1. Closing Entries (Part 2)

2. Closing Entry #2 - Expenses We want to clear the balance of each expense account. Expenses have debit balances, so we need CREDIT entries to zero the accounts.

3. Closing Entry #3 – Income or Loss So, we see that expenses are subtracted from total revenue. In the example here, the balance is a credit because revenues are greater than expenses. This means that we have a net income. Now…what do we do with this?

4. Closing Entry #3 – Income or Loss Think of the equity equation: Beginning Capital + Net Income…

5. Closing Entry #4 - Drawings If we think about the equity equation, we need to consider drawings to figure out our ending capital. The Drawings account always has a debit balance. This means we need a CREDIT entry to close it.

6. Closing Entry #4 - Drawings Looking at the closing entries, it is obvious why closing entries is important. The nominal accounts have all been closed. The Capital account now shows what equity actually is: Beginning Capital ($28,895.42) Net Income ($60,636.09) + - Drawings($42,000) = Ending Capital($47,531.51)

7. Post-Closing Trial Balance We have to make sure that the ledger accounts are accurate. We have to make a trial balance from the ledger account balances.,

8. Complete Accounting Cycle So, you now understand that the whole process is cyclical. Here is the whole process.