Closing Entries
Reminder
• For those that were not here on Friday, please
remember that your third major test is on
THURSDAY or FRIDAY (depending on Assembly)
• It will cover
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HST Payable & Recoverable
The Classified Balance Sheet
The Worksheet
Adjusting Entries (Supplies, Prepaids, Depreciation)
Closing Entries
THE ACCOUNTING CYCLE
Closing
Entries
Transaction
Journal
Entry
Financial Statements
Adjusting Entries
Ledger
Trial Balance
Closing Entries Concepts
• At the end of each fiscal period, the company
wants to clear out certain accounts, so that
they have zero balances carrying forward
– This is done after financial statements have been
prepared (there must be totals in all accounts to
do this process)
• The business will clear out the Nominal
Accounts and leave the Real Accounts alone
Closing Entries Concepts
WHY DO WE CLOSE OUT ACCOUNTS? Closing
various accounts allows us to plainly observe
the previous year's effect on our revenue,
expense, and drawings accounts.
• You can well imagine that if we did not close
these accounts, their balances would build to
outrageous amounts.
– Easier to analyze the numbers if we know we
made x amount of money in 2011 and spent y.
Closing Entries
• REAL ACCOUNTS – balances that continue into
the next fiscal period
ex. Bank, trucks, accounts payable etc.
• NOMINAL ACCOUNTS – have balances that do
not continue into the next fiscal period
ONLY Expenses, drawing and revenue
Closing Entries Concepts
• CLOSING OUT AN ACCOUNT – means to make it have no
balance. Nominal accounts are closed out at the end of
the fiscal period.
• INCOME SUMMARY ACCOUNT – summarizes the
revenues and expenses of the period. Represents either
the net income or net loss for the fiscal period
– A temporary account that aids us in the closing entry process
– This will never have a balance at the end of the month,
therefore is not necessary to classify as an asset, liability,
expense or revenue account
Closing Entries Concepts
HOW DO WE DO THIS?
At the end of each month, there is an order in
which we close out accounts
1. Close out the revenue account(s) to the Income
Summary account
2. Close out the expense account(s) to the Income
Summary account
3. Close out the Income Summary account to the
Capital account
4. Close out the Drawing account to the Capital
account
Journalizing and Posting the Closing Entries
•
Closing Entry #1: Close out the revenue
account(s) to the Income Summary account
Journal
Dec 31
Shipping Revenue 213821
Income Summary 213821
Because revenue is a CR balance account, a DR entry is
needed to close it off
Journalizing and Posting the Closing Entries
•
Closing Entry #2: Close out the expense account(s)
to the Income Summary account
Journal
Dec 31
Income Summary
146984.91
Bank Charges Expense
…(all exp listed here)
Insurance Expense
Because expenses are a DR balance account, a CR entry is
needed to close them off
3500
2494
Journalizing and Posting the Closing Entries
•
Closing Entry #3: Close out the Income
Summary account to the Capital account
Journal
Dec 31
Income Summary
P. Lovett, Capital
66836.09
66836.09
If the Income Summary account has a CR balance, then a DR
entry is needed to close it. (profit  capital increases)
If the Income Summary account has a DR balance, then a CR
entry is needed to close it. (loss  capital decreases)
Journalizing and Posting the Closing Entries
•
Closing Entry #4: Close out the Drawing
account to the Capital account
Journal
Dec 31
P. Lovett, Capital
42000
P. Lovett, Drawings
42000
Because Drawings is a DR balance account, a CR entry is needed
to close it
Journalizing and Posting the Closing Entries
• Post-Closing Trial Balance
– Checks the accuracy of the ledger after the
adjusting and closing entries have been done
– Example shown on page 249
• Homework
– Page 252 - #11 & #12