Notes, Chapter 8, Section 1
Adjusting Entries –
Permanent Accounts (also referred to as “real” accounts) –
o Includes: asset accounts, liability accounts, and the owner’s capital
account.
o The ending account balances of permanent accounts for one fiscal period
are the beginning account balances for the next fiscal period.
Temporary Accounts (also referred to as “nominal” accounts) –
o Includes: revenue, expenses, owner’s drawing account, and the income
summary account.
o Temporary accounts show changes in the owner’s capital for a single fiscal
period. Therefore, at the end of a fiscal period, the balances of temporary
accounts are summarized and transferred to the owner’s capital account.
o Temporary accounts begin a new fiscal period with zero balances.
Closing Entries –
o Temporary account balances must be reduced to zero at the end of each
fiscal period. This procedure prepares the temporary accounts for recording
information for the next fiscal period.
o To close a temporary account, an amount equal to its balance is recorded in
the account on the side opposite to its balance. For example, if an account
has a credit balance of $4,411.00, a debit of $4,411.00 is recorded to close
the account.
o The heading “closing entries” is centered on the general ledger line – there
are no doc. numbers associated with closing entries.
Steps to completing closing entries:
1. The first closing entry _________________________________
2. The second closing entry _____________________________
3. The third closing entry ______________________________. The amount of the net
income or net loss is credited or debited (respectively) to the owner’s capital
account.
4. The fourth closing entry ______________________________________. (Remember
that drawing accounts decreases owner’s equity. Also, the drawing account
is neither a revenue or an expense, therefore, it is not closed through the
income summary, but is closed directly through the capital account.)
Income Summary –
o The income summary account is unique because it does not have a
______________________________________.
o The balance of the income summary account is determined by the amounts
posted to the account at the end of a fiscal period.
o Whether the balance of the income summary account is a credit or a debit
depends upon whether the business earns a net income or incurs a net loss.
o Because income summary is a temporary account, the account is also
closed at the end of a fiscal period when the net income or net loss is
recorded.