Presentation is loading. Please wait.

Presentation is loading. Please wait.

PURPOSE OF CLOSING ENTRIES 4 start over  move the company’s net income for a time period to the OE section of the balance sheet 4Start over  measure.

Similar presentations


Presentation on theme: "PURPOSE OF CLOSING ENTRIES 4 start over  move the company’s net income for a time period to the OE section of the balance sheet 4Start over  measure."— Presentation transcript:

1 PURPOSE OF CLOSING ENTRIES 4 start over  move the company’s net income for a time period to the OE section of the balance sheet 4Start over  measure expenses for a time period 4Intuitively… if a company has $245 million net income, the equity of the company goes up by $245 million

2 CLOSING ACCOUNTS 1. Updates the owner’s capital account in the ledger by transferring net income (loss) and owner’s drawings to owner’s capital. 2. Prepares the temporary accounts (revenue, expense, drawings) for the next period’s postings by reducing their balances to zero. 3. Accounts are closed every time period (quarterly, annually) 4. Accounting software does this for you!!!

3 ILLUSTRATION 4-2 TEMPORARY VERSUS PERMANENT ACCOUNTS TEMPORARY (NOMINAL) These accounts are closed All revenue accounts All expense accounts Owner’s drawings (&dividends) PERMANENT (REAL) These accounts are not closed All asset accounts All liability accounts Owner’s capital account (Balance Sheet Accounts) (Income Statement / Drawings Accounts)

4 ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS 1 1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues. 2 Debit the owner’s capital account for total expenses, and credit each expense account for its balance. 1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues. 2 Debit the owner’s capital account for total expenses, and credit each expense account for its balance. (INDIVIDUAL) EXPENSES Normal Dr. Balance Normal Cr. Balance Cr. to close Dr. to close - 0 - Expenses Revenues Opening Balance 2

5 ILLUSTRATION 4-3 DIAGRAM OF CLOSING PROCESS 3 3 Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount. OWNER’S DRAWINGS Normal Dr. Balance Cr. to close - 0 - Expenses Revenues Opening Balance Drawings Ending Balance

6 Example: Journalize the closing entries if Bert’s Pigeon Service had Revenue of $5000, salary expenses of $2000 and supply expenses of $1500; Bert had drawings of $1000 Journalize the closing entries for Bert’s Pigeon Service What was the Net income? What was the overall increase in OE? Revenue5000 Capital Bert5000 Capital, Bert3500 Salary2000 Supply exp.1500 Capital, Bert1000 drawings1000 Net Income: 5000 – 3500 = 1500 Increase in OE: 5000 – 3500 – 1000 = $500

7 POST-CLOSING TRIAL BALANCE After all closing entries have been journalized and posted, a post-closing trial balance is prepared. The purpose of this trial balance is to prove the equality of the permanent (balance sheet) account balances that are carried forward into the next accounting period.

8 ILLUSTRATION 4-8 POST-CLOSING TRIAL BALANCE The post-closing trial balance is prepared from the permanent accounts in the ledger. The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.

9 1. Analyse transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries 6. Prepare adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare post-closing trial balance STEPS IN THE ACCOUNTING CYCLE


Download ppt "PURPOSE OF CLOSING ENTRIES 4 start over  move the company’s net income for a time period to the OE section of the balance sheet 4Start over  measure."

Similar presentations


Ads by Google