closing entries and the post-closing trial balance chapter 5
TRANSCRIPT
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Closing Entries and The Post-Closing Trial Balance
Chapter 5
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Learning Outcomes
List the steps of the accounting cycle
Journalize and post closing entries
Prepare a post-closing trial balance
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9 Steps of Accounting Cycle
1. Analyze transactions and record in journal (Chapters 1 and 2)
2. Post journal entries to the ledger accounts (Chapter 3)
3. Prepare a trial balance (Chapter 3)
4. Gather adjustment data and record in worksheet (Chapter 4)
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9 Steps of Accounting Cycle5. Complete the worksheet (Chapter 4)
6. Prepare financial statements from worksheet (Chapter 4)
7. Journalize and post the adjusting entries from worksheet (Chapter 4)
8. Journalize and post the closing entries (Chapter 5)
9. Prepare a post-closing trial balance (Chapter 5)
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Closing Entries Purpose: to clear the “temporary” or
“nominal” accounts Revenue Expenses Drawing Income Summary
We “close” the books because this information pertains to only one fiscal period
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Closing Entries These accounts provide information for
Income Statement Statement of Owner’s Equity
“Permanent” or “real” accounts provide information for the balance sheet
Real/Permanent accounts are: Assets Liabilities Owner’s Equity
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New Account For Closing
Income Summary Used only for closing accounts and
adjusting for merchandise (later on) You “zero out” the account you are
closing with a debit or a credit (the opposite of which side the account’s balance is on) and the second entry is to the Income Summary account
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Steps in Closing Accounts (1)
Close Revenue to Income Summary Normal balance of revenue accounts is
credit Debit the revenue account the same
amount making balance zero Credit Income Summary
Income from Services Income Summary
$5,000(normal balance side)
$5,000 $5,000
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Steps in Closing Accounts (2) Close each Expense Account to
Income Summary Normal balance of each Expense account is debit Credit the expense account the same amount
making balance zero debit Income Summary
Utilities Expense Income Summary
$5,000$350(normal balance side)
$350 $350
Bal: $4,650
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Steps in Closing Accounts Close each Expense Account to
Income Summary Normal balance of each Expense account is debit Credit the expense account the same amount
making balance zero debit Income Summary
Depreciation Expense, Equipment Income Summary
$5,000$550(normal balance side)
$550 $350
$550 Bal: $4,100
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Steps in Closing Accounts Close each Expense Account to
Income Summary Normal balance of each Expense account is debit Credit the expense account the same amount
making balance zero debit Income Summary
Salary Expense Income Summary
$5,000$1,000(normal balance side)
$1,000 $350$550
$1,000Bal: $3,100
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Steps in Closing Accounts Close each Expense Account to
Income Summary Normal balance of each Expense account is debit Credit the expense account the same amount
making balance zero debit Income Summary
Rent Expense Income Summary
$5,000$1,200(normal balance side)
$1,200 $350$550$1,000
$1,200Bal: $1,900
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Steps in Closing Accounts (3)
Close Income Summary to Capital Normal balance of Income Summary account is
credit (if you show Net Income) Debit the Income Summary account the same
amount making balance zero Credit the Capital account by the same amount
Income Summary
$1,900
Bal: $1,900(Normal balance
side)New balance = $0
$1,900
Capital
Previous balance: 20,000
$1,900New balance: 21,900
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Steps in Closing Accounts (4)
Close Drawing to Capital Normal balance of Drawing is debit (contra) Credit the Drawing account the same amount,
making balance zero Debit the Capital account to “reduce” it by how
much the owner took out of the business
CapitalPrevious balance $21,900$1,000
Drawing
$1,000$1,000(normal balance side)
(new balance: $20,900)
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Next, Journalize the Closing Entries
Center the title “Closing Entries” on a line in the Journal
No explanation is necessary after each entry
Debits must equal credits
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Chapter 5
GENERAL JOURNAL
PAGE____4_____
DATE DESCRIPTIONPOST. REF. DEBIT CREDIT
1 2005 Closing Entries 1
2 June 30 Income from Services 5 0 0 0 00 2
3 Income Summary 5 0 0 0 00 3
4 4
5 30 Income Summary 3 1 0 0 00 5
6 Utilities Expense 3 5 0 00 6
7 Depreciation Expense, Equipment 5 5 0 00 7
8 Salary Expense 1 0 0 0 00 8
9 Rent Expense 1 2 0 0 00 9
10 10
11 30 Income Summary 1 9 0 0 00 11
12 R. Gentry, Capital 1 9 0 0 00 12
13 13
14 30 R. Gentry, Capital 1 0 0 0 00 14
15 R. Gentry, Drawing 1 0 0 0 00 15
16 16
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Next, Post the Closing Entries
Post the journal closing entries to the ledger accounts.
Cross reference your journal and ledger page numbers.
Draw a line through both the debit column and the credit column to show that the balance is zero.
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Lastly, prepare the Post-Closing Trial Balance
This is to make sure the “books” are ready for the new fiscal period
List only those accounts that have balances
Debits must equal credits
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R. Gentry Consulting Services
Post-Closing Trial Balance
June 30, 2005
ACCOUNT NAME
DEBIT CREDIT
1 Cash 21 4 6 0 00
Accounts Receivable 2 0 0 0 00
2 Supplies 1 0 0 00
Prepaid Insurance 3 3 0 00
3 Equipment 15 0 0 0 00
4
Accumulated Depreciation, Equipment 12 0 0 0 00
5 Accounts Payable 5 7 0 0 00
Wages Payable 2 9 0 00
6 R. Gentry, Capital 20 9 0 0 00
7 R. Gentry, Drawing 1 0 0 0 00
8 Fees Income 5 0 0 0 00
9 Salary Expense 1 0 0 0 00
10 Rent Expense 1 2 0 0 00
11 Utilities Expense 3 5 0 00
12 Depreciation Expense, Equipment 5 5 0 00
13
14
Do not list the accounts shown here in red – they will not have balances after they are closed.
The difference (net income) is shown on the Income Statement.
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R. Gentry Consulting Services
Post-Closing Trial Balance
June 30, 2005
ACCOUNT NAME
DEBIT CREDIT
1 Cash 21 4 6 0 00
Accounts Receivable 2 0 0 0 00
2 Supplies 1 0 0 00
Prepaid Insurance 3 3 0 00
3 Equipment 15 0 0 0 00
4 Accumulated Depreciation, Equipment 12 0 0 0 00
5 Accounts Payable 5 7 0 0 00
Wages Payable 2 9 0 00
6 R. Gentry, Capital 20 9 0 0 00
13 38 8 9 0 00 38 8 9 0 00
14
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Chapter 5 Demonstration Problems
Monday, October 8E 5-1
E 5-3
Wednesday, October 10E 5-4
E 5-7P 5-1A
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Chapter 5 Homework
Problem 5-2A (E-20)(textbook - page 168-169 + working papers - pages 109-110)
Problem 5-3A (E-20)(textbook - page 169 + working papers - pages 112-113, 116-119)
due October 17
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Next Week:
Monday: In-class Assignment #3(Look at textbook pages 178 through 180 – could you do this problem?)
Journalize transactions Post transactions to ledger accounts Prepare a Trial Balance Complete the work sheet with
adjustments (continued)
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In-Class Assignment (continued)
Prepare the Income Statement Prepare the Statement of Owner’s
Equity Prepare the Balance Sheet Journalize the adjusting entries Post adjusting entries to ledger
accounts Journalize closing entries
(continued)
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In-Class Assignment (continued)
Post the closing entries to the ledger accounts
Prepare a post-closing Trial Balance
You will have all class period on Monday, 10/15 – plus class time after quiz on Wednesday, 10/17 – plus all class period the following Monday (if needed)
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Midterm (Ch. 1-5) on Wednesday, October 24 (100 points)
Monday Wednesday