6-1 © 2010 the mcgraw-hill companies, inc. all rights reserved

6-1 © 2010 The McGraw-Hill Companies, Inc. All rights reserved

Closing Entries and the Postclosing

Trial Balance

Closing Entries and the Postclosing

Trial Balance

Section 1: Closing Entries

Chapter

6

Section Objectives

1. Journalize and post closing entries.

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

6-3

The Accounting Cycle

Step 7 Journalize and

post closing entries

Step 1 Analyze

transactions

Step 2 Journalize the

data about transactions

Step 4 Prepare

a worksheet

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entriesStep 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

Step 3 Post the

data about transactions

The seventh step in the accounting cycle is to journalize and post closing entries

Step 7 Journalize and

post closing entries

6-4

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.

ANSWER:

QUESTION:

What is the Income Summary account?

6-5

Income Summary AccountIncome Summary Account

Classified as a temporary owner’s equity account.

Does not have a normal balance.

Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

6-6

2. Transfer the expense account balances to the Income Summary account.

4. Transfer the balance of the drawing account to the owner’s capital account.

3. Transfer the balance of the Income Summary account to the owner’s capital account.

1. Transfer the balance of the revenue account to the Income Summary account.

Objective 1 Journalize and post closing entries

There are four steps in the closing process:

6-7

Net Income

47,000 47,000 137,350 137,350

CREDIT

BALANCE SHEETINCOME STMT.

DEBIT CREDIT DEBIT

111,350

5,0001,000

11,0004,000

1833,500

100,0005,000

47,000 8,000 650500

1834,000

47,000

103,68313,333 137,350

183

150,683

TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS

DEBIT CREDIT CREDIT DEBIT CREDIT

ACCOUNT NAME

CashAccounts ReceivableSuppliesPrepaid RentEquipment

Accum. Depr.—Equip.

Carolyn Wells, Cap.Accounts Payable

Carolyn Wells, Draw.Fees IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp.—Equip.Totals

DEBIT

111,350

3,500100,000

5,00047,000

8,000 650

11,0008,000

5,0001,500

111,350

5,000

11,000

5,000

8,000 650

1,000

3,500100,000

47,000

500

1834,000

150,500

150,500 4,683 4,683

(c) 183

(a) 500(b) 4,000(c) 183

(a) 500(b) 4,000 4,000

150,68333,667 33,667

Wells’ Consulting ServicesWorksheet

Month Ended December 31, 2010

Fees Income has a credit balance of $47,000

6-8

Fees Income

Closing 47,000

Balance 47,000

Income Summary

Closing 47,000

Step 1: Close Revenue

6-9

The words “Closing Entries” are written in the Description column of the general journal

GENERAL JOURNAL PAGE

4

DATE DESCRIPTION POST. DEBIT CREDIT REF.

2010 Closing Entries

Dec. 31 Fees Income 47,000

Income Summary 47,000

Step 1: Close Revenue

6-10

The Income Statement section of the worksheet for Wells’ Consulting Services lists five expense accounts.

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.

Step 2: Close Expenses

6-11

The five expense account balances are reduced to zero.

Step 2: Close Expenses

The total, $13,333 of expenses are transferred to the temporary owner’s equity account, Income Summary.

6-12

Income Summary Salaries Expense

Closing 13,333

Bal 47,000

Closing 8,000

Balance 8,000

Utilities Expense Supplies Expense

Balance 650 Balance 500Closing 500Closing 650

Depr. Expense – Equip.Rent Expense

Closing 4,000

Balance 4,000 Balance 183

Closing 183

6-13

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF.

2010 Closing EntriesDec. 31 Income Summary 13,333.00 Salaries Expense 8,000.00 Utilities Expense 650.00 Supplies Expense 500.00 Rent Expense 4,000.00 Depreciation Exp.-Equip. 183.00

Step 2: Close Expenses

6-14

The Income Summary account reflects all entries in the Income Statement section of the worksheet.

Income Summary

Dr.

Closing 13,333

Cr.

Balance 33,667

Closing 47,000

Net Income

6-15

The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Carolyn Wells, Capital.

The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income.

Step 3: Close Net Income to Capital

The Income Summary account is reduced to zero.

The net income amount, $33,667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33,667.

6-16

Income Summary Carolyn Wells, Capital

Closing 33,667

Balance 33,667Balance 100,000

Step 3: Close Net Income to Capital

Closing 33,667

6-17

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Income Summary 33,667.00

Carolyn Wells, Capital 33,667.00

Step 3: Close Net Income to Capital

6-18

•Withdrawals appear in the statement of owner’s equity as a deduction from capital.

•The drawing account is closed directly to the capital account.

•The drawing account balance is reduced to zero.

•The balance of the drawing account, $5,000, is transferred to the owner’s capital account.

Step 4: Close Drawing to Capital

6-19

Carolyn Wells, Capital Carolyn Wells, Drawing

Closing 5,000

Balance 133,667

Closing 5,000

Balance 5,000

Step 4: Close Drawing to Capital

6-20

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Carolyn Wells, Capital 5,000.00

Carolyn Wells, Drawing 5,000.00

Step 4: Close Drawing to Capital

6-21

The new balance of the Carolyn Wells, Capital account agrees with the amount listed on the balance sheet.

Carolyn Wells, CapitalCarolyn Wells, Drawing

Closing 5,000

Cr. Dr.

Balance 5,000

Balance 0

Cr.

Balance 100,000

Net Inc. 33,667

Balance 128,667

Dr.

Drawing 5,000

Carolyn Wells, Capital

6-22

Summary of Closing Entries

GENERAL JOURNAL PAGE 4

POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries

Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00

31 Income Summary 309 13,333.00 Salaries Expense 511 8,000.00 Utilities Expense 514 650.00 Supplies Expense 517 500.00 Rent Expense 520 4,000.00 Depr. Expense-Equip. 523 183.00

31 Income Summary 309 33,667.00 Carolyn Wells, Capital 301 33,667.00

31 Carolyn Wells, Capital 301 5,000.00 Carolyn Wells, Draw. 302 5,000.00

STEPS

1. Close Revenue Account

2. Close Expense Accounts

3. CloseIncome Summary

4. CloseDrawing Account

6-23

“Closing” is entered in the Description column of the ledger accounts.

The ending balances of the drawing, revenue, and expense accounts are zero.

Posting the Closing EntriesAll journal entries are posted to the general ledger accounts.

6-24

GENERAL JOURNAL PAGE 4

POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00

STEPS

1. CLOSEREVENUE

ACCOUNT Fees Income ACCOUNT NO. 401

POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2010 Dec. 31 J2 36,000.00 36,000.00Dec. 31 J2 11,000.00 47,000.00Dec. 31 Closing J4 47,000.00 – 0 –

6-25

ACCOUNT Income Summary ACCOUNT NO. 309

POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2010 Dec. 31 Closing J4 47,000.00 47,000.00

GENERAL JOURNAL PAGE 4

POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00

STEPS

1. CLOSEREVENUE

Closing Entriesand the Postclosing

Trial Balance

Closing Entriesand the Postclosing

Trial Balance

Section 2: Using Accounting Information

Chapter

6

2. Prepare a postclosing trial balance.

3. Interpret financial statements.

4. Review the steps in the accounting cycle.

McGraw-Hill © 2010 The McGraw-Hill Companies, Inc. All rights reserved.

6-27

Step 1 Analyze

transactions

Step 2 Journalize the

data about transactions

Step 7 Journalize and

post closing entries

Step 3 Post the

data about transactions

Step 4 Prepare

a worksheet

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entriesStep 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

The Accounting Cycle

Step 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

6-28

What is the postclosing trial balance

A postclosing trial balance is a statement that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances.

QUESTION:

ANSWER:

6-29

Wells’ Consulting Services Postclosing Trial Balance December 31, 2010

ACCOUNT NAME DEBIT CREDIT Cash 111,350.00 Accounts Receivable 5,000.00Supplies 1,000.00Prepaid Rent 4,000.00 Equipment 11,000.00Accumulated Depreciation–Equipment 183.00 Accounts Payable 3,500.00Carolyn Wells, Capital 128,667.00Totals 132,350.00 132,350.00

6-30

If the postclosing trial balance does not balance, the accounting records contain errors.

Use the audit trail to trace data through the accounting records.

Finding and Correcting Errors

6-31

Objective 3

Interpret financial statements

6-32

What is the cash balance?

How much do the customers owe the business?

Wells’ Consulting Services Partial Balance Sheet

December 31, 2010Assets

Cash $ 111,350.00 Accounts Receivable 5,000.00Supplies 1,000.00Prepaid Rent 4,000.00 Equipment $ 11,000.00Less Accumulated Depreciation 183.00 10,817.00Total Assets $ 132,167.00

6-33

How much does the business owe its suppliers?

Wells’ Consulting Services Balance SheetDecember 31, 2010

Assets Cash $ 111,350.00 Accounts Receivable 5,000.00Supplies 1,000.00Prepaid Rent 4,000.00 Equipment $ 11,000.00Less Accumulated Depreciation 183.00 10,817.00Total Assets $ 132,167.00

Liabilities and Owner’s EquityLiabilities Accounts Payable $ 3,500.00Owner’s Equity Carolyn Wells, Capital 128,667.00Total Liabilities and Owner’s Equity $132,167.00

6-34

Wells’ Consulting Services Income Statement

Month Ended December 31, 2010

Revenue Fees Income 47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Supplies Expense 500.00 Rent Expense 4,000.00 Depr. Expense--Equipment 183.00 Total Expenses 13,333.00Net Income for the Month 33,667.00

What is the profit?

6-35

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 financial statements

Income Statement

Statement of Owner’s Equity

Balance Sheet

Step 5Prepare financial

statements

Step 5Prepare financial

statements

Objective 4 Review the steps in the accounting cycle

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

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entries

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

Step 7 Journalize and

post closing entries

6-37

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

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

Step 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

Step 9 Interpret

the financial information Step 8

Prepare a postclosing trial balance

Step 5Prepare financial

statements

Step 4 Prepare

a worksheet

Step 3 Post the

data about transactions

Step 2 Journalize the

data about transactions

Step 1 Analyze

transactions

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

6-38

Flow of Data Through a Simple Accounting System

Source Documents

Source documents are analyzed

General journal

General ledger

Worksheet Financialstatements

Source Documents

6-39

Haddock • Price • Farina

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College AccountingA Contemporary Approach, 1ST Edition