Chapter 8 - Recording Adjusting and Closing Entries for a Service Business
Chapter Objectives

Record adjusting entries for a service business

Record closing entries for a service business

Prepare a post-closing trial balance
Adjusting Entries

Adjustments must be journalized so they can be posted to the general ledger accounts.

Journal entries recorded to update general ledger accounts at the end of a fiscal period are
called adjusting entries.

Recorded on the next journal page following the page on which the last daily transactions for
the month are recorded.

Analysis of your adjustment is done when the work sheet was completed.

All we are doing is recording the entry

Posting to general ledger account before the account balance changes.

Once the entry is posted the supplies account balance will reflect the amount of supplies on
hand!
Adjusting Entries for Supplies
No source document is prepared for adjusting entries. They are identified with a heading in the journal.
Prepaid Insurance
The Prepaid Insurance account balance will reflect the amount of prepaid insurance premiums that
remain at the end of the fiscal period.
Audit Your Understanding

Why are adjusting entries journalized?


Where is the information obtained to journalize adjusting entries?


To update general ledger accounts at the end of a fiscal period.
Adjustments column of the work sheet
What accounts are increased from zero balances after adjusting entries for supplies and prepaid
insurance are journalized and posted?

Supplies Expense and Insurance Expense
8.2 Recording closing entries
Objectives

Record closing entries for a service business and identify accounting concepts related to closing
entries.
Terms

Permanent Accounts

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Temporary Accounts


Accounts used to accumulate information from one fiscal period to the next.
Accounts used to accumulating information until it is transferred to the owner’s capital
account
Closing Entries

Journal entries used to prepare temporary accounts for a new fiscal period.
Need for Permanent and Temporary Accounts


Permanent accounts

Referred to as real accounts

Asset Accounts

Liability Accounts

Owner’s Capital Account

Ending account balance at the end of the fiscal period are the balances at the beginning
of the next fiscal period.
Temporary Accounts

Accounts used to accumulate information until it is transferred to the owner’s capital
account

Referred to as Nominal Accounts

Include


Revenue

Expense

Owner’s drawing accounts

Income Summary account
Show changes in the owner's capital for a single fiscal period

At the end of a fiscal period, the balance of temporary accounts are summarized and
transferred to the owner’s capital account

Temporary accounts begin the fiscal period with a zero balance.
Closing Entries

Journal entries used to prepare temporary accounts for a new fiscal period

Temporary account balances must be reduced to zero at the end of each fiscal period.

We do this so the temporary account balances are not added to the previous fiscal
period

Accounting Concept: Matching Revenue with Expenses

Transfers the balance of one account to another account

Procedure for closing an account includes entering an amount equal to the account
balance on the side opposite its balance.
Need for the Income Summary Account

A temporary account title Income Summary is used to summarize the closing entries for
revenue and expense accounts.

Income Summary

Does not have a normal balance side.

Balance is determined whether business earns a net income or a net loss.

Ex) Revenue is greater than total expenses – Net Income. The Income summary
account has a Debit balance.


Net loss – account balance is Credit
Income Summary

Is a temporary account and is closed when the net income or loss is recorded
4 Closing Entries
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Income statement accounts with credit balances


Income statement accounts with debit balances


Sales / Income Summary
Expenses / Income Summary
An entry to record net income or net loss and close income Summary

Capital / Income Summary

An entry to close owner’s equity drawing account

Capital / Drawing
Closing Entries


Why do we have to do closing entries?

To bring temporary accounts to a zero balance and to transfer the balance of each
account to another account.

First closing entry closes all income statement accounts with credit balances

Income Summary Account is the other account used in the closing entry for revenues
and expenses

Closing Entry for an Income Statement with a Credit Balance
Closing Entry for Income Statement Accounts with Debit Balances


Remember:

The purpose of closing entries is to bring the balance of temporary accounts to zero.

To transfer the balance of each account to another account.

Second Closing entry closes all income statement accounts that have debit balances.

Income summary account is the other account used in the closing entry for revenues and
expenses

Closing Entry to Record Net Income or Loss and Close the Income Summary Account

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Closing Entry to Record Net Income or Loss and Close the Income Summary Account

Third Closing Entry


Records Net Income or Net loss

Closes the income Summary Account

Amount of Net income increases the owner’s capital.

The entry to record net income should include a credit to the capital account

Other part closes income summary

Net income – the credit side of Income Summary revenues is larger than the
debit side – expenses.

A debit is required to close Income Summary when there is a net income

Opposite happens for Net Loss – decreases Capital
Closing Entry for the Owner’s Drawing Account
Withdrawals are assets that the owner takes out of a business and which decrease the amount
of the owner’s equity.
The drawing account is a temporary account that accumulates information for a fiscal period.
Drawing is either a revenue or expense account so it is not closed through Income Summary.
Closed directly to the Owner’s Capital Account.
Audit Your Understanding

What do the ending balances or permanent accounts for one fiscal period represent at the
beginning of the next fiscal period?



Beginning balances
What do the balances of temporary accounts show?

Changes in the Owner's Equity Accounts

Audit Your Understanding
List the four closing entries?

An entry to close income statement accounts with credit balances

An entry to close income statement accounts with debit balances.

An entry to record net income or net loss and close the income summary account

An entry to close the owner’s drawing account.
8.3 Preparing a Post-Closing Trial Balance

Objectives

Prepare a post-closing trial balance

Terms:

Post-closing trial balance


A trial balance prepared after the closing entries are posted.
Accounting Cycle

The series of accounting activities included in recording financial information for a fiscal
period
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GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED

Post-Closing Trial Balance

Post means after

Post-closing trial balance is a trial balance prepared after the closing entries.

Only general ledger accounts with balances are included on a post-closing trial balance.

Why is it important to prove that debits equal credits at the close of the fiscal period?

To prove that the work is correct before starting a new fiscal period so errors are not
carried forward.

POST-CLOSING TRIAL BALANCE
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ACCOUNTING CYCLE FOR A SERVICE BUSINESS

Audit Your Understanding

Which accounts go on the post-closing trial balance?


Only those with balances – permanent accounts
Why are temporary accounts omitted from a post-closing trial balance.

Because they are closed and have zero balances.