The procedures given in this slideshow refer to a company using a PERPETUAL Inventory System. Why closing entries are necessary. 3 Year-End Closing in Simply 4 1. Close temporary accounts with credit balances 8 2.Close temporary accounts with debit balances 9 3. Transfer the balance of the Income Summary account to the owner’s capital account 11 Starting a New Fiscal Year 13 1. 1.Close the Withdrawals account to the Owner’s Capital Account 14 2. 2.Reverse Prior-Year Accrued Expenses 15 Financial Statements for the New Fiscal Year 17 Contents Slideshow 10
Year-End Closing in Simply To close the current fiscal year in Simply, you would select Start New Year from the Maintenance Menu. Click Start New Year now. Simply will give you a chance to back up. Read the warning window. Click Yes.
Year-End Closing in Simply (continued) In the Backup File Name box, you can specify the folder name where you wish to save the backup. Click OK. If the folder does not exist, Simply will create it for you automatically. Simply would also confirm clearing of old data. For example, if the current year is 2018, “old data” refers to data for 2017. If you select Yes, Simply would delete 2017 data and move 2018 data in its place. Click Yes.
Year-End Closing in Simply (continued) Simply would then remind you to update the locking date. Click. This refers to the date you have entered in the Company System Setting page when you first set up the company records. When you set up the System locking date for the old year in order that no transactions could be entered previous to that date. Click. When starting a new year, the new locking date should be the first day of the new fiscal year. In this case, the first day of the new fiscal year is Jan 01, 2019. Updating the Locking Date to this date will prevent posting entries to the previous year 2018. Click to continue.
Automatic Closing Entries When Simply performs year-end closing procedures, it does not generate journal entries; therefore, closing entries would not appear in the General Journal Entry Listing at the end of the year. The procedures illustrated here are designed to help you understand the theory behind the closing procedures that Simply automatically performs. Revenue and expense accounts, along with income distribution accounts (such as dividend for corporations) are temporary accounts. They are at the bottom of the Trial Balance (see right). Procedure #1: Close temporary accounts with credit balances to Income Summary. Click. Procedure #1 for the Trial Balance at the right are the accounts that have credit balances are Sales-All and Purchase Discounts. They will be closed to the Income Summary account. Click to continue. Procedure #1: Close temporary accounts with credit balances to Income Summary. DR Sales – All 327,600.00 DR Purchase Discounts 1,942.00 CR Income Summary 329,542.00
Automatic Closing Entries: Procedure #2: Close temporary accounts with debit balances. This procedure (which Simply does automatically when you start a new year) closes temporary Inventory, COGS and expense accounts that have debit balances (Cost of Goods Sold, Sales Returns, Sales Discounts – blue bracket), Inventory Adjustments (green arrow) and all expense accounts (purple bracket). Study Procedure #2 based on the partial Trial Balance shown. Click to continue. Procedure #2: Close temporary accounts with debit balances. DR Income Summary 304,770.00 CR Sales Returns & Allowances 3,980.00 CR Sales Discounts 5,725.00 CR Cost of Goods Sold 123,470.00 CR Inventory Adjustments 60.00 CR Rent Expense24,000.00 CR Wages Expense88,109.00 CR EI Expense 3,452.00 CR CPP Expense 3,193.00 CR Office Supplies Expense 2,170.00 CR Telephone Expense 4,980.00 CR Advertising Expense15,137.00 CR Depreciation Expense – All11,915.00 CR Bad Debts Expense 2,438.00 CR Water/Hydro Expense 3,908.00 CR Bank Charges Expense 1,413.00 CR Bank Interest on Loan Expense 1,680.00 CR Insurance Expense 2,400.00 CR Automobile Expense 2,900.00 CR Automobile Lease 3,840.00
Automamtic Closing Entries: (continued) Study the summary of the relevant (not all) accounts after Procedures 1 and 2 (see below). T. Bal means Trial Balance before closing procedures. Procedure #1 (Proc. #1): Closed temporary accounts with credit balances (income account Sales-All and COGS account Purchase Discounts) Procedure #2 (Proc. #2): Closed COGS, Inventory and temporary expense accounts with debit balances. Income Summary shows a credit $24,772 balance for. This amount represents net profit (revenue – expenses). Expenses (All) represents all individual expense accounts. Click to continue. Income Summary Sales – All Proc. #1 329,542 T. Bal 327,600 Proc.#2 304,770 Proc. #1 327,600 Balance 24,772 Balance 0 Sales Returns Sales Discounts T. Bal 3,980 T. Bal 5,725 Proc. #2 3,990 Proc. #2 5,725 Balance 0 Purchase Discounts Expenses (All) Purchase Discounts T. Bal 293,123 T. Bal 1,942 T. Bal 293,123 T. Bal 1,942 Proc. #2 293,123 Proc. #1 1,942 Proc. #2 293,123 Proc. #1 1,942 Balance 0 Balance 0 Balance 0 Balance 0
Automatic Closing Entries (continued) Procedure #3: Transfer the balance of the Income Summary account to the owner’s Capital account Study closing Procedure #3. It transfers the balance of the temporary clearing account Income Summary to the owner’s Capital account. Click to see the balances of Income Summary and Capital after Procedure #3. Click to continue. Procedure #3: Transfer the balance of the Income Summary account to the owner’s Capital account. DR Income Summary 24,772 CR Capital Nathan Kafa 24,772 Income Summary Capital Nathan Kafa Proc. #2 304,770 Proc. #1 329,542 T. Bal 86,635 Proc. #3 24,772 Proc. #3 24,772 Balance 0 Balance 111.407
Starting the New Fiscal Year Review the post-closing Trial Balance. Notice that the Income, Cost of Goods Sold and Expense accounts have been closed to zero. So far, all the adjustments from the pre- closing Trial Balance have been automatically performed by Simply To prepare the company files for the next fiscal year, you need to perform two adjustments: Click. 1. 1.The balance of the Drawings account needs to be closed to the owner’s Capital account. Click. 2. Some of the accruals need to be reversed. Click to continue.
Starting the New Fiscal Year In Simply, you would enter journal entries to start the new fiscal year in the General Journal. Be sure to enter appropriate comments for the audit trail. See sample at right. Click to continue.
Starting the New Fiscal Year: Entry #1: Close the Drawings account to the owner’s Capital Account. The post-closing Trial Balance shows a $10,000 balance in the Drawings account. This amount should be entered as a debit to the owner’s Capital account, therefore reducing the Capital account by the Drawings amount. Click and study Entry #1 to start the new fiscal year. Click again to see the effect of Entry #1 to the Drawings and Capital accounts. Click to continue. Entry #1: Close the Drawings account to the Owner’s Capital Account. DR Capital Nathan Kafa 10,000 CR Drawings Nathan Kafa 10,000 Drawings Nathan Kafa Capital Nathan Kafa T Bal 10,000 Entry# 1 10,000 T. Bal 86,635 Entry # 1 10,000 Proc. #3 24,772 Balance 0 Balance 101.407 Drawings Nathan Kafa Capital Nathan Kafa T Bal 10,000 T. Bal 86.635 Proc. #3 24,772 Balance 10,000 Balance 111,407
Starting a New Fiscal Year: Entry #2: Reverse Accrued and Estimated Adjustments In the last chapter, you posted period-end adjustments. To start the new fiscal year, some, not all of these entries need to be reversed. Adjustments to PREPAID EXPENSES (insurance and office supplies) do not need to be reversed because the expenses were incurred and paid in the previous period. Likewise, depreciations are not reversed because the asset reduction occurred in the previous period. See right for entries that are not reversed. Click. Adjustments that had not been paid at period-end (accrued or estimated), although incurred in the previous period, need to be restored in the records; otherwise, when the expenses need to be paid, the account balance will not reflect the full amount of the invoice due. Click to see the reversing entries. Click to continue. Insurance Expense Adjustment at Year-End DR Insurance Expense 50.00 CR Prepaid Insurance 50.00 Depreciation Adjustment at Year-End DR Deprec. Expense – Computer Equip. 580.00 CR Accrued Liabilities 580.00 Office Supplies Adjustment at Year-End DR Office Supplies Expense 285.00 CR Prepaid Office Supplies 285.00 Journal Entries that are NOT reversed Adjustment and Accruals at Year-End Bank Reconciliation Adjustment at Year-End DR Bank Charges Expense 33.00 CR Cash in Bank 33.00 Accrued Wages at Year-End DR Wages Expense 1, 809.00 CR Wages Payable 1,809.00 Utility Expense Accrued at Year-End DR Water/Hydro Expense 340.00 CR Accrued Liabilities 340.00 Reversing Entries To reverse Bank Reconciliation Adjustment DR Cash in Bank 33.00 CR Bank Charges Expense 33.00 To reverse Accrued Wages DR Wages Payable 1,809.00 CR Wages Expense 1,809.00 To reverse Utility Expense Accrued DR Accrued Liabilities 340.00 CR Water/Hydro Expense 340.00
Starting Financial Statements for the New Fiscal Year Study the Trial Balance for the new fiscal year after the adjustments. Click. The Drawings balance has been closed to the owner’s Capital account. Click. Relevant accruals have been reversed. Click. Study the Income Statement. After all the year-end adjustments are made, the Net Income is reduced to $2,672.00 Click to continue.
Starting Financial Statements for the New Fiscal Year (continued) Study the Balance Sheet for the new fiscal year after the adjustments. The Net Income in the Income Statement has been entered as Current Earnings. You are now ready to process transactions For the new fiscal year. Click to continue.
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