BUSA 100 HYBRID COURSE – MR. FARINA
LECTURE NOTES
Chapter 6: Closing Entries and the Postclosing Trial Balance
Purpose of handout
The purpose of this handout is to summarize key Chapter 6 concepts.
Chapter 6: an overview
The primary Chapter 6 objective is to learn four more journal entries that are required to
close the accounting records at the end of the fiscal year (closing entries). We will also
discuss using a postclosing trial balance, prepared after closing entries are posted.
Closing Entries
At the end of the fiscal year, companies must close, or “zero-out,” balances in the
temporary accounts. The temporary accounts are:
1. the revenue accounts;
2. the expense accounts;
3. the income summary account (a new account used for closing entries);
4. and, the owner’s drawing account.
Using the first initial of each of the accounts spells “REID,” and might be a helpful tool
in remembering the closing entries. Additionally, the closing entries are prepared in that
order.
The asset, liability, and owner’s capital accounts are called permanent accounts and are
never closed out.
The following summarizes the closing process:
1. To close a revenue account: debit the revenue account and credit the income
summary account. Use a compound entry if there is more than one revenue
account.
2. To close an expense account: debit the income summary account and credit the
expense accounts, using a compound entry.
3. To close the income summary account:
If net income: debit the income summary, credit owner, capital
If net loss: debit the owner, capital account, credit income summary
4. To close the owner, drawing account: debit owner, capital, credit owner, drawing.
The example on the next page illustrates the closing entry process. Note that not all
accounts are listed, just those involved in the closing entry process.
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Example of closing entries
Selected accounts for A. Fontes, CPA, at the end of the most recent fiscal year ended
December 31, are as follows:
Accounting Fees Income…...$95,000
Consulting Fees Income…….$ 7,500
Rent Expense……………….$20,000
Utilities Expense……………$12,000
Supplies Expense………… $ 1,200
A. Fontes, Capital…………..$90,000
A. Fontes, Drawing…………$65,000
Required: (1) prepare the four closing entries, in order (“REID); and (2) determine the
final balance of A. Fontes, Capital, after the closing entries are posted. The solution is on
the next page.
Date
Description
Closing entries:
DR
CR
Dec. 31
Dec. 31
Dec. 31
Dec. 31
A. Fontes, Capital
90000
A. Fontes, Drawing
65000
Accounting Fees
95000
Consulting Fees
7500
Rent Expense
20000
Utilities Expense
12000
Supplies Expense
1200
Income Summary
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Solution to Example of Closing Entries
(1) The four closing entries are:
Date
Description
Closing entries:
Dec. 31 Accounting Fees Income
Consulting Fees Income
Income Summary
Dec. 31
Dec. 31
Dec. 31
DR
CR
95000
7500
102500
Income Summary
Rent Expense
Utilities Expense
Supplies Expense
33200
Income Summary
A. Fontes, Capital
69300
A. Fontes, Capital
A. Fontes, Drawing
65000
20000
12000
1200
69300
65000
Note: The third closing entry amount was calculated by taking $102,500 less
$33,200. This is also the firm’s net income---it is just total revenues minus total expenses.
(2) The balance of A. Fontes, Capital, would be calculated as follows:
$90,000 beginning balance (given) + $69,300 (third closing entry, or net income)
- $65,000 drawing = $94,300
Posting the Closing Entries
The closing entries are journal entries. They need to be both journalized in the General
Journal and posted to the G/L. The posting process works exactly the same as described
in Chapter 4, except that you need to write in “closing” in the description column of the
G/L account. After the entries are posted, the balance in all temporary accounts should
be zero.
The Post-Closing Trial Balance
Because we have posted additional entries (the closing entries), we need to make sure our
G/L is still in balance. We can do so by preparing a postclosing trial balance. A
postclosing trial balance is just another trial balance, prepared after the closing entries
were posted, to make sure total debits still equal total credits. The only difference now is
that when you go through the ledger to record any balances, the only accounts that should
have remaining balances are the permanent accounts—assets, liabilities, and the owner’s
capital account. Therefore the postclosing trial balance should only the permanent
accounts—assets, liabilities, and the owner, capital account.
**Now prepare Ex. 6.6, P6.3A and Ex. 6.3, using Homework Manager.**
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In Summary
Chapters 1 through 6 have taught us the accounting cycle for a sole proprietorship
business engaged in providing services. The accounting cycle is discussed in detail on
pages 168 and 169 of your text. In summary, here is what we should have learned:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Analyze transactions.
Journalize transactions in a general journal.
Post transactions from the general journal to the general ledger.
Prepare a worksheet, including adjusting entries.
Prepare the financial statements: the Income Statement, Statement of Owner’s
Equity, and Balance Sheet.
Journalize and post the adjusting entries.
Journalize and post the closing entries.
Prepare a postclosing trial balance.
Analyze the financial statements to gather information needed to make
appropriate business decisions.
Congratulations! At this point, we are halfway through the course. In Chapter 7, we will
begin to learn the accounting cycle for companies that sell merchandise.
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