Unit 13 – Adjusting and Closing Entries
Previously…
• All adjustments were made on the work sheet.
The ledger accounts have not yet been
changed. (currently, are incorrect and do not
reflect the adjustments made on the work
sheet)
• Adjusting entries are used to record the
adjustments in the ledger accounts.
Adjusting Entries
• Work sheet
• Journal form
• Post them to the ledger
General Journal
Date
20_
Jan.
Particulars
31
31
31
31
Page 21
P.R.
Debit
Supplies Expense
Supplies
To record supplies used in January.
100.00
Insurance Expense
Prepaid Insurance
To record insurance for the month.
60.00
Rent Expense
Prepaid Rent
To record rent for one month.
1700.00
Depreciation Expense – Equipment
Acc. Depreciation – Equipment
To record one month’s depreciation,
declining-balance method.
160.00
Credit
100.00
60.00
1700.00
160.00
General Ledger (Before Adjustments)
Supplies Expense
Supplies
Jan.31
1000
Prepaid Insurance
Jan.31
Insurance Expense
720
Prepaid Rent
Jan.31
Rent Expense
5100
Equipment
Jan.31
Depreciation Expense - Equipment
12000
Acc. Depreciation – Equipment
Jan.31
2400
General Ledger (After Adjustments)
Supplies Expense
Supplies
Jan.31
Balance
1000 Jan. 31
900
100
Jan. 31
Insurance Expense
Prepaid Insurance
Jan.31
Balance
720
660
Jan. 31
60
5100 Jan. 31
3400
1700
Jan.31
1700
Jan. 31
12000
Acc. Depreciation – Equipment
Jan.31
31
Balance
60
Depreciation Expense - Equipment
Equipment
Jan.31
Jan. 31
Rent Expense
Prepaid Rent
Jan.31
Balance
100
2400
160
2560
160
Adjusting Entries
•
•
•
•
Work sheet
Journal form
Post them to the ledger
Adjusted Trial Balance
Closing Entries
• Summary
– Income statement: net income or net loss for a specific
accounting period. (data found in revenue and expense
accounts)
• New accounting period = revenue and expense accounts
should show zero balances.
• “Matching principle” – revenue for each accounting
period is matched with the expenses for that accounting
period to determine net income or loss.
• Closing the books: the process by which revenue and
expense accounts are reduced to zero at the end of each
accounting period.
Temporary (vs) Permanent Accounts
• Temporary accounts:
– Contain information for the current accounting period
only
– Balances not carried over to next accounting period
– Examples: Revenue & Expense accounts
• Permanent accounts:
– Balances are carried forward from one accounting
period to another (they are not closed – put to 0)
– Examples: Asset, Liability, & Owner’s Equity accounts
Purpose of Closing the Books
1) Prepare Revenue and Expense accounts for the
next accounting period (by reducing them to 0)
2) Updating the Owner’s Equity account
- Increase or decrease of capital
[Net income/loss, and Drawings]
Income Summary Account
• Closing Revenue & Expense accounts
Transfer balances
Income Summary Account
Expenses
Balance
XXX
Revenue
XXX
XXXX
Balance XXXX
Income Summary
XXX
Balance (net loss)
XXXX
Balance (net income)
Steps – Closing the Books
1) Close Revenue Accounts into Income summary
2) Close Expense Accounts into Income summary
3) Close Income summary into Capital
4) Close Drawings into Capital
Step 1: Close Revenue Accounts into
Income summary
Sales
Dec. 31
20 000
General Journal
Date
20_
Dec
.
Page
Particulars
P.R.
Debit
31 Sales
Income Summary
To close the sales account.
20,000.00
20,000.00
Sales
Dec. 31
20 000
Credit
Balance
20 000
Income Summary
Dec. 31
20 000
Step 2: Close Expense Accounts into
Income summary
Advertising Expense
Dec. 31
3 000
General Journal
Date
20_
Dec
.
Page
Particulars
P.R.
31 Income Summary
Advertising Expense
To close Advertising Expense.
Debit
3,000.00
3,000.00
Advertising Expense
Balance
3 000
Dec. 31 3 000
Income Summary
Dec. 31 3 000
Credit
Dec. 31
20 000
Compound entry (makes it easier)
General Journal
Date
20_
Dec
.
Particulars
31 Income Summary
Advertising Expense
Salaries Expense
Telephone Expense
General Expense
To close the expense accounts.
Page
P.R.
Debit
Credit
14,000.00
3,000.00
10,000.00
500.00
500.00
Step 3: Close Income Summary into
Capital
Income Summary
Increases OE
Dec. 31
14 000
Dec. 31
Balance
20 000
6 000
General Journal
Date
20_
Dec
.
Particulars
Income Summary
Dec. 31
31
14 000
6 000
Page
P.R.
31 Income Summary
D. Adams, Capital
To close Income Summary and
transfer the net income to Capital.
Dec. 31
Balance
Net income
Credits > Debits
Debit
Credit
6,000.00
6,000.00
D. Adams, Capital
20 000
6 000
17 000
Dec. 31 6 000
Step 4: Close Drawings into Capital
D. Adams, Drawings
Balance
2 000
General Journal
Date
20_
Dec
.
Particulars
31
Page
P.R.
D. Adams, Capital
D. Adams, Drawings
To close the Drawings account.
Debit
Credit
2,000.00
2,000.00
D. Adams, Capital
D. Adams, Drawings
Balance
2 000 Dec. 31
2 000
Dec. 31 2 000
17 000
________________ Dec. 31 6 000
Balance 21 000
Closing Books (from work sheet)
• Same process.
– (simply retrieving information from the work
sheet)
– Example: Page 244-248
– See Ledger Accounts (after adjusting and closing
entries have been posted) – Page 246-248
Post-Closing Trial Balance
• Created after adjusting and closing entries
have been posted to the general ledger.
• Purpose: prove mathematical accuracy of the
general ledger. (debits = credits) … ready for
the next fiscal period.
• This trial balance is much shorter.
– Only asset, liability, & capital accounts have
balances. (others have been closed)
Post-Closing Trial Balance
Management Consultant Services
Post-Closing Trial Balance
December 31, 20 Account
Acc. # Debit
Cash
Accounts Receivable
Supplies
Equipment
Accumulated Depreciation – Equipment
Accounts payable
Bank Loan
J. Turner, Capital
100
102
131
141
142
200
221
300
Credit
$ 18 000
19 000
1 400
12 000
$4 320
1 000
3 000
_________ 42 080
$50 400
$50 400
Example 249-250 (Effect of a net loss) …Decreases Owner’s Equity.
Updated Accounting Cycle
New Accounting Period Begins
Post-closing
Trial Balance
Business Transactions
Adjusting and
closing entries
posted
Journalizing
Journal
Proof
Financial
Statements
Posting
Ledger
Financial
Statements
Prepared
Ledger
Work Sheet
Work sheet
including Trial
Balance Prepared
Journal
Adjusting and closing
entries journalized