0 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship What You’ll Learn  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 the closing entries.  Post the closing entries to the general ledger.  Prepare a post-closing trial balance.  Define the accounting terms introduced in this chapter.

1 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 10, Section 1 Preparing Closing Entries What Do You Think? Why is it important to transfer the temporary account balances to the permanent owner’s capital account?

2 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Closing entries transfer the temporary account balances to the owner’s capital account. You Will Learn  the last two steps of the accounting cycle.  the purpose of closing entries.  the purpose of the Income Summary account.  how to journalize the closing entries. Preparing Closing Entries SECTION 10.1

3 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  closing entries  Income Summary account  compound entry Preparing Closing Entries SECTION 10.1

4 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Completing the Accounting Cycle Closing entries are journal entries made at the end of an accounting period to zero the balances in the temporary accounts and transfer the net income or loss to the capital account. After closing entries are made, the trial balance can be prepared. Preparing Closing Entries SECTION 10.1

5 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries The events leading up to the closing process are:  Net income or loss is calculated on the work sheet.  The income statement is completed.  The capital account ending balance is calculated on the statement of changes in owner’s equity.  The ending balance of the capital account appears on the balance sheet.  The capital account balance in the general ledger does not equal the amount on the balance sheet. Closing entries need to be journalized and posted. Preparing Closing Entries SECTION 10.1

6 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Preparing Closing Entries SECTION 10.1

7 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Income Summary Account The Income Summary account:  serves as a simple income statement in the general ledger.  is used to accumulate revenue and expenses for the period.  equals the net income or loss for the period. It is a temporary account that:  is used only at the end of the accounting period to summarize revenue and expense balances.  does not have a normal balance.  has a zero balance before and after the closing.  does not appear on any financial statement. Preparing Closing Entries SECTION 10.1

8 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Closing Revenue to Income Summary To record closing entries in the general journal:  Enter Closing Entries in the Description column.  Enter the last day of the accounting period.  Enter the name(s) and amount(s) of the account(s) to be debited.  Enter Income Summary as the name of the account to be credited and the amount to be credited. Preparing Closing Entries SECTION 10.1

9 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Closing Expenses to Income Summary A journal entry with two or more debits or credits is a compound entry. Preparing Closing Entries SECTION 10.1

10 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Preparing Closing Entries SECTION 10.1

11 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Closing Income Summary to Capital This entry transfers the balance of the Income Summary account to the capital account. An example of this closing entry can be seen here: Preparing Closing Entries SECTION 10.1

12 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Closing Withdrawals to Capital This entry transfers the balance of the withdrawals account to the capital account. An example of this closing entry is shown below: Preparing Closing Entries SECTION 10.1

13 Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  closing entries Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account.  Income Summary account The general ledger account used to summarize the revenue and expenses for the period.  compound entry A journal entry with two or more debits or two more credits. Preparing Closing Entries SECTION 10.1