Chapter
6
Skyline College
6-1
The Closing Process
Closing entries are journal entries
that transfer the results of
operations (net income or net loss)
to owner’s equity and reduce the
revenue, expense, and drawing
account balances to zero.
Only balance sheet accounts carry
forward a balance.
6-2
The Income Summary Account
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.

Classified as a temporary owner’s equity account

Only time it has a balance is during the closing process

Has a zero balance after the closing process and remains with
a zero balance until after the closing procedure for the next
period
6-3
There are four steps in the closing
process:
1. Transfer the balance of the revenue account 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.
6-4
Step 1: Transfer Revenue Account
Balances
On December 31 the worksheet for JT ‘s
Consulting Services shows one revenue
account, Fees Income of $35,000.
The Fees Income account is closed to the Income
Summary account.
6-5
JT’s Consulting Services
Worksheet
Month Ended December 31, 2007
ACCOUNT NAME
TRIAL BALANCE
ADJUSTMENTS
ADJ. TRIAL BAL.
INCOME STMT.
BALANCE SHEET
DEBIT
DEBIT
DEBIT
DEBIT
DEBIT
CREDIT
83,500
Cash
5,000
Accounts Receivable
3,000
Supplies
Prepaid Rent
7,000
Equipment
22,000
Accum. Depr.—Equip.
7,000
Accounts Payable
Jason Taylor, Cap.
90,000
4,000
Jason Taylor, Draw.
Fees Income
35,000
Salaries Expense
7,000
Utilities Expense
500
Supplies Expense
Rent Expense
Depr. Exp.—Equip.
Totals
132,000 132,000
Net Income
CREDIT
83,500
5,000
(a) 1,000
2,000
3,500
(b) 3,500
22,000
(c) 367
CREDIT
CREDIT
83,500
5,000
2,000
3,500
22,000
367
7,000
90,000
367
7,000
90,000
4,000
4,000
35,000
(a) 1,000
3,500
(c)
367
4,083
(b)
7,000
500
1,000
3,500
367
4,083 120,583 120,583
35,000
7,000
500
1,000
3,500
367
12,367 35,000 120,000 97,367
22,633
22,633
35,000 35,000 120,000 120,000
It has a credit balance
of $35,000.
6-6
CREDIT
Step 1: Close Revenue
Fees Income
Closing 35,000
Income Summary
+
Bal 35,000
Closing 35,000

The revenue account, Fees Income, is decreased by
$35,000 to zero.

The $35,000 is transferred to the temporary owner’s
equity account, Income Summary.
6-7
Step 1: Close Revenue
GENERAL JOURNAL
DATE
2007
DESCRIPTION
POST.
REF.
PAGE
DEBIT
CREDIT
Closing Entries
Dec. 31 Fees Income
35,000
Income Summary
35,000
The words “Closing Entries” are written in the
Description column of the general journal.
6-8
4
Step 2: Transfer Expense Account
Balances

The Income Statement section of the worksheet for
JT’s Consulting Services lists five expense accounts.
Salaries Expense
$7,000
Utilities Expense
500
Supplies Expense
1,000
Rent Expense
3,500
Depreciation Expense 367

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.
6-9
Step 2: Close Expenses

The five expense account balances are reduced to
zero.
 The total, $12,367
of
expenses are transferred to
the temporary owner’s equity
account, Income Summary.
6-10
JT’s
JT’s Consulting
Consulting Services
Services
Worksheet
Worksheet
Month
Month Ended
Ended December
December 31,
31, 2007
2007
ACCOUNT NAME
TRIAL BALANCE
ADJUSTMENTS
ADJ. TRIAL BAL.
INCOME STMT.
BALANCE SHEET
DEBIT
DEBIT
DEBIT
DEBIT
DEBIT
CREDIT
83,500
Cash
5,000
Accounts Receivable
3,000
Supplies
Prepaid Rent
7,000
Equipment
22,000
Accum. Depr.—Equip.
7,000
7,000
Accounts Payable
Jason Taylor, Cap.
90,000
4,000
Jason Taylor, Draw.
Fees Income
35,000
Salaries Expense
7,000
Utilities Expense
500
Supplies Expense
Rent Expense
Depr. Exp.—Equip.
Totals
132,000 132,000
CREDIT
83,500
5,000
(a) 1,000
2,000
3,500
(b) 3,500
22,000
(c) 367
0
CREDIT
CREDIT
83,500
5,000
2,000
3,500
22,000
367
7,000
7,000
90,000
367
7,000
7,000
90,000
4,000
4,000
35,000
(a) 1,000
3,500
(c)
367
4,083
(b)
7,000
500
1,000
3,500
367
4,083 120,583 120,583
35,000
7,000
500
1,000
3,500
367
12,367 35,000 120,000 97,367
22,633
22,633
35,000 120,000
120,000
35,000 35,000
120,000 120,000
a credit
balance
It hasIta has
debit
balance
of $35,000.
of $12,367.
6-11
CREDIT
Step 2: Close Expenses
Income Summary
Closing
12,367
Salaries Expense
+
Bal 7,000
Bal 35,000
Closing 7,000
Bal 22,633
Utilities Expense
+
Bal
500
Supplies Expense
Closing 500
+
Bal
Depr. Expense – Equip.
Rent Expense
+
Bal 3,500
1000
Closing 1,000
Closing 3,500
Bal
6-12
+
367
Closing 367
Step 2: Close Expenses
GENERAL JOURNAL
DATE
2007
Dec. 31
DESCRIPTION
POST.
REF.
Closing Entries
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depreciation Exp.-Equip.
PAGE
DEBIT
CREDIT
12,367
7,000
500
1,000
3,500
367
6-13
4
The Income Summary account reflects all
entries in the Income Statement section of
the worksheet.
Income Summary
Dr.
Cr.
Closing 12,367
Closing 35,000
Balance 22,633
Net Income
6-14
Step 3: Close Net Income to
Owner’s Capital
The journal entry to transfer net income to owner’s
equity is a debit to Income Summary, and a credit
to Jason Taylor, Capital because Income Summary
has a credit balance of $22,633.


The balance of Income Summary is reduced to
zero; the owner’s capital account is increased by
the amount of net income.
6-15
Step 3: Close Net Income to Capital

The Income Summary account is reduced to zero.

The net income amount, $22,633, is transferred to the
owner’s capital account. Jason Taylor, Capital is
increased by $22,633.
6-16
Step 3: Close Net Income to Capital
Income Summary
Jason Taylor, Capital
+
Bal 90,000
Closing 22,633
Bal 22,633
Closing 22,633
6-17
Step 3: Close Net Income to Capital
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
Closing Entries
Dec. 31 Income Summary
PAGE
DEBIT
CREDIT
22,633
Jason Taylor, Capital
22,633
6-18
4
Step 4: Close Drawing to Capital
The

drawing account balance is reduced to zero.
The balance of the drawing account, $4,000, is
transferred to the owner’s capital account.
Remember that withdrawals appear in the
statement of owner’s equity as a
deduction from capital.
6-19
Step 4: Close Drawing to Capital
Jason Taylor, Drawing
Jason Taylor, Capital
Closing 4,000
+
Bal 112,633
+
Bal 4,000
Closing 4,000
Bal 108,633
The new balance of the Jason Taylor, Capital account
agrees with the amount listed on the balance sheet.
6-20
Step 4: Close Drawing to Capital
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
Closing Entries
Dec. 31 Jason Taylor, Capital
4
PAGE
DEBIT
CREDIT
4,000
Jason Taylor, Drawing
4,000
6-21
Summary of Closing Entries
GENERAL JOURNAL
STEPS
DATE
2007
1. CLOSE
REVENUE
Dec. 31
2. CLOSE
EXPENSE
ACCOUNTS
31
3. CLOSE
INCOME
SUMMARY
31
4. CLOSE
DRAWING
ACCOUNT
31
DESCRIPTION
Closing Entries
POST.
REF.
DEBIT
Fees Income
Income Summary
401
309
35,000
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense-Equip.
Income Summary
Jason Taylor, Capital
309
511
514
517
520
523
309
301
12,367
Jason Taylor, Capital
Jason Taylor , Draw.
301
302
6-22
PAGE
4
CREDIT
35,000
7,000
500
1,000
3,500
367
22,633
22,633
4,000
4,000
Posting the Closing Entries

“Closing” is entered in the Description column of
the ledger accounts.

The ending balances of the drawing, revenue,
and expense accounts are zero.
All journal entries are posted to the general
ledger accounts.
6-23
GENERAL JOURNAL
STEPS
DATE
2007
1. CLOSE
REVENUE
Dec. 31
2. CLOSE
31
ACCOUNT
Fees Income
EXPENSE
ACCOUNTS
DATE DESCRIPTION
2007
Dec. 31
31
3. CLOSE
Dec.
31
INCOME
Dec.
31
Closing
SUMMARY
4. CLOSE
DRAWING
ACCOUNT
31
DESCRIPTION
Closing Entries
Fees Income
Income Summary
POST.
REF.
401
309
Income Summary
309
ACCOUNT NO.
Salaries Expense
511
POST. Expense
Utilities
514
REF.
DEBIT
CREDIT
Supplies
Expense
517
Rent Expense
520
Depr. Expense-Equip. 523
J2
26,000
Income
Summary
309
J2
9,000
Jason
Taylor,
301
J4
35,000Capital
Jason Taylor, Capital
Jason Taylor, Draw.
6-24
301
302
DEBIT
PAGE
4
CREDIT
35,000
35,000
12,367
401
7,000
BALANCE 500
DEBIT
CREDIT
1,000
3,500
367
26,000
22,633
35,000
– 0 –22,633
4,000
4,000
GENERAL JOURNAL
STEPS
DATE
2007
1. CLOSE
REVENUE
Dec. 31
2. CLOSE
EXPENSE
ACCOUNTS
ACCOUNT
DESCRIPTION
Closing Entries
Fees Income
Income Summary
POST.
REF.
401
309
DEBIT
PAGE
4
CREDIT
35,000
35,000
31
Income Summary
309
12,367
Salaries Expense
511
7,000
514 NO.
500
Income SummaryUtilities Expense ACCOUNT
309
Supplies Expense
517
1,000
POST.
BALANCE 3,500
Rent Expense
520
DATE DESCRIPTION
REF.
DEBIT
CREDIT
DEBIT
CREDIT
Depr. Expense-Equip.
523
367
31
Income Summary
309
22,633.00
3. CLOSE
2007
INCOME
Jason
301
22,633.00
Dec. 31 Closing
J4 Taylor, Capital35,000
35,000
SUMMARY
4. CLOSE
DRAWING
ACCOUNT
31
Jason Taylor, Cap
Jason Taylor, Draw.
6-25
301
302
4,000
4,000
Preparing the Postclosing
Trial Balance
A postclosing trial balance is a statement
that is prepared to prove the equality of
general ledger:
Proves that total debits equal total credits
Verifies that revenue, expense, and drawing
accounts have zero balances
Only permanent accounts appear on the
postclosing trial balance (assets, liabilities
and owner’s capital).
6-26
Postclosing Trial Balance
JT’s Consulting Services
Postclosing Trial Balance
December 31, 2007
ACCOUNT NAME
DEBIT
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation–Equipment
Accounts Payable
Jason Taylor, Capital
Totals
CREDIT
83,500
5,000
2,000
3,500
22,000
_______
116,000 116,000
6-27
367
7,000
108,633
Interpret financial statements.
To interpret means to
understand and explain the
meaning and importance of
something.
6-28
Consider the financial statements for JT’s
Consulting Services at the end of the
accounting period.

What is the cash balance?

How much do customers owe
the business?

How much does the business
owe suppliers?

What is the profit or loss?
6-29
JT’s Consulting Services
Balance Sheet
December 31, 2007
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$83,500
5,000
2,000
3,500
$ 22,000
<367>
Liabilities and Owner’s Equity
Liabilities
What is the
Accounts Payable
cash balance?
Owner’s Equity
Jason Taylor, Capital
Total Liabilities and Owner’s Equity
6-30
21,633
$ 115,633
$ 7,000
108,633
$115,633
JT’s Consulting Services
Balance Sheet
December 31, 2007
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$83,500
5,000
2,000
3,500
$ 22,000
< 367>
Liabilities and Owner’s Equity
Liabilities
How much do the
Accounts Payable
customers owe the
Owner’s Equity
business?
Jason Taylor, Capital
Total Liabilities and Owner’s Equity
6-31
21,633
$ 115,633
$ 7,000
108,633
$115,633
JT’s Consulting Services
Balance Sheet
December 31, 2007
Assets
Cash
Accounts Receivable How much does the business
Supplies
owe its suppliers?
Prepaid Rent
Equipment
$ 22,000
Less Accumulated Depreciation
< 367>
Total Assets
Liabilities and Owner’s Equity
Liabilities
Accounts Payable
Owner’s Equity
Jason Taylor, Capital
Total Liabilities and Owner’s Equity
$83,500
5,000
2,000
3,500
21,633
$ 115,633
$ 7,000
108,633
$115,633
6-32
JT’s Consulting Services
Income Statement
Month Ended December 31, 2007
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Supplies Expense
What is the profit?
Rent Expense
Depr. Expense--Equipment
Total Expenses
Net Income for the Month
6-33
35,000
7,000
500
1,000
3,500
367
< 12,367>
22,633
The Accounting Cycle
Step 1
Analyze
transactions
Analyze the source documents.

Sales slips
 Purchase invoices

Credit memorandums
 Check stubs
6-34
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Record the effects of the
transactions in a journal.
6-35
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Transfer data from the journal to the
general ledger accounts.
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
Prepare a worksheet with five sections.

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet
6-37
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
6-38
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
The adjusting entries are a permanent
record of the changes in account balances
shown on the worksheet.
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
6-39
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
6-40
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
The Accounting Cycle
Step 1
Analyze
transactions
 Confirm
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
that the general ledger is in
balance.
 Confirm that the revenue, expense, and
drawing accounts have zero balances.
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
6-41
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Use financial statements to understand and
communicate the financial information and to
make decisions.
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
6-42
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
Flow of Data Through a Simple
Accounting System
Source
documents
Documents
General
journal
General
ledger
Worksheet
Source documents are analyzed.
6-43
Financial
statements
Flow of Data Through a Simple
Accounting System
Source
documents
General
journal
General
ledger
Worksheet
Financial
statements
Transactions are recorded in the general journal.
6-44
Flow of Data Through a Simple
Accounting System
Source
documents
General
journal
General
ledger
Worksheet
Financial
statements
Transactions are posted from the general journal to
the general ledger.
6-45
Flow of Data Through a Simple
Accounting System
Source
documents
General
journal
General
ledger
Worksheet
Financial
statements
Financial information is proved, adjusted, and
summarized on the worksheet.
6-46
Flow of Data Through a Simple
Accounting System
Source
documents
General
journal
General
ledger
Worksheet
Financial information is reported on financial
statements.
6-47
Financial
statements