Concepts and Practices

Last stage in the accounting cycle is to
prepare the accounts for the next period by
transferring the results of business
operations and owner’s withdrawals to
Capital.




Real accounts continue from one period to
another
Real accounts are assets, liabilities, and
Capital
Nominal accounts have balances that do not
continue from one period to another
Nominal accounts are revenue and expense
accounts with the addition of Drawings



Used only for closing entries
Nominal accounts are closed into Income
Summary to collect information
Income Summary is then closed to Capital



Nominal accounts need to have a balance of
zero at the end of the fiscal period in order to
collect only one period’s information
Net income will be transferred to Capital via
the Income Summary account
Drawings are closed directly to Capital
Four steps:
1. Close revenue (income statement credit
column) to Income Summary
2. Close expenses (income statement debit
column) to Income Summary
3. Close Income Summary to Capital (this
amount will be net income or loss)
4. Close Drawings to Capital
P. Tang and Company
Accounts
Trial Balance
DR
CR
DR
Bank
1800
Accounts Receivable
19500
Supplies
1000
Prepaid Insurance
1750
Equipment
22000
Automobile
21000
Accounts Payable
4360
P. Tang, Capital
54040
P. Tang, Drawings
15000
Fees Earned
60300
Car Expense
3800
General Expense
2950
Miscellaneous Expense
700
Rent Expense
7200
Wages Expense
22000
118700 118700
Supplies Expense
Insurance Expense
Net Income
Work Sheet For the year ended December 31, 2009
Adjustments
CR
Income Statement
DR
CR
300
950
DR
Balance Sheet
CR
1800
19500
700
800
22000
21000
175
4535
54040
15000
60300
75
100
3875
3050
700
7200
22000
300
950
1425
300
950
38075
22225
60300
1425
60300
80800
60300
80800
58575
22225
80800
Closing Revenue—to make it zero, you will debit Fees Earned
P. Tang and Company Work Sheet For the year ended December 31, 2009
Accounts
Trial Balance
Adjustments
Income Statement
Balance Sheet
DR
CR
DR
CR
DR
CR
DR
CR
Bank
1800
1800
Accounts Receivable
19500
19500
Supplies
1000
300
700
Prepaid Insurance
1750
950
800
Equipment
22000
22000
Automobile
21000
21000
Accounts Payable
4360
175
4535
P. Tang, Capital
54040
54040
P. Tang, Drawings
15000
15000
Fees Earned
60300
60300
Car Expense
3800
75
3875
General Expense
2950
100
3050
Miscellaneous Expense
700
700
Rent Expense
7200
7200
Wages Expense
22000
22000
118700 118700
Supplies Expense
300
300
Insurance Expense
950
950
$ 1,425.00 $ 1,425.00 $ 38,075.00 $ 60,300.00 $ 80,800.00 $
58,575.00
Net income
$ 22,225.00
$
22,225.00
$ 60,300.00 $ 60,300.00 $ 80,800.00 $
80,800.00
Use Income summary to collect information
Date
Dec
Particulars
31 Fees Earned
Income Summary
Close revenue
PR
DR
CR
60 3 0 0 -60 3 0 0 --
Closing Expenses—to make them zero, you will credit them
P. Tang and Company Work Sheet For the year ended December 31, 2009
Accounts
Trial Balance
Adjustments
Income Statement
Balance Sheet
DR
CR
DR
CR
DR
CR
DR
CR
Bank
1800
1800
Accounts Receivable
19500
19500
Supplies
1000
300
700
Prepaid Insurance
1750
950
800
Equipment
22000
22000
Automobile
21000
21000
Accounts Payable
4360
175
4535
P. Tang, Capital
54040
54040
P. Tang, Drawings
15000
15000
Fees Earned
60300
60300
Car Expense
3800
75
3875
General Expense
2950
100
3050
Miscellaneous Expense
700
700
Rent Expense
7200
7200
Wages Expense
22000
22000
118700 118700
Supplies Expense
300
300
Insurance Expense
950
950
$ 1,425.00 $ 1,425.00 $ 38,075.00 $ 60,300.00 $ 80,800.00 $
58,575.00
Net income
$ 22,225.00
$
22,225.00
$ 60,300.00 $ 60,300.00 $ 80,800.00 $
80,800.00
Journal after closing revenue and expenses
Date
Dec
Particulars
31
31
PR
DR
Fees Earned
Income Summary
Close revenue
60 3 0 0 --
Income Summary
Car Expense
General Expense
Miscellaneous Expense
Rent Expense
Wages Expense
Supplies Expense
Insurance Expense
Close expenses
38 0 7 5 --
CR
60 3 0 0 --
3 8 7
3 0 5
7 0
7 2 0
22 0 0
3 0
9 5
5
0
0
0
0
0
0
--------
Closing Income Summary –transferring net income to Capital
P. Tang and Company Work Sheet For the year ended December 31, 2009
Accounts
Trial Balance
Adjustments
Income Statement
Balance Sheet
DR
CR
DR
CR
DR
CR
DR
CR
Bank
1800
1800
Accounts Receivable
19500
19500
Supplies
1000
300
700
Prepaid Insurance
1750
950
800
Equipment
22000
22000
Automobile
21000
21000
Accounts Payable
4360
175
4535
P. Tang, Capital
54040
54040
P. Tang, Drawings
15000
15000
Fees Earned
60300
60300
Car Expense
3800
75
3875
General Expense
2950
100
3050
Miscellaneous Expense
700
700
Rent Expense
7200
7200
Wages Expense
22000
22000
118700 118700
Supplies Expense
300
300
Insurance Expense
950
950
$ 1,425.00 $ 1,425.00 $ 38,075.00 $ 60,300.00 $ 80,800.00 $
58,575.00
Net income
$ 22,225.00
$
22,225.00
$ 60,300.00 $ 60,300.00 $ 80,800.00 $
80,800.00
Closing Income Summary to Capital
Date
Dec
Particulars
31
31
31
PR
DR
Fees Earned
Income Summary
Close revenue
60 3 0 0 --
Income Summary
Car Expense
General Expense
Miscellaneous Expense
Rent Expense
Wages Expense
Supplies Expense
Insurance Expense
Close expenses
38 0 7 5 --
Income Summary
P. Tang, Capital
To close income summary and transfer net
income to Capital
22 2 2 5 --
CR
60 3 0 0 --
3 8 7
3 0 5
7 0
7 2 0
22 0 0
3 0
9 5
5
0
0
0
0
0
0
--------
22 2 2 5 --
Closing Drawings—to make it zero, you will debit Capital to show
that it has been decreased by Drawings
P. Tang and Company Work Sheet For the year ended December 31, 2009
Accounts
Trial Balance
Adjustments
Income Statement
Balance Sheet
DR
CR
DR
CR
DR
CR
DR
CR
Bank
1800
1800
Accounts Receivable
19500
19500
Supplies
1000
300
700
Prepaid Insurance
1750
950
800
Equipment
22000
22000
Automobile
21000
21000
Accounts Payable
4360
175
4535
P. Tang, Capital
54040
54040
P. Tang, Drawings
15000
15000
Fees Earned
60300
60300
Car Expense
3800
75
3875
General Expense
2950
100
3050
Miscellaneous Expense
700
700
Rent Expense
7200
7200
Wages Expense
22000
22000
118700 118700
Supplies Expense
300
300
Insurance Expense
950
950
$ 1,425.00 $ 1,425.00 $ 38,075.00 $ 60,300.00 $ 80,800.00 $
58,575.00
Net income
$ 22,225.00
$
22,225.00
$ 60,300.00 $ 60,300.00 $ 80,800.00 $
80,800.00
Closing Entries Completed
Date
Dec
Particulars
31
31
31
31
PR
DR
Fees Earned
Income Summary
Close revenue
60 3 0 0 --
Income Summary
Car Expense
General Expense
Miscellaneous Expense
Rent Expense
Wages Expense
Supplies Expense
Insurance Expense
Close expenses
38 0 7 5 --
Income Summary
P. Tang, Capital
To close income summary and transfer net
income to Capital
22 2 2 5 --
P. Tang, Capital
P. Tang, Drawings
Close Drawings
15 0 0 0 --
CR
60 3 0 0 --
3 8 7
3 0 5
7 0
7 2 0
22 0 0
3 0
9 5
5
0
0
0
0
0
0
--------
22 2 2 5 --
15 0 0 0 --
Post-closing balance is prepared after the adjusting and
closing entries have been journalized and posted. Only
assets, liabilities, and capital should have balances.
Everything else should be zero.
P. Tang and Company
Post-Closing Trial Balance
December 31, 2009
Accounts
Trial Balance
DR
CR
Bank
1800
Accounts
Receivable
19500
Supplies
700
Prepaid Insurance
800
Equipment
22000
Automobile
21000
Accounts Payable
4535
P. Tang, Capital
61265
65800 65800