Chapter 8
Adjusting and
Closing Entries
Steps of the Accounting Cycle
1. Analyze Transactions
2. Journalize
3. Post
4. Prepare the work sheet
5. Prepare Financial Statements
6. Journalize Adjusting and Closing
Entries
7. Post Adjusting and Closing Entries
8. Prepare Post-Closing Trial Balance
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How is an account
balance changed?
By journalizing a transaction and
posting the entry to the account.
– Remember, when we prepared a work
sheet, we only planned the adjusting
entries.
– No account balances were actually
changed when making the work sheet.
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8-1 Recording Adjusting Entries
Adjusting Entries: journal entries
recorded to update general ledger
accounts at the end of the fiscal
period.
ADJUSTING ENTRY FOR
SUPPLIES
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page 202
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ADJUSTING ENTRY FOR
PREPAID INSURANCE
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page 204
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Audit Your Understanding
Why are adjustments journalized?
The accounts are not up to date until the
entries on the work sheet are journalized
and posted to the ledger accounts.
Where is the information obtained from to
journalize the adjusting entries?
The work sheet adjustments column.
Remember—just copy them from the
work sheet
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Work Together
On website
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8-2 Recording Closing Entries
Permanent Accounts: accounts used to
accumulate information from one fiscal period to
the next.
Examples: Asset and Liability Accounts and the Owner’s
Capital Account
Temporary Accounts: accounts used to
accumulate information until it is transferred to the
owner’s capital account.
Examples: Examples include: Revenue, expense,
owner’s drawing, and the income summary account.
Closing Entries: journal entries used to prepare
temporary accounts for a new fiscal period.
Closing Entries, Continued
To close a temporary account, an amount
equal to its balance is recorded in the
account on the side opposite its balance.
Example: Sales has a credit balance of
$4,000
A debit of $4,000 is recorded to close the
Sales account.
– Once the entry is posted, the Sales account
balance = 0
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Income Summary Account-Continued
Remember: debits must equal credits
If an account is debited for $4,000 to close it,
some other account must be credited for the same
amount.
Income Summary is a temporary account used to
summarize the closing entries for the revenue and
expense accounts.
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Four Closing Entries:
Entry to close Income Statement Accounts
with credit balances.
(S)
Entry to close Income Statement Accounts
with debit balances.
(E)
Entry to record net income (or net loss) and
close the Income Summary Account. (N)
Entry to close the owner’s drawing account.
(D)
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CLOSING ENTRY FOR AN INCOME STATEMENT
ACCOUNT WITH A CREDIT BALANCE (Sales) page 208
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CLOSING ENTRY FOR INCOME STATEMENT
page 209
ACCOUNTS WITH DEBIT BALANCES (expenses)
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Remember...
Purpose of closing entries is to
bring the balance of temporary
accounts to zero.
Debits must equal credits—So
the Income Summary account
is the other account used in the
closing entry for revenues and
expenses.
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CLOSING ENTRY TO RECORD NET
INCOME OR LOSS AND CLOSE THE
INCOME SUMMARY ACCOUNT (Net
Income or Loss)
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page 210
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CLOSING ENTRY FOR THE
OWNER’S DRAWING ACCOUNT
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page 211
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Audit Your Understanding
What do the ending balances of
permanent accounts for one fiscal
period represent at the beginning of the
next fiscal period?
Beginning Balances
What do the balances of temporary
accounts show?
Changes in the owner’s capital for a
single fiscal period.
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Work Together
On Website
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8-3 Preparing a Post-Closing Trial Balance
Post-Closing Trial Balance: a trial balance
prepared after the closing entries are posted.
(The last step in the cycle)
Accounting Cycle: the series of accounting
activities included in recording financial
information for a fiscal period.
Why do this report?
After the closing entries are recorded
and posted, the business is almost
ready to start recording transactions for
the new accounting period.
Before this is done, it is important to
check if debits still equal credits.
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GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND
page 213
CLOSING ENTRIES ARE POSTED
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POST-CLOSING TRIAL BALANCE
page 216
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Audit Your Understanding
Which accounts go on the post-closing trial balance?
Permanent Accounts: Assets, Liabilities, and the
Owner’s Capital Account
Why are temporary accounts omitted from a postclosing trial balance?
Because they are closed and have zero balances.
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Maze Challenge
What is the highest level you can
reach?
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Work Together
Textbook Page 219 – Workbook
page 167
–Only permanent accounts are
listed.
– Total debits must equal the total
credits.
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The End!
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