2Closing Entries and the Postclosing Trial Balance Chapter6Closing Entries and the Postclosing Trial BalanceSection 1: Closing EntriesSection ObjectivesJournalize and post closing entries.
3The Accounting CycleStep 2 Journalize the data about transactionsStep 3 Post the data about transactionsStep 1 Analyze transactionsStep 4 Prepare a worksheetStep 5 Prepare financial statementsStep 9 Interpret the financial informationStep Journalize and post adjusting entriesStep 7 Journalize and post closing entriesStep 7 Journalize and post closing entriesStep 8 Prepare a postclosing trial balanceThe seventh step in the accounting cycle is to journalize and post closing entries
4Income 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.
5Journalize and post closing entries Objective 1Journalize and post closing entriesThere 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 theIncome Summary account.3. Transfer the balance of the Income Summaryaccount to the owner’s capital account.4. Transfer the balance of the drawing account to the owner’s capital account.
6Step 2: Close ExpensesThe 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.
7Step 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.
8Step 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.
9Summary of Closing Entries STEPSGENERAL JOURNAL PAGEPOST.DATE DESCRIPTION REF DEBIT CREDITClosing Entries1. Close Revenue AccountDec Fees Income ,000.00Income Summary ,000.00Income Summary ,333.00Salaries Expense ,000.00Utilities ExpenseSupplies ExpenseRent Expense ,000.00Depr. Expense-Equip2. Close Expense Accounts3. CloseIncome SummaryIncome Summary ,667.00Carolyn Wells, Capital ,667.004. CloseDrawing AccountCarolyn Wells, Capital ,000.00Carolyn Wells, Draw ,000.00
10Posting 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.
11Closing Entries and the Postclosing Trial Balance Chapter6Closing Entries and the Postclosing Trial BalanceSection 2: Using Accounting Information2. Prepare a postclosing trial balance.3. Interpret financial statements.4. Review the steps in the accounting cycle.
12What is the postclosing trial balance QUESTION:What is the postclosing trial balanceA 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:
13ACCOUNT NAME DEBIT CREDIT Wells’ Consulting ServicesPostclosing Trial BalanceDecember 31, 2013ACCOUNT NAME DEBIT CREDITCash ,350.00Accounts Receivable ,000.00Supplies ,000.00Prepaid Rent ,000.00Equipment ,000.00Accumulated Depreciation–EquipmentAccounts Payable ,500.00Carolyn Wells, Capital ,667.00Totals , ,350.00
14Wells’ Consulting Services Partial Balance Sheet December 31, 2013 AssetsCash $ 111,350.00Accounts Receivable ,000.00Supplies ,000.00Prepaid Rent ,000.00Equipment $ 11,000.00Less Accumulated Depreciation ,817.00Total Assets $ 132,167.00What is the cash balance?How much do the customers owe the business?
15Wells’ Consulting Services Balance Sheet December 31, 2013 AssetsCash $ 111,350.00Accounts Receivable ,000.00Supplies ,000.00Prepaid Rent ,000.00Equipment $ 11,000.00Less Accumulated Depreciation ,817.00Total Assets $ 132,167.00Liabilities and Owner’s EquityLiabilitiesAccounts Payable $ 3,500.00Owner’s EquityCarolyn Wells, Capital ,667.00Total Liabilities and Owner’s Equity $132,167.00How much does the business owe its suppliers?
16Wells’ Consulting Services Income Statement Month Ended December 31, 2013RevenueFees Income ,000.00ExpensesSalaries Expense ,000.00Utilities ExpenseSupplies ExpenseRent Expense ,000.00Depr. Expense--EquipmentTotal Expenses ,333.00Net Income for the Month ,667.00What is the profit?
17Flow of Data Through a Simple Accounting System SourceDocumentsSourceDocumentsGeneraljournalGeneralledgerWorksheetFinancialstatementsSource documents are analyzedAfter 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.