closing entries (part 2). closing entry #2 - expenses we want to clear the balance of each expense...
TRANSCRIPT
Closing Entry #2 - Expenses
• We want to clear the balance of each expense account.
• Expenses have debit balances, so we need CREDIT entries to zero the accounts.
Closing Entry #3 – Income or Loss
• So, we see that expenses are subtracted from total revenue. In the example here, the balance is a credit because revenues are greater than expenses.
• This means that we have a net income. Now…what do we do with this?
Closing Entry #4 - Drawings
• If we think about the equity equation, we need to consider drawings to figure out our ending capital.
• The Drawings account always has a debit balance. This means we need a CREDIT entry to close it.
Closing Entry #4 - Drawings
• Looking at the closing entries, it is obvious why closing entries is important.
• The nominal accounts have all been closed.
• The Capital account now shows what equity actually is:
Beginning Capital ($28,895.42)Net Income ($60,636.09)+ -Drawings($42,000) =Ending Capital($47,531.51)
Post-Closing Trial Balance
We have to make sure that the ledger accounts are accurate.
We have to make a trial balance from theledger account balances.,
Complete Accounting Cycle
• So, you now understand that the whole process is cyclical. Here is the whole process.