Chapter 8!
The Accounting Cycle
Work Sheet and Adjusting Process
Unit 4 Quest (chapter 8 and 10) will be on December 4
(Thursday)
Youtube clip: “Closing entries” by Education unlocked
Closing Accounts
Just as you have to clean out your locker in
June in order to start fresh new semester
in September, we also have to clean out
some ledger accounts in December in
order to start brand new year in
January.
 But we do not clean out all accounts. We
only clean out some accounts.

Permanent Accounts




=Real Accounts = All Balance Sheet accounts are
permanent accounts. (except Drawings account)
The balances carry into next year. We do not
change the account balances of all permanent accounts
except drawings account.
Capital account is a permanent account, but we change
its balance as we go to the next fiscal period (or next
year)
All asset accounts, liability and most OE accounts are
permanent accounts.
Temporary Accounts
=Nominal accounts
 The balances do not carry into next year.
 All income statement accounts and
Drawings account are temporary
accounts.
 The balances of these accounts become
zero when we open the new fiscal year
 “Closing an account” means that you
are making the account balance as zero.

Closing Journal Entries
= Closing Entries
 In order to close accounts, you can not just
close accounts, but you have to make
journal entries 쉐인
to 유먼
close the
temporary accounts.
 There are 4 closing entries you have to
make: CE#1, CE#2, CE#3 and CE #4

Closing Entry# 1 - Revenue
In order to close (make the accounts as zero)
temporary accounts, we will use an account
called, “Income Summary”.
 The numbers in revenue and expense accounts
are people whereas the bus is the income
summary account.
 Destination is capital
Account.

Closing Entry# 1 - Revenue

This entry deals with Revenue account.

Since the revenue account has a credit balance of
$207 821, (given by fig 8.13 Page 293) in order to make
this account zero, I must make a debit entry of
$207 821.
Then I also need a credit entry. Which account
should it be?
The logical way would be to credit capital
account. But many accountants use “Income
Summary” account, which is a temporary
account we use to facilitate closing process.


Closing Entry# 1 - Revenue
“Income Summary” account will
summarize revenue and expense amounts
in one ledger account. This ledger account
will then reveal the amount of net income
or loss.
 Then we transfer the ending balance of
this account to the capital account.

Closing Entry# 1 - Revenue

The closing entry #1 will be:
Dr
Cr
Dec 31 Shipping Rev
207821
Income Summary
207821
To close the 2004 balance of revenue
Closing Entry# 2 - Expenses
The closing entry #2 tries to clear the
balance of each expense accounts.
 Since expense accounts have debit
balances, we should credit these accounts
to bring the expense account balances to
zero.
 We have to add all the expense account
balances and the total amount will be
debited to Income Summary account.

Closing Entry# 2 - Expenses
The journal entry would be:
Dr
Income Summary
14718491
Bank Charges Expense
Miscellaneous Expense
Rent Expense
Telephone Expense
Truck Expense
Utilities Expense
Wages Expense
Supplies Expense
Insurance Expense
To close the 2004 expense accounts
Cr
3500
2036.65
24000
2045
42447.16
3750
65957.20
954.90
2494
Closing Entry# 3 – Income (or Loss)


The amount for the third Closing Entry is also found in the
worksheet (P293)
Let’s see the T account of Income Summary account:
Income Summary Account
207,821 CE1 (Rev)
CE2(Exp) 147,184.91
60,636.09


Right now, the Income Summary Account has an ending
balance of 60636.09 credit balance.
Since the total revenue is greater than total expense this
60,636.09 represents net income for 2004.
Closing Entry# 3 – Income (or Loss)
Since Income Summary account is a temporary account,
we need to close this account by making a debit entry.
 Which account should we credit?
 We will credit Capital account.
 Journal Entry would be:
Dr.
Cr.
Dec 31Income Summary
60636.09
P Marshall, Capital
60636.09
To close income summary account and transfer the
net income to capital account
 Remember in chapter 5, we learned that Net Income
amount was added to Capital account? By doing this
journal entry, we are adding net income number to the
capital account.

Closing Entry# 4 - Drawings
The fourth Closing entry transfers the balance of Drawings
account to the capital account.
 Again this number is easily picked up from the worksheet.
 Since Drawings account always has a debit balance, we
will credit the same amount to Drawing account.
 Which account should we debit?
 We will debit Capital account for the same amount.
Dr.
Cr.
Dec 31 P Marshall, Capital
42000
P Marshall, Drawing
42000
To close the drawings account and transfer its balance
to capital account

Closing Entry# 4 - Drawings




After all 4 Closing Entries have been posted, the objectives
of the closing have been achieved.
The temporary accounts have been closed (cleared) and
ready for the next fiscal period.
Also the capital account shows the true balance of equity
on the last day of the fiscal period.
Show T account of Capital account
Capital Account
28895.42 (BBalance)
60636.09 (Closed IS acc)
(closed Draw) 42000
4753151
Recall Chapter 5



Recall that the ending balance of capital account is :
BB of C + Net Income – Drawings = EB of Capital Account
We are doing same thing except that we are now using
Income Summary Account to make it more formal
process.
Homework
P297 Review: #7, 10, 11, 12 and 13
 P298 – P300 Exercise #1, 3, #4 and #5
