1. McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Closing Entries and the Postclosing Trial Balance
Chapter 6
Closing Entries and the Postclosing Trial Balance
Section 1: Closing Entries
Section Objectives
Journalize and post closing entries.

3. The Accounting Cycle
Step 2 Journalize the data about transactions
Step 3 Post the data about transactions
Step 1 Analyze transactions
Step 4 Prepare a worksheet
Step 5 Prepare financial statements
Step 9 Interpret the financial information
Step Journalize and post adjusting entries
Step 7 Journalize and post closing entries
Step 7 Journalize and post closing entries
Step 8 Prepare a postclosing trial balance
The seventh step in the accounting cycle is to journalize and post closing entries

4. Income Summary Account
Classified as a temporary owner’s equity account.
Does not have a normal balance.
Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

5. Journalize and post closing entries
Objective 1
Journalize and post closing entries
There are four steps in the closing process:
1. Transfer the balance of revenue account balances to the Income Summary account.
2. Transfer the expense account balances to the
Income Summary account.
3. Transfer the balance of the Income Summary
account to the owner’s capital account.
4. Transfer the balance of the drawing account to the owner’s capital account.

6. Step 2: Close Expenses
The Income Statement section of the worksheet for Wells’ Consulting Services lists five expense accounts.
Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero.
This closing entry transfers total expenses to the Income Summary account.

7. Step 3: Close Net Income to Capital
The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Carolyn Wells, Capital.
The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income.
The Income Summary account is reduced to zero.
The net income amount, $33,667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33,667.

8. Step 4: Close Drawing to Capital
Withdrawals appear in the statement of owner’s equity as a deduction from capital.
The drawing account is closed directly to the capital account.
The drawing account balance is reduced to zero.
The balance of the drawing account, $5,000, is transferred to the owner’s capital account.

9. Summary of Closing Entries
STEPS
GENERAL JOURNAL PAGE
POST.
DATE DESCRIPTION REF DEBIT CREDIT
Closing Entries
1. Close Revenue Account
Dec Fees Income ,000.00
Income Summary ,000.00
Income Summary ,333.00
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depr. Expense-Equip
2. Close Expense Accounts
3. Close
Income Summary
Income Summary ,667.00
Carolyn Wells, Capital ,667.00
4. Close
Drawing Account
Carolyn Wells, Capital ,000.00
Carolyn Wells, Draw ,000.00

10. Posting the Closing Entries
All journal entries are posted to the general ledger accounts.
“Closing” is entered in the Description column of the ledger accounts.
The ending balances of the drawing, revenue, and expense accounts are zero.

11. Closing Entries and the Postclosing Trial Balance
Chapter 6
Closing Entries and the Postclosing Trial Balance
Section 2: Using Accounting Information
2. Prepare a postclosing trial balance.
3. Interpret financial statements.
4. Review the steps in the accounting cycle.

12. What is the postclosing trial balance
QUESTION:
What is the postclosing trial balance
A postclosing trial balance is report that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances.
ANSWER:

13. ACCOUNT NAME DEBIT CREDIT
Wells’ Consulting Services
Postclosing Trial Balance
December 31, 2013
ACCOUNT NAME DEBIT CREDIT
Cash ,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment ,000.00
Accumulated Depreciation–Equipment
Accounts Payable ,500.00
Carolyn Wells, Capital ,667.00
Totals , ,350.00

14. Wells’ Consulting Services Partial Balance Sheet December 31, 2013
Assets
Cash $ 111,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment $ 11,000.00
Less Accumulated Depreciation ,817.00
Total Assets $ 132,167.00
What is the cash balance?
How much do the customers owe the business?

15. Wells’ Consulting Services Balance Sheet December 31, 2013
Assets
Cash $ 111,350.00
Accounts Receivable ,000.00
Supplies ,000.00
Prepaid Rent ,000.00
Equipment $ 11,000.00
Less Accumulated Depreciation ,817.00
Total Assets $ 132,167.00
Liabilities and Owner’s Equity
Liabilities
Accounts Payable $ 3,500.00
Owner’s Equity
Carolyn Wells, Capital ,667.00
Total Liabilities and Owner’s Equity $132,167.00
How much does the business owe its suppliers?

16. Wells’ Consulting Services Income Statement
Month Ended December 31, 2013
Revenue
Fees Income ,000.00
Expenses
Salaries Expense ,000.00
Utilities Expense
Supplies Expense
Rent Expense ,000.00
Depr. Expense--Equipment
Total Expenses ,333.00
Net Income for the Month ,667.00
What is the profit?

17. Flow of Data Through a Simple Accounting System
Source
Documents
Source
Documents
General
journal
General
ledger
Worksheet
Financial
statements
Source documents are analyzed
After studying the accounting cycle of Wells’ Consulting Services, you should have an understanding of how data flows through a simple accounting system for a small business. Review the flow and make certain that you are comfortable with the documents and reports.