Completing the Accounting
Cycle for Sole Proprietorship
Chapter 10
The Accounting Cycle
 Steps in the Accounting Cycle
1.
2.
3.
4.
5.
6.
7.
Collect and verify source documents
Analyze each transaction
Journalize each transaction
Post to the ledger
Prepare a trial balance
Prepare a worksheet
Prepare financial statements
Completing the Accounting Cycle
 What are the last two steps in the
accounting cycle?
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
Preparing Closing Entries
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.
Starting the 8th Step
 What is the purpose of closing entries?
 The closing process updates accounts through
closing entries and brings the balance of the
general ledger capital account up-to-date.
Income Summary Account
 Income Summary Account
 Used to accumulate and summarize the revenue and expenses
for the period.
 Expense (debit) balances are transferred to debit side of the Income
Summary account
 Revenue (credit) balances are transferred to the credit side of the
Income Summary account
 The balance equals the net income or net loss for the fiscal period
 Part of the Owner’s Equity section of the general ledger
 Temporary account
 Does not have a normal balance, meaning it does not have an
increase or decrease side
 Does not appear on any financial statement
 Balance before and after the closing process is zero
Preparing Closing Entries
 How do you journalize closing entries?
1. Transfer the balances of all revenue accounts to the
credit side of the Income Summary account.
2. Transfer all expense account balances to the debit
side of the Income Summary account.
3. Transfer the balance of the Income Summary account
to the capital account (net income to the credit side;
net loss to the debit side).
4. Transfer the balance of the withdrawals account to the
debit side of the capital account.
Journalize Closing Entries
 Closing Revenue to Income Summary
1. Enter Closing Entries in the center of the
Description column
2. Enter the date (the last day of the accounting
period).
3. Enter the name(s) of the account(s) to be
debited and the debit amount(s).
4. Enter the name of the account, Income
Summary, and the amount to be credited.
Closing Revenue Example
GENERAL JOURNAL
1
2
3
DATE
ACCOUNT TITLE
2012
Closing Entries
Oct 31
Delivery Revenue
Income Summary
DOC.
NO.
POST.
REF.
PAGE
3
1
2
GENERAL
DEBIT
CREDIT
1
2,650
2
2,650
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
11
Journalizing Closing Entries
Closing Expenses to Income Summary
Not necessary to use a separate closing entry
for each expense account.
Use a compound entry
Journal entry with two or more debits or two more
credits.
Saves both space and posting time
DATE
ACCOUNT TITLE
NO.
REF.
DEBIT
CREDIT
Closing Entries
Closing
Expenses
Example
Oct 31 Delivery Revenue
2,650
1
2012
1
2
3
Income Summary
2
2,650
4
5
4
Oct 31 Income Summary
6
Advertising Expense
7
Maintenance Expense
8
9
3
Rent Expense
Utiliities Expense
1,500
5
75
6
600
7
700
8
125
9
10
10
11
11
12
12
13
13
14
14
15
15
16
16
Journalize Closing Entries
Closing Income Summary to Capital
The third closing entry transfers the balance of
the Income Summary account to the capital
account
Income Summary has a credit balance of
$1,150 (net income) in the example below
Income Summary
Closing entry for expenses $1500
Closing entry for revenue $2650
Balance
$1,150
GENERAL JOURNAL
DOC. POST.
NO. REF.
PAGE
3
1
2
GENERAL
DEBIT
CREDIT
Journalize Closing Entries
1
DATE
ACCOUNT TITLE
2012
Closing Entries
1
Oct 31 Delivery Revenue
2,650
 Closing
Income Summary to Capital
(cont’d)
2
2
Income Summary
3
2,650
Income Summary
Capital
4
4
Debit
5
8
9
Credit
Oct 31 Income Summary
Closing
1150
6
7
Balance Expense
1150
Advertising
Debit
Credit
1,500
__
5
+
75
12
6
Maintenance Expense
600 7
Balance 25,400
Rent Expense
Utiliities Expense
Closing
700 8
1,150
125
10
11
3
9
10
Oct 31 Income Summary
Maria Sanchez, Capital
1,150
11
1,150
12
13
13
14
14
Journalize Closing Entries
After the third closing entry has been
posted, the Income Summary account
appears in T-account form as follows:
Income Summary
Closing entry for expenses $1,500
Closing balance to owner’s
capital account
$1,150
Closing entry for revenue $2650
Journalize Closing Entries
 If there is a net loss in the business then the
Income Summary account has a debit balance
 In that case the third closing entry debits the
capital account and credits Income Summary for
the amount of the net loss.
GENERAL JOURNAL
1
2
DATE
ACCOUNT TITLE
2012
Closing Entries
Oct 31
Maria Sanchez, Capital
DOC.
NO.
POST.
REF.
PAGE
3
1
2
GENERAL
DEBIT
CREDIT
1
700
Income Summary
3
2
700
4
5
6
3
4
Oct 31
Income Summary
Advertising Expense
1,500
5
75
6
GENERAL JOURNAL
Journalize Closing Entries
1
DATE
ACCOUNT TITLE
2012
Closing Entries
DOC.
NO.
POST.
REF.
Sanchez, Capital
ClosingMaria
Withdrawals
to Capital
Income Summary
2
Oct 31
PAGE
3
1
2
GENERAL
DEBIT
CREDIT
1
700
2
700
3
4
5
6
7
4
Oct 31
Debit
8
Closing 500
9
Income Summary
Capital
1,500
Withdrawals
Advertising Expense
Credit
Maintenance Expense
Rent Expense
Balance
Utiliities Expense
Debit
Balance 500
Oct 31
Income Summary
Closing 500
75
6
600
7
700
8
125
9
10
1,150
Maria Sanchez, Capital
12
5
Credit
26,550
10
11
11
1,150
13
14
15
3
12
13
Oct 31
Maria Sanchez, Capital
Maria Sanchez, Wthdrawals
500
14
500
15
16
16
17
17
18
18
19
19
20
20
Journal Summary
Summary of Closing Entries
GENERAL JOURNAL
1
2
DATE
ACCOUNT TITLE
2012
Closing Entries
Oct 31
Delivery Revenue
DOC.
NO.
POST.
REF.
PAGE
3
1
2
GENERAL
DEBIT
CREDIT
1
2,650
Income Summary
3
2
2,650
4
5
4
Oct 31
Income Summary
6
Advertising Expense
7
Maintenance Expense
1,500
Rent Expense
Utiliities Expense
8
9
5
75
6
600
7
700
8
125
9
10
11
10
Oct 31
Income Summary
1,150
Maria Sanchez, Capital
12
11
1,150
13
14
15
3
12
13
Oct 31
Maria Sanchez, Capital
Maria Sanchez, Wthdrawals
500
14
500
15
16
16
17
17
Completing the 8th Step
What is special about posting the closing
entries?
The posting procedure is the same as for any
other general journal entry, with one exception.
The words Closing Entries are written in the
Description column of the general ledger
account.
The 9th Step in the Accounting Cycle
Preparing a Post-Closing Trial Balance
Why do we need a post-closing trial balance?
It is prepared to make sure total debits equal total
credits after the closing entries are posted.
Only accounts with balances are listed on the
post-closing trial balance.
After the closing process – only permanent accounts
have balances
Temporary accounts have zero balances so they are
not listed
Example
RoadRunner Delivery Service
Post-Closing Trial Balance
October 31, 2012
Cash in Bank
Accts. Rec -- City News
Computer Equipment
Office Equipment
Delivery Equipment
Accts. Pay -- Beacon Advertising
Accts. Pay -- North Shore Auto
Maria Sanchez, Capital
Total
$ 21,125.00
$ 1,450.00
$ 3,000.00
$
200.00
$ 12,000.00
$
75.00
$ 11,650.00
$ 26,050.00
$ 37,775.00 $ 37,775.00