Journalizing and Posting the Closing Entries

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CHAPTER

10

COMPLETION OF THE

ACCOUNTING CYCLE

Closing Entries -

Closing Entry Concepts

The final stage of the accounting cycle is to prepare the accounts for the next fiscal period.

To do this, you must understand which accounts have balances that continue from one period to the next and which do not.

Purpose of Closing Entries

1.

Updates the owner’s capital account in the ledger by transferring net income (loss) and owner’s drawings to owner’s capital.

2.

Prepares the temporary accounts (revenue, expense, drawings) for the next period’s postings by reducing their balances to zero .

Closing Entries

The revenue and expense accounts are reduced to zero by a process called closing the books.

Closing the books is the process by which revenue and expense accounts are reduced to zero of the end of each accounting period.

Closing the accounts is sometimes called clearing the accounts.

Real Accounts and Nominal Accounts

Real Accounts

All asset and liability accounts, as well as the owner's capital account, are considered to be real accounts.

Real accounts have balances that continue into the next fiscal period.

Examples of real accounts are Bank, Trucks, and Accounts

Payable.

Real Accounts and Nominal Accounts

Nominal Accounts

Nominal accounts (Revenue, Expense, and Drawings) have balances that do not continue into the next fiscal period.

Nominal accounts, with the exception of the Drawings account , are related to the income statement, and the income statement deals only with a single fiscal period.

All nominal accounts begin each fiscal period with a nil balance.

Real Accounts and Nominal Accounts

Income Summary

 A special nominal account, called the Income Summary account, is used only during the closing entry process.

The Income Summary account summarizes the revenues and expenses of the period.

The temporary balance in this account represents either the amount of net income or the amount of net loss .

Real Accounts and Nominal

Accounts

Other names for REAL and NOMINAL accounts are

Permanent and TEMPORARY accounts.

These alternative terms help you remember which accounts will continue to have balances ( PERMANENT ) and which will be closed out ( TEMPORARY ).

Temporary Versus Permanent

TEMPORARY (NOMINAL)

These accounts are closed

PERMANENT (REAL)

These accounts are not closed

All revenue accounts All asset accounts

All expense accounts All liability accounts

Owner’s drawings Owner’s capital account

(Income Statement /

Drawings Accounts)

(Balance Sheet Accounts)

Journalizing and Posting the Closing

Entries

Don’t forget to post to the General Ledger

Closing Entry No. 1

Journalizing and Posting the

Closing Entries

Closing Entry No. 2

Journalizing and Posting the

Closing Entries

Don’t forget to post to the General Ledger

Closing Entry No. 3

Journalizing and Posting the

Closing Entries

Don’t forget to post to the General Ledger

Closing Entry No. 4

Closing Entries

STOP AND CHECK

1. Does the balance in your

Owner’s Capital account equal the ending capital balance reported in the

Balance Sheet and Statement of Owner’s Equity?

2. Are all of your temporary account balances zero?

Post - Closing Trial Balance

 After all closing entries have been journalized and posted, a post-closing trial balance is prepared.

 The purpose of this trial balance is to prove the equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period.

Post - Closing Trial Balance

Notes Payable

Accounts Payable

Unearned Revenue

Salaries Payable

Interest Payable

C.R. Byrd, Capital

Pioneer Advertising Agency

Post-Closing Trial Balance

October 31, 2002

After Adjustment

Debit Credit

Cash

Accounts Receivable

Advertising Supplies

Prepaid Insurance

The post-closing trial

$ 15,200 balance is prepared

200

1,000 from the permanent

550

Office Equipment accounts in the ledger.

5,000

Accumulated Amortization

The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly

$ 83

5,000

2,500

800

1,200

25

12,342 completed.

$ 21,950 $ 21,950

Steps in the Accounting Cycle

9. Prepare post-closing trial balance

8. Journalize and post closing entries

1. Source

Documents:

Analyse

Transactions

2. Journalize the transactions

3. Post to ledger accounts

4. Prepare a trial balance

7. Prepare financial statements

6. Prepare adjusted trial balance

5. Journalize and post adjusting entries

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