Completing the Accounting Cycle for a Sole Proprietorship

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Completing the Accounting Cycle
for a Sole Proprietorship
Chapter 10
The Last Two Steps of the
Accounting Cycle
• Journalize and Post 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
• Prepare a Post-Closing Trial Balance
– Trial Balance prepared after temporary accounts
are brought to zero and capital has been adjusted
accordingly
Pg 250
The Process of Closing Entries
Pg 251
1. Prior to the closing process, you know that the net
income or net loss is calculated on the work sheet
2. The net income or net loss amount then appears on
the income statement
3. On the statement of changes in owner’s equity, the
ending balance of the capital account includes net
income or net loss
4. The ending balance of the capital account then
appears on the balance sheet
5. At this point, however, the balance of the capital
account in the general ledger does not equal the
amount on the balance sheet because the closing
entries need to be journalized and posted
Pg 252
Pg 252
The Income Summary Account
• The Income Summary Account is used to
accumulate and summarize the revenue and
expenses for the period.
– Expenses, which have debit balances, are
transferred as debits to Income Summary
– Revenues, which have credit balances, are
transferred as credits to Income Summary
– The balance in the account equals the net income
or net loss for the fiscal period
Pg 253
Income Summary T Account
Income Summary
Debit
Credit
Expenses
Revenue
If Revenue >Expenses
If Revenue < Expenses
Balance is net income
Balance in net loss
Pg 253
General Journal Closing Transactions
Pg 254 - 256
Closing Income Summary to Capital
• Once all transactions for Revenue and Expenses
have been journalized, Income Summary has a
balance. If there was a net income the Income
Summary Account should have a credit balance. If
there was a net loss, Income Summary should
have a debit balance
• The balance is then offset with the Capital
account opposite to what the current Income
Summary balance is. The idea is to bring the
account to a zero balance.
Pg 257
Pg 257
Closing Withdrawals to Capital
• Withdrawal accounts usually have a debit
balance so to close them you off set with a
credit and debit to Capital
Pg 258
General Journal of Closing Entries
Pg 258
Posting the Closing
Entries to the
General Ledger
Pg 260-261
Post-Closing Trial Balance
Pg 262
• 9th & Final Step in the Accounting Cycle –
Prepared to make sure total debits equal total
credits after the closing entries are posted.
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