McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
6–1
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 1: Closing Entries
Section Objectives
1.
Journalize and post closing
entries.
6–2
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
The seventh step in the accounting cycle is to journalize and post
closing entries
6–3
QUESTION:
What is the Income Summary account?
ANSWER:
The Income Summary account is a
special owner’s equity account that
is used only in the closing process
to summarize the results of
operations.
6–4
Income Summary Account

Classified as a temporary owner’s equity account.

Does not have a normal balance.

Has a zero balance after the closing process and remains with
a zero balance until after the closing procedure for the next
period.
6–5
Objective 1 Journalize and post closing entries
There are four steps in the closing
process:
1. Transfer the balance of revenue account
balances to the Income Summary account.
2. Transfer the expense account balances to the
Income Summary account.
3. Transfer the balance of the Income Summary
account to the owner’s capital account.
4. Transfer the balance of the drawing account to the
owner’s capital account.
6–6
Wells’ Consulting Services
Worksheet
Month Ended December 31, 2013
ACCOUNT NAME
TRIAL BALANCE
ADJUSTMENTS
ADJ. TRIAL BAL.
INCOME STMT.
BALANCE SHEET
DEBIT
DEBIT
DEBIT
DEBIT
DEBIT
CREDIT
111,350
Cash
5,000
Accounts Receivable
1,500
Supplies
Prepaid Rent
8,000
Equipment
11,000
Accum. Depr.—Equip.
3,500
Accounts Payable
Carolyn Wells, Cap.
100,000
5,000
Carolyn Wells, Draw.
Fees Income
47,000
Salaries Expense
8,000
Utilities Expense
650
(a) 500
Supplies Expense
Rent Expense
(b) 4,000
Depr. Exp.—Equip.
(c)
183
Totals
150,500 150,500
4,683
Net Income
CREDIT
111,350
5,000
(a) 500
1,000
4,000
(b) 4,000
11,000
(c) 183
CREDIT
CREDIT
CREDIT
111,350
5,000
1,000
4,000
11,000
183
3,500
100,000
183
3,500
100,000
5,000
5,000
47,000
8,000
8,000
650
650
500
500
4,000
4,000
183
183
4,683 150,683 150,683 13,333
33,667
47,000
Fees Income has a credit
balance of $47,000
47,000
47,000 137,350 103,683
33,667
47,000 137,350 137,350
6–7
Step 1: Close Revenue
Fees Income
Balance 47,000
Income Summary
Closing 47,000
Closing 47,000
6–8
Step 1: Close Revenue
GENERAL JOURNAL
DATE
2013
DESCRIPTION
POST.
REF.
4
PAGE
DEBIT
CREDIT
Closing Entries
Dec. 31 Fees Income
47,000
Income Summary
47,000
The words “Closing Entries” are written in the
Description column of the general journal
6–9
Step 2: Close Expenses

The Income Statement section of the worksheet for
Wells’ Consulting Services lists five expense accounts.

Since expense accounts have debit balances, enter a
credit in each account to reduce its balance to zero.

This closing entry transfers total expenses to the
Income Summary account.
6–10
Step 2: Close Expenses

The five expense account balances are reduced to
zero.
 The total, $13,333
of
expenses are transferred to
the temporary owner’s equity
account, Income Summary.
6–11
Income Summary
Bal 47,000
Closing
Salaries Expense
Balance 8,000
Closing 8,000
13,333
Utilities Expense
Balance
650
Supplies Expense
Balance
500
Closing 650
Rent Expense
Closing 500
Depr. Expense – Equip.
Balance
Balance 4,000
Closing 4,000
183
Closing 183
6–12
Step 2: Close Expenses
GENERAL JOURNAL
DATE
2013
Dec. 31
DESCRIPTION
Closing Entries
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depreciation Exp.-Equip.
POST.
REF.
4
PAGE
DEBIT
CREDIT
13,333.00
8,000.00
650.00
500.00
4,000.00
183.00
6–13
The Income Summary account reflects all
entries in the Income Statement section of
the worksheet.
Income Summary
Dr.
Cr.
Closing 13,333
Closing 47,000
Balance 33,667
Net Income
6–14
Step 3: Close Net Income to Capital

The journal entry to transfer net income to owner’s
equity is a debit to Income Summary, and a credit
to Carolyn Wells, Capital.

The balance of Income Summary is reduced to
zero; the owner’s capital account is increased by
the amount of net income.

The Income Summary account is reduced to zero.

The net income amount, $33,667, is transferred to the
owner’s capital account. Carolyn Wells, Capital is
increased by $33,667.
6–15
Step 3: Close Net Income to Capital
Income Summary
Balance 33,667
Closing 33,667
Carolyn Wells, Capital
Balance 100,000
Closing 33,667
6–16
Step 3: Close Net Income to Capital
GENERAL JOURNAL
DATE
DESCRIPTION
Closing Entries
Dec. 31 Income Summary
Carolyn Wells, Capital
POST.
REF.
PAGE
DEBIT
4
CREDIT
33,667.00
33,667.00
6–17
Step 4: Close Drawing to Capital
•Withdrawals appear in the statement of owner’s
equity as a deduction from capital.
•The drawing account is closed directly to the capital
account.
•The drawing account balance is reduced to zero.
•The balance of the drawing account, $5,000, is
transferred to the owner’s capital account.
6–18
Step 4: Close Drawing to Capital
Carolyn Wells, Capital
Balance 133,667
Closing 5,000
Carolyn Wells, Drawing
Balance 5,000
Closing 5,000
6–19
Step 4: Close Drawing to Capital
GENERAL JOURNAL
DATE
DESCRIPTION
Closing Entries
Dec. 31 Carolyn Wells, Capital
Carolyn Wells, Drawing
POST.
REF.
4
PAGE
DEBIT
CREDIT
5,000.00
5,000.00
6–20
The new balance of the Carolyn Wells,
Capital account agrees with the amount
listed on the balance sheet.
Carolyn Wells, Drawing
Dr.
Cr.
Balance
5,000
Balance
0
Carolyn Wells, Capital
Dr.
Cr.
Balance 100,000
Closing 5,000
Drawing 5,000
Net Inc.
33,667
Balance 128,667
Carolyn Wells, Capital
6–21
Summary of Closing Entries
GENERAL JOURNAL
STEPS
1. Close
Revenue
Account
DATE
2013
Dec. 31
2. Close
Expense
Accounts
31
3. Close
Income
Summary
31
4. Close
Drawing
Account
31
DESCRIPTION
Closing Entries
POST.
REF.
PAGE
DEBIT
Fees Income
Income Summary
401
309
47,000.00
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense-Equip.
Income Summary
Carolyn Wells, Capital
309
511
514
517
520
523
309
301
13,333.00
Carolyn Wells, Capital
Carolyn Wells, Draw.
301
302
4
CREDIT
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
33,667.00
33,667.00
5,000.00
5,000.00
6–22
Posting the Closing Entries
All journal entries are posted to the general
ledger accounts.

“Closing” is entered in the Description column of
the ledger accounts.

The ending balances of the drawing, revenue,
and expense accounts are zero.
6–23
GENERAL JOURNAL
STEPS
DATE
2013
1. CLOSE
REVENUE
Dec. 31
ACCOUNT
Fees Income
DATE
2013
Dec. 31
Dec. 31
Dec. 31
DESCRIPTION
Closing
DESCRIPTION
Closing Entries
Fees Income
Income Summary
POST.
REF.
401
309
ACCOUNT NO.
POST.
REF.
J2
J2
J4
DEBIT
CREDIT
36,000.00
11,000.00
47,000.00
DEBIT
PAGE
4
CREDIT
47,000.00
47,000.00
401
BALANCE
DEBIT
CREDIT
36,000.00
47,000.00
–0–
6–24
GENERAL JOURNAL
DATE
2013
STEPS
1. CLOSE
REVENUE
ACCOUNT
DATE
2013
Dec. 31
Dec. 31
DESCRIPTION
Closing Entries
Fees Income
Income Summary
Income Summary
DESCRIPTION
Closing
POST.
REF.
DEBIT
401
309
ACCOUNT NO.
POST.
REF.
J4
DEBIT
CREDIT
47,000.00
PAGE
4
CREDIT
47,000.00
47,000.00
309
BALANCE
DEBIT
CREDIT
47,000.00
6–25
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 2: Using Accounting
Information
2.
Prepare a postclosing trial
balance.
3.
Interpret financial statements.
4.
Review the steps in the
accounting cycle.
6–26
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
6–27
QUESTION:
What is the postclosing trial balance
ANSWER:
A postclosing trial balance is report that
is prepared to prove the equality of total
debits and credits after the closing
process is completed. It verifies that
revenue, expense, and drawing accounts
have zero balances.
6–28
Wells’ Consulting Services
Postclosing Trial Balance
December 31, 2013
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation–Equipment
Accounts Payable
Carolyn Wells, Capital
Totals
DEBIT
CREDIT
111,350.00
5,000.00
1,000.00
4,000.00
11,000.00
132,350.00
183.00
3,500.00
128,667.00
132,350.00
6–29
Finding and Correcting Errors
If the postclosing trial balance does not
balance, the accounting records contain
errors.
Use the audit trail to trace data through
the accounting records.
6–30
Objective 3
Interpret financial
statements
6–31
Wells’ Consulting Services
Partial Balance Sheet
December 31, 2013
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
What is the
cash balance?
How much do the customers
owe the business?
6–32
Wells’ Consulting Services
Balance Sheet
December 31, 2013
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Owner’s Equity
Carolyn Wells, Capital
Total Liabilities and Owner’s Equity
$ 3,500.00
128,667.00
$132,167.00
How much does the business owe its suppliers?
6–33
Wells’ Consulting Services
Income Statement
Month Ended December 31, 2013
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense--Equipment
Total Expenses
Net Income for the Month
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
13,333.00
33,667.00
What is the profit?
6–34
Objective 4 Review the steps in the accounting cycle
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Prepare financial statements

Income Statement

Statement of Owner’s Equity

Balance Sheet
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
6–35
The Accounting Cycle
Step 1
Analyze
transactions


Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Transfer net income or net loss
to owner’s equity.
Reduce the balances of the
temporary accounts to zero.
Step 7
Journalize and
post closing
entries
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
6–36
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
6–37
Flow of Data Through a Simple
Accounting System
Source
Documents
General
journal
General
ledger
Worksheet
Financial
statements
Source documents are analyzed
6–38
Thank You
for using
College Accounting:
A Contemporary Approach, 2nd Edition
Haddock • Price • Farina
6–39