PURPOSE OF CLOSING ENTRIES
 start over  move the company’s net
income for a time period to the OE
section of the balance sheet
Start over  measure expenses for a
time period
Intuitively… if a company has $245
million net income, the equity of the
company goes up by $245 million
CLOSING ACCOUNTS
1.
2.
3.
4.
Updates the owner’s capital account in
the ledger by transferring net income
(loss) and owner’s drawings to owner’s
capital.
Prepares the temporary accounts
(revenue, expense, drawings) for the
next period’s postings by reducing their
balances to zero.
Accounts are closed every time period
(quarterly, annually)
Accounting software does this for you!!!
ILLUSTRATION 4-2
TEMPORARY VERSUS
PERMANENT ACCOUNTS
TEMPORARY (NOMINAL)
PERMANENT (REAL)
These accounts are closed
These accounts are not closed
ILLUSTRATION 4-3
DIAGRAM OF CLOSING PROCESS
(INDIVIDUAL)
REVENUES
(INDIVIDUAL)
EXPENSES
Normal Dr.
Balance
-0-
Cr. to close
Dr. to close
2
1
OWNER’S
CAPITAL
Expenses
Opening Balance
Revenues
Normal Cr.
Balance
-0-
ILLUSTRATION 4-3
DIAGRAM OF CLOSING PROCESS
OWNER’S
CAPITAL
Expenses
Drawings
Opening Balance
Revenues
Ending Balance
3
OWNER’S
DRAWINGS
Normal Dr.
Balance
-0-
Cr. to close
Example: Journalize the closing entries if Bert’s Pigeon Service had
Revenue of $5000, salary expenses of $2000 and supply expenses of
$1500; Bert had drawings of $1000
What was the Net income? What was the overall increase in OE?
POST-CLOSING TRIAL BALANCE


After all closing entries have been
journalized and posted, a ___________
____________ is prepared.
The purpose of this trial balance is to prove
the equality of the permanent (balance
sheet) account balances that are carried
forward into the next accounting period.
ILLUSTRATION 4-8
POST-CLOSING TRIAL BALANCE
Pioneer Advertising Agency
Post-Closing Trial Balance
October 31, 2002
After Adjustment
Debit
Credit
Cash
The post-closing trial$ 15,200
Accounts Receivable
200
balance
is
prepared
Advertising Supplies
1,000
from the permanent
Prepaid Insurance
550
Office Equipment
5,000
accounts in the ledger.
Accumulated Amortization
$
83
Notes Payable
5,000
The post-closing trial
Accounts Payable
2,500
balance provides evidence
Unearned Revenue
800
that
the
journalizing
and
Salaries Payable
1,200
posting of closing entries
Interest Payable
25
has been properly
C.R. Byrd, Capital
12,342
$ 21,950
$ 21,950
completed.
STEPS IN THE ACCOUNTING CYCLE
9. Prepare
post-closing
trial balance
1. Analyse
transactions
3. Post to ledger
accounts
8. Journalize
and post
closing entries
7. Prepare
financial
statements
2. Journalize the
transactions
4. Prepare a
trial balance
6. Prepare
adjusted trial
balance
5. Journalize
and post
adjusting
entries