the accounting cycle: closing entries 1. previous lecture 2 unadjusted trial balance adjustments...
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THE ACCOUNTING CYCLE: Closing Entries
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Previous Lecture
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• Unadjusted Trial Balance• Adjustments• Adjusted Trial Balance• Income statement• Balance Sheet• All above together in one sheet is called work
sheet• Statement of Retained Earnings
Adjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing EntriesAdjusting and Closing Entries
If a work sheet has been prepared, the data for these entries are in the Adjustments columns.
If a work sheet has been prepared, the data for these entries are in the Adjustments columns.
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Closing the Books
• Closing entries– Transfer the temporary account
balances to update the retained earnings account
– Reduce the balances in the temporary accounts to zero to prepare for the next period’s postings
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TemporaryTemporary PermanentPermanent
All revenue accounts All asset accounts
All expense accounts All liability accounts
Dividends accountShareholders’ equity
accounts
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Retained Earnings is a permanent account; the others shown hereare temporary
Individual Expenses
Retained Earnings
Income Summary
Individual Revenues
Dividends
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Post-Closing Trial Balance
• Proves the equality of total debit balances and total credit balances after the closing entries have been made
• Should contain only permanent accounts
RETAINED EARNINGSRETAINED EARNINGS
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
Income Summary
11Revenues are transferred to Income Summary22
Expenses are transferred to Income Summary
33 Net Income or Net Loss is transferred to Retained Earnings
44Dividends are transferred to Retained Earnings
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RETAINED EARNINGSRETAINED EARNINGS
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
Income Summary
11Revenues are transferred to Income Summary22
Expenses are transferred to Income Summary
33 Net Income or Net Loss is transferred to Retained Earnings
44Dividends are transferred to Retained Earnings
The The Income Summary Income Summary account does not appear on account does not appear on
the financial statements.the financial statements.
The The Income Summary Income Summary account does not appear on account does not appear on
the financial statements.the financial statements.
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Retained Earnings
Bal. 25,000
Dividends
Bal. 4,000
Income Summary
Note: Note: The The balances shown balances shown
are adjusted are adjusted balances before balances before
closing. The closing. The following following sequence sequence
demonstrates the demonstrates the closing process.closing process.
Note: Note: The The balances shown balances shown
are adjusted are adjusted balances before balances before
closing. The closing. The following following sequence sequence
demonstrates the demonstrates the closing process.closing process.
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
Retained Earnings
Dividends
Bal. 4,000
Income Summary
Debit each revenue account for the amount of its
balance, and credit Income Summary
for the total revenue.
16,840
120
16,960
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Retained Earnings
Dividends
Bal. 4,000
Income Summary
Debit Income Summary for the total expenses and credit each expense
account for its balance.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Retained Earnings
Dividends
Bal. 4,000
Income Summary
Debit Income Summary for the
amount of its balance (in this
case, the net income) and credit
Retained Earnings.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
7,205
7,205
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Retained Earnings
Dividends
Bal. 4,000
Income Summary
Debit Retained Earnings for the
balance of Dividends and
credit Dividend for the same amount.
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,840
120
16,9609,775
455
100
2,040
985
50
1,600
4,525
7,205
4,000
4,000
The Closing ProcessThe Closing ProcessThe Closing ProcessThe Closing Process
7,205
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Wages Expense
Bal. 4,525
Rent Expense
Bal. 1,600
Depreciation Expense
Bal. 50
Utilities Expense
Bal. 985
Supplies Expense
Bal. 2,040
Insurance Expense
Bal. 100
Miscellaneous Expense
Bal. 455
Retained Earnings
Dividends
Bal. 4,000
Income Summary
Fees Earned
Bal. 16,840
Rent Revenue
Bal. 120
16,480
120
16,9609,775
445
100
2,040
985
50
1,600
4,525
7,205
7,205
4,000
4,000
Close RevenuesClose Revenues
Close ExpensesClose Expenses
Close Income SummaryClose Income Summary
Close DividendsClose Dividends
16,84016,840
120120
16,96016,960
4,5254,525
1,6001,600
5050
985985
2,0402,040
100100
455455
9,7759,775
7,2057,205
7,2057,205
4,0004,000
4,0004,000
Review of the Closing ProcessReview of the Closing ProcessReview of the Closing ProcessReview of the Closing Process
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After the closing entries are posted, all of the
temporary accounts have zero balances.
After the closing entries are posted, all of the
temporary accounts have zero balances.
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Post-closing Trial BalancePost-closing Trial BalancePost-closing Trial BalancePost-closing Trial BalanceNetSolutions
Post-Closing Trial BalanceDecember 31, 2005
Cash 2 065 00Accounts Receivable 2 720 00Supplies 760 00Prepaid Insurance 2 300 00Land 20 000 00Office Equipment 1 800 00Accumulated Depreciation 50 00Accounts Payable 900 00Wages Payable 250 00Unearned Rent 240 00Capital Stock 25 000 00Retained Earnings 3 205 00
29 645 00 29 645 00
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Closing the Temporary Equity Accounts
Close Revenue accounts to Income Summary.
Close Expense accounts to Income Summary.
Close Income Summary account to Retained Earnings.
Close Dividends to Retained Earnings.
The closing process gets the temporary
accounts ready for the next accounting
period.
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JJ’s Lawn Care Service would make the these closing entries.
JJ’s Lawn Care Service would make the these closing entries.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Sales Reveune 750
Income Summary 750
To close the revenue account.
Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue
account.
Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue
account.
Closing Entries for Revenue Accounts
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Income Summary750
750
Sales Revenue750 750
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Closing Entries for Revenue Accounts
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GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts.
Since expense accounts have a debit balance, the closing entry requires a credit to the expense
accounts.
Since expense accounts have a debit balance, the closing entry requires a credit to the expense
accounts.
Closing Entries for Expense Accounts
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Closing Entries for Expense Accounts
Income Summary350 750
400
Gasoline Exp.50 50
-
Net Income
Depr. Exp.: Truck250 250
-
Depr. Exp.: Tools & Equipment
50 50 -
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Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income
Summary.
Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income
Summary.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Income Summary 400
Retained Earnings 400
To close Income Summary.
Closing the Income Summary Account
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Retained Earnings
- 400
400
Income Summary350 750 400
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The balance in Income Summary is now zero.
Closing the Income Summary Account
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Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends
account.
Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends
account.
GENERAL JOURNAL
Date Account Titles and ExplanationPRDebit Credit
May 31 Retained Earnings 200
Dividends 200
To close the Dividends account.
Closing the Dividends Account
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Closing the Dividends Account
Retained Earnings200 -
400
200
Dividends200 200
-
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After all closing
entries are made, JJ’s
After-Closing Trial Balance
looks like this.
After all closing
entries are made, JJ’s
After-Closing Trial Balance
looks like this.
Cash 3,925$ Accounts receivable 75 Tools & equipment 2,650 Accumulated depr.: tools & equipment 50$ Truck 15,000 Accumulated depr.: truck 250 Notes payable 13,000 Accounts payable 150 Capital stock 8,000 Retained earnings 200 Total 21,650$ 21,650$
JJ's Lawn Care ServiceAfter-Closing Trial Balance
May 31, 2003
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Did the business earn a profit or loss in the
current period?
What is the business’s future potential for a
profit?
Evaluating Profitability
Evaluating Profitability
Does the business have assets available to pay debts as they are due?
Evaluating Solvency
Evaluating Solvency
Evaluating the Business
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Are product lines profitable?
Are resources being used efficiently?
Are production processes efficient?
Focusing Management’s
Attention
Focusing Management’s
Attention
Evaluating the Business
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Monthly
Quarterly
Jan. 1 Dec. 31
Annually
Many companies prepare financial statements at various points throughout the year.
Many companies prepare financial statements at various points throughout the year.
Interim Financial
Statements
Preparing Financial Statements Covering Different Periods of Time
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Required Steps in the Accounting Cycle
1. Analyze business transactions
2. Journalize the transactions
3. Post to general ledger accounts
4. Prepare a trial balance
5. Journalize and post adjusting entries (prepayments and accruals)
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Required Steps in the Accounting Cycle
6. Prepare an adjusted trial balance
7. Prepare financial statements
8. Journalize and post closing entries
9. Prepare a post-closing trial balance
Journalize transactions. Post entries to
the ledger accounts.
Prepare trial balance.
Make end-of-year
adjustments.
Prepare adjusted trial balance.
Prepare financial statements.
Prepare after closing trial balance.
Journalize and post closing
entries.
The Accounting Cycle
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What we did in this lecturer
• Closing the Books• Temporary Accounts– All Revenue Accounts– All Expenses Accounts– All Dividend Accounts
• Permanent Accounts– All Assets Accounts– All Liabilities Accounts– Shareholder Equity Accounts
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End of Chapter 5
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