10.1
Preparing Closing
Entries
is used only at the end of the accounting period
to summarize revenue and expense balances.
The Income
Summary
account is a
temporary
account that:
does not have a normal balance.
has a zero balance before and after the closing.
does not appear on any financial statement.
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Preparing the
Closing Entries
Section 10.1
Preparing Closing
Entries
Enter Closing Entries in the
Description column.
To record
closing entries
in the general
journal:
Enter the last day of the accounting period.
Enter the name(s) and amount(s) of the account(s)
to be debited.
Enter Income Summary as the name of the account to
be credited and the amount to be credited.
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Preparing Closing Entries
Section 10.1
Preparing Closing
Entries
Closing Entry
First Closing Entry—Close Revenue to Income
Summary
See page 257
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Preparing Closing Entries
Section 10.1
Preparing Closing
Entries
Closing Entry
Second Closing Entry—Close Expenses to
Income Summary
See page 258
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Preparing Closing Entries
Section 10.1
Preparing Closing
Entries
Closing Entry
Second Closing Entry—Close Expenses to
Income Summary
See pages 258–259
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Preparing Closing Entries
Section 10.1
Preparing Closing
Entries
Closing Entry
Third Closing Entry—Close Income Summary to
Capital
See page 259–260
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Preparing Closing Entries
Section 10.1
Preparing Closing
Entries
Closing Entry
Fourth Closing Entry—Close Withdrawals to
Capital
See page 261
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Section 10.2
Posting Closing Entries and
Preparing a Post-Closing Trial
Balance
Key Term
post-closing trial balance
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Completing the Eighth Step in the
Accounting Cycle: Posting the Closing
Entries to the General Ledger
Section 10.2
Posting Closing Entries and
Preparing a Post-Closing Trial
Balance
Closing Entries Posted to the General Ledger
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See page 263
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The Ninth Step in the Accounting
Cycle: Preparing a Post-Closing
Trial Balance
Section 10.2
Posting Closing Entries and
Preparing a Post-Closing Trial
Balance
Post-Closing Trial Balance
See page 265
post-closing trial balance
A list of the permanent general ledger account balances; it is prepared
to prove the ledger after the closing entries are posted.
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Question 1
As a result of the first two closing entries, the Income Summary account had a debit of
$2,250 and a credit of $4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing entry to close the balance of the
Income Summary account to Scott Jones, Capital.
Step 1
Calculate the balance of the Income Summary account.
Credits are more than debits; therefore,
$4,125 - $2,250 = $1,875 credit balance,
which indicates a net income.
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(continued)
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Question 1
As a result of the first two closing entries, the Income Summary account had a debit of
$2,250 and a credit of $4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing entry to close the balance of the
Income Summary account to Scott Jones, Capital.
Step 2
Identify the accounts affected.
The accounts Income Summary and Scott Jones,
Capital are affected.
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(continued)
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Question 1
As a result of the first two closing entries, the Income Summary account had a debit of
$2,250 and a credit of $4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing entry to close the balance of the
Income Summary account to Scott Jones, Capital.
Step 3
Classify the accounts affected.
Income Summary is a temporary owner’s equity
account; Scott Jones, Capital is the permanent owner’s
capital account.
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(continued)
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Question 1
As a result of the first two closing entries, the Income Summary account had a debit of
$2,250 and a credit of $4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing entry to close the balance of the
Income Summary account to Scott Jones, Capital.
Step 4
Are the accounts increased or decreased?
The Income Summary account is decreased by its
balance, $1,875, to zero. Scott Jones, Capital is
increased by $1,875.
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(continued)
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Question 1
As a result of the first two closing entries, the Income Summary account had a debit of
$2,250 and a credit of $4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing entry to close the balance of the
Income Summary account to Scott Jones, Capital.
Step 5
Apply the debit/credit rule.
To reduce the Income Summary account to zero, debit
Income Summary $1,875. To increase the capital
account, credit Scott Jones, Capital for $1,875.
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Question 2
Why are all of the temporary accounts reset to zero at the end of the
fiscal year?
All revenues increase owner’s equity, and all expenses reduce
owner’s equity.
These transactions are separated from capital so the business
can analyze how a profit or loss was made during the year.
At the end of the year, the accumulation of these revenues and
expenses are transferred into the capital account.
The temporary accounts are reset to zero, which allows the
business to compare the revenue and expense data from one
period to the next.
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