1. Chapter 10: Completing the Accounting Cycle for a Sole Proprietor
Accounting I
Ms. Alltucker

2. Chapter Objectives
Explain why it is necessary to update accounts through closing entries.
Explain the purpose of the Income Summary account.
Explain the relationship between the Income Summary account and the capital account.
Analyze and journalize closing entries.
Post the closing entries to the general ledger.
Prepare a post-closing trial balance.
Define the accounting terms introduced in this chapter.

3. Section 1: Preparing Closing Entries
What you will learn:
Why temporary capital accounts are closed at the end of the fiscal year.
The purpose of the Income Summary account.
The relationship between the Income Summary account and the capital account.
How to analyze and journalize closing entries.
Why it’s important:
Closing entries are made to prepare the financial records for the next fiscal year.

4. Completing the Accounting Cycle
At the end of an accounting period, an accountant transfers the balances of the temporary accounts to the owner’s capital account to bring it up to date and to prepare the accounting records for the next period.
Temporary accounts:
Revenue
Expenses
Withdrawals

5. 8th Step: Journalizing the Closing Entries
Closing Entries: journal entries made to close, or reduce to zero, the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account

6. Purpose of Closing Process
In your worksheet you found net income or net loss
Net income or net loss is seen on the Income Statement
Changes in Owner’s Equity reflects the net income or net loss.
General ledger capital account balance does not equal the amount on the balance sheet.
Look on page 234 for a visual aid

7. Income Summary account
Look on page 73 at the chart of accounts. What type of account is Income Summary?

8. The Income Summary Account
Which general ledger account have you seen that has not been used yet?
Income summary: used to accumulate and summarize the revenue and expenses for the period.
Serves as a simple income statement in the ledger
Expenses: debit balances are transferred as debits to the income summary account as a debit
Revenue: credit balances are transferred as credits to Income Summary
Balance of Income Summary equals the net income or the net loss for the fiscal period.
The balance of Income Summary is transferred to the capital account at the end of the closing process.

9. Income Summary Income Summary Expenses Revenue
Used only at the end of the fiscal year to summarize the balances from the revenue and expense accounts
Balance before and after the closing process is zero
Does not appear on any financial statement
Does not have a normal balance
Does not have an increase or a decrease side
Income Summary
Income Summary
Debit Credit
Expenses Revenue
If Revenue > Expenses Balance is net income
If Revenue < Expenses Balance is net loss

10. Preparing Closing Entries
Four journal entries are prepared to close the temporary capital accounts
1. the balance of the revenue account is transferred to the credit side of the income summary account
2. The expense account balances are transferred to the debit side of the Income Summary account.
3. The balance of the Income Summary account is transferred to the capital account
Net income to credit side
Net loss to debit side
4. The balance of the withdrawals account is transferred to the debit side of the capital account.

11. Closing the Balance of the Revenue Account to Income Summary
Balance of the revenue account is found in the Income Statement of the work sheet
1. Enter “Closing Entries” in the center of the description column.
2. Enter the date (last day of the fiscal period)
3. Enter the names of the accounts to be debited and the amounts to be debited.
4. Enter the name of the account, Income Summary, to be credit and the amount credited

12. Closing the Revenue account to Income Summary
First Closing Entry—Close Revenue to Income Summary
JOURNAL ENTRY

13. Closing the Expense accounts to Income Summary
Balances of the expense accounts are found in the income statement section of the worksheet
JOURNAL ENTRY
Second Closing Entry—Close Expenses to Income Summary

14. Closing the Income Summary Account to Capital
Closing entry for revenue
2650
Closing entry for expenses
1500
1150
New Balance
If Income Summary has a credit balance net profit
If Income Summary has a debit balance  net loss

15. Closing the Income Summary Account to Capital
JOURNAL ENTRY 7.
Fourth Closing Entry—Close Withdrawals to Capital

16. Closing Withdrawals to Capital
Withdrawals decrease owner’s equity
Balance of the withdrawals account is found in the Balance Sheet section of the work sheet
Fourth Closing Entry—Close Withdrawals to Capital
JOURNAL ENTRY 7.

17. Thinking Critically
Why are closing entries for revenue and expense accounts recorded?
What is the order in which you journalize closing entries?
What is the purpose of the Income Summary account?

18. Section 2:Posting Closing Entries and Preparing a Post-Closing Trial Balance
What you will learn:
How to record closing entries in the general ledger.
The purpose of a post-closing trial balance.
How to prepare a post-closing trial balance.
Why it’s important:
A post-closing trial balance verifies that the closing entries are properly recorded in the general ledger and that you are ready to start the next accounting period.

19. Completing the Accounting Cycle
Post the closing entries to the general ledger accounts
Procedure is exactly the same as other general ledger postings, with ONE exception.
“Closing Entries” are written in the Description column of the general ledger account

20. Review: Posting to General Ledger Steps
1. Enter the date of the journal entry in the Date column
2. Description is usually left blank in general posting
When doing closing entries write “Closing Entries”
3. Identify where the journal entry is recorded in post reference column—Example: G1
4. Enter the debit amount in the debit column
5. Compute and record the new account balance in the appropriate balance column
6. Return to journal and enter the ledger account number of the account you just posted
7. Repeat the same steps for the credit entry

21. Review: Posting to General Ledger Steps

22. Posting Closing Entries
Income Summary Balance (credit): $1150
Withdrawal balance: $500
Maria Sanchez, Capital
301 20
Oct 1 G1
25000
25000 G1
400 2
25400 31
Closing Entry G3
1150
26550 31
Closing Entry G3
500
26050
You have to do this for every line in the general journal.
DO NOT FORGET TO PUT THE POST REFERENCE IN THE JOURNAL AFTER
YOU HAVE POSTED.

23. The Ninth Step in the Accounting Cycle
Preparing a Post-Closing Trial Balance
Prepared to make sure total debits equal total credits after the closing entries are posted.
Only accounts with balances are listed on the post-closing trial balance
Only permanent accounts have balances
Temporary accounts have zero balances—no need to list them

24. Post-Closing Trial Balance
After the journal entries are posted to the accounts in the general ledger, the total of all the debit balances should equal the total of all the credit balances
Proving the ledger
Debits = Credits
Prepared on a two-column accounting stationery

25. Post Closing Trial Balance

26. Thinking Critically
After the closing process, what types of accounts have balances other than zero, and what types of accounts have zero balances?
What is the purpose of the eighth and ninth steps in the accounting cycle?
What happens when your debits don’t equal credits in the post closing trial balance?