2. Powerpoint - Closing Entries
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Accounting Practices 501 Chapter 8 Closing entries Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011 We know that Profit = Income less Expenses Once profit has been calculated, what happens to the income and expense accounts? Mmm…….. They get closed off as they only belong to ONE accounting period Ch8G - Adj Trial Balance 2 Extract from trial balance at year end After the financial statements have been prepared from the adjusted trial balance, we then close off the income and expense accounts so that they start at zero in the new financial year The following is an extract from an adjusted trial balance (after balance day adjustments) and only shows some accounts Ch8G - Adj Trial Balance 3 Extract from adjusted trial balance at year end Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After the financial statements have been prepared from the adjusted trial balance, we need to close off the income and expense accounts so that they start at zero for the new period Ch8G - Adj Trial Balance 4 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 ALL the income and expense accounts are closed off to a Profit & Loss account Lets close off the income accounts first. After closing off an account, the balance will be zero. Ch8G - Adj Trial Balance 5 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 General Journal Account Titles Date 31/3 Interest Ref no Sales Debit 600 Credit 90,000 90,600 Profit & Loss Being entry required to close income accounts Ch8G - Adj Trial Balance 6 Adjusted Trial Bal Closing Dr Cr Dr Cr Purchases 40000 Other expenses 30000 600 Interest 600 Sales 90000 90000 Opening inventory 6000 Closing inventory 5000 Drawings 2000 Funds introduced 6000 NIL NIL 90,600 Profit & Loss General Journal Account Titles Date 31/3 Interest After closing Dr Cr Ref no Sales Debit 600 Credit 90,000 90,600 Profit & Loss Being entry required to close income accounts Ch8G - Adj Trial Balance 7 Adjusted Trial Bal Closing Dr Cr Dr Cr Purchases 40000 Other expenses 30000 600 Interest 600 Sales 90000 90000 Opening inventory 6000 Closing inventory 5000 Drawings 2000 Funds introduced 6000 After closing Dr Cr NIL NIL 90,600 Profit & Loss After closing, the balances of the income accounts start at zero for the new accounting period (1 April) Ch8G - Adj Trial Balance 8 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 Lets close off the expense accounts. After closing off an account, the balance will be zero. Ch8G - Adj Trial Balance 9 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 Account Titles Date 31/3 Profit & Loss Ref no Debit Credit 71,000 Purchases 40,000 Other expenses 30,000 Opening inventory Closing inventory 6,000 5,000 Being entry required to close expense accounts to Profit & Loss Adjusted Trial Bal Dr Cr Purchases 40000 Other expenses 30000 Interest 600 Sales 90000 Opening inventory 6000 Closing inventory 5000 Drawings 2000 Funds introduced 6000 Profit & Loss Account Titles Date 31/3 Profit & Loss Closing Dr Cr 40000 30000 After closing Dr Cr NIL NIL 600 NIL 90000 NIL 6000 NIL 5000 NIL 71,000 90,600 Ref no Debit 19,600 Credit 71,000 Purchases 40,000 Other expenses 30,000 Opening inventory Closing inventory 6,000 5,000 Being entry required to close expense accounts to Profit & Loss Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL 19,600 Profit & Loss All the income and expense accounts have now been closed off and have zero balances. Ch8G - Adj Trial Balance 12 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL 19,600 Profit & Loss The last thing to do is to close off the Profit & Loss, Drawings and Funds Introduced accounts and transfer the amounts to the Capital account Ch8G - Adj Trial Balance 13 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL 19,600 Profit & Loss Owner gets the profit Ch8G - Adj Trial Balance 14 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 NIL NIL NIL NIL NIL 19,600 Profit & Loss General Journal Account Titles Date 31/3 Profit & Loss After closing Dr Cr NIL Ref no 19,600 Debit 19,600 Credit 19,600 Capital Being entry required to close Profit & Loss to Capital Ch8G - Adj Trial Balance 15 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL NIL Profit & Loss General Journal Account Titles Date 31/3 Capital Drawings Debit 2,000 Being entry required to close Drawings to Capital Ch8G - Adj Trial Balance Credit 2,000 16 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL NIL NIL Profit & Loss General Journal Account Titles Date 31/3 Funds introduced Capital Debit 6,000 Being entry required to close Funds introduced to Capital Ch8G - Adj Trial Balance Credit 6,000 17 Purchases Other expenses Interest Sales Opening inventory Closing inventory Drawings Funds introduced Adjusted Trial Bal Dr Cr 40000 30000 600 90000 6000 5000 2000 6000 After closing Dr Cr NIL NIL NIL NIL NIL NIL NIL NIL NIL Profit & Loss General Journal Account Titles Date 31/3 Funds introduced Capital Debit 6,000 Being entry required to close Funds introduced to Capital Ch8G - Adj Trial Balance Credit 6,000 18 That wasn’t too bad .... was it? Ch8G - Adj Trial Balance 19
