1. Recall:  As we already know, during any fiscal period, the total equity of a business is contained in a number of accounts in the equity section of the ledger (Revenue, Expenses, Drawings)  We’ve also just discovered that these three accounts are nominal accounts.

2. Closing out the Nominal Accounts  The “old” balances in the nominal accounts must be removed to make the accounts “fresh” for the next period. This process is known as closing the accounts.  Closing an account means to cause it to have ____ ________________. The nominal accounts are closed out at the end of each fiscal period.  Closing the nominal accounts involves _____________ the ____________ collected in _____________ ____________ into the one real equity account, the _____________ account.

3. Closing out the Nominal Accounts cont’d  Closing the nominal accounts involves journalizing and posting closing entries. This is done in two (2) phases: 1. Transfer the balances of the revenue and expense accounts to the new Income Summary account 2. Transfer the balances of the Income Summary and Drawings accounts to the Capital account

4. BAF3M1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9.4

5. Recall: The Accounting Cycle Transactions occur. Source documents. Accounting entries recorded in the journal Journal entries posted to the ledger accounts Performed daily Ledger balanced by means of a trial balance Performed monthly Work sheet prepared Formal income statement and balance sheet prepared Adjusting entries journalized and posted Closing entries journalized and posted Post-closing trial balance Performed at the end of each fiscal period

6. Journalizing and Posting Closing Entries  The source of data for the closing entries is found in the work sheet.  Closing entry ______: Transfer balances in revenue account(s) to a new account called Income Summary  Closing entry ______: Transfer balances in expense accounts to the Income Summary account  Closing entry ______: Transfer the balance in the Income Summary account to the Capital account  Closing entry ______: Transfer the balance in the Drawings account to the Capital account

7. Closing entry #1 Dec31Revenue213821 Income Summary213821 Closing entry  Closing entry #1: Transfer balances in revenue account(s) to a new account called Income Summary

8. Closing entry #2  Closing entry #2: Transfer balances in expense accounts to the Income Summary account 31Income Summary14698491 Bank Charges Expense 3500 Miscellaneous Expense 203665 Rent Expense 24000 Telephone Expense 1845 Truck Expense 4244716 Utilities Expense 3750 Wages Expense 6595720 Supplies Expense95490 Insurance Expense 2494 Closing entry

9. Closing entry #3  Closing entry #3: Transfer the balance in the Income Summary account to the Capital account If the Income Summary account has a credit balance, it will take a debit entry to close it. If it has a debit balance, it will take a credit entry to close it. 31Income Summary 6683609 J. Smith, Capital 6683609 Closing entry

10. Closing entry #4  Closing entry #4: Transfer the balance in the Drawings account to the Capital account 31J. Smith, Capital 42000 J. Smith, Drawings 42000 Closing entry

11. Post-closing Trial Balance  The _________________ of the _____________ must be checked ____________ you have finished ___________________ and ______________ the adjusting and closing entries.  This is done by preparing the post-closing trial balance.  The post-closing trial balance is more brief than a regular trial balance because it does not include the nominal accounts – revenue(s), expenses, and drawings

12. Recap: Uses of the work sheet 1. Provides a method of organizing the figures for the financial statements. It contains all of the up- to-date figures for the statements in one convenient place. 2. Lets the accountant see the effect of adjusting entries before they are recorded in the accounts. 3. Provides arithmetic accuracy of the figures before they are used in financial statements. 4. The source for all of the information for recording the adjusting and closing entries.

13. BAF3M1 COMPLETING THE ACCOUNTING CYCLE Chapter 9, Section 9.5

14. Adjusting for Depreciation  Assets that are bought for business use to produce revenue over several fiscal periods are known as “Fixed assets”, “Capital assets”, and “Plant and equipment”.  With the exception of land, every fixed asset is expected to be used up in the course of time. Thus, the asset depreciates (decreases) in value.  Depreciation refers to an allowance made for the _______________ ____ ___________of an ___________ over __________. It can be thought of as allocating a part of the cost of an asset as an expense for each accounting period during which the business uses that asset. (_______________ _______________)

15. Calculating Depreciation  Depreciation must be included on every year-end income statement.  Since depreciation is dependant on usage and time, accountants estimate the value of depreciation while the asset is still in use.  Two most common methods of calculating depreciation: 1. __________________________________ 2. __________________________________

16. Straight-line depreciation  Divides up the net cost of the asset _____________ over the years of the asset’s life.  This is the formula used: Straight-line depreciation for one year Original cost of asset Estimated salvage value Estimated number of periods in the life of the asset

17. Example: Tip Top Trucking purchased a truck for $78 000 on January 1, 2008. It estimated that the truck would be used for 6 years, and at the end of that time, it can be sold for $7 800. (The $7800 is the salvage value and is an estimated amount) Estimated annual depreciation $78 000$7 800 6 $11 700 Straight-line depreciation for one year Original cost of asset Estimated salvage value Estimated number of periods in the life of the asset

18. Adjusting for Depreciation NEW ACCOUNT!  The journal (adjusting) entry for depreciation:  The Accumulated Depreciation account is used to ________________ the _____ _________ ____________ of a fixed asset (in this example, Truck) 31Depreciation Expense - Truck 11700 Accumulated Depreciation - Truck 11700 Adjusting entry Note:This adjusting entry is not journalized at this time. It is entered in the Adjustments section of the work sheet first, then journalized and posted.

19. Depreciation on Financial Statements  Depreciation Expense is recorded on the _______________ _____________________  Accumulated Depreciation is deducted from its respective fixed asset account on the ________________ ____________  An example of the Fixed Assets section of the balance sheet (also on page 344 in the textbook) Fixed Assets Truck $78 000 Less: Accumulated Depreciation 11 700 42 900

20. Declining-Balance Method  Calculates the annual depreciation by __________________ the remaining undepreciated cost of the asset by a ______________ ___________________.  In the first year, the undepreciated cost is equal to the purchase price (capital cost). Canada Customs and Revenue Agency Rates of Capital Cost Allowance (Depreciation) DescriptionRate Office furniture and equipment20% Cars, trucks, tractors, computers30%

21. Example: Assume that computers are purchased on January 1, 2008 for $22 000. This is the initial capital cost figure. The rate is 30%. Year 1 For the 2008 fiscal year, the depreciation = $22 000 x 0.30 = $6 600 Original cost before depreciation..................................................................... $22 000 Less: Depreciation for 2008................................................................................ 6 600 Undepreciated cost (net book value) at end of 2008.................................... $15 400 Year 2 For the 2009 fiscal year, the depreciation = $15 400 x 0.30 = $4 620 Undepreciated cost after first year................................................................... $ 15 400 Less: Depreciation for 2009............................................................................... 4 620 Undepreciated cost (net book value) at end of 2009.................................... $ 10 780 Year 3 For the 2010 fiscal year, the depreciation = $10 780 x 0.30 = $3 234 Undepreciated cost after first year................................................................... $ 10 780 Less: Depreciation for 2009............................................................................... 3 234 Undepreciated cost (net book value) at end of 2009.................................... $ 7 546