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Closing Entries and the Postclosing Trial Balance

1.Journalize and post closing entries. Closing Entries Section Objective

The Closing Process Page 164

The Accounting Cycle Step 7 Journalize and post closing entries Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Step 3 Post the data about transactions The seventh step in the accounting cycle is to journalize and post closing entries. Sneak Preview! Page 176 Page 164 Step 7 Journalize and post closing entries

Closing entries are journal entries that transfer the results of operations (net income or net loss) to owner’s equity and reduce the revenue, expense, and drawing account balances to zero. ANSWER: QUESTION: What are closing entries? Page 164

The Income Summary Account Page 164

The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations. ANSWER: QUESTION: What is the Income Summary account? Page 164

Income 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 Page 164

Objective 1 Journalize and post closing entries. Page 165

Steps in the Closing Process Page 165

2. Transfer the expense account balances to the Income Summary account. There are four steps in the closing process: 4. Transfer the balance of the drawing account to the owner’s capital account. Page Transfer the balance of the Income Summary account to the owner’s capital account. 1. Transfer the balance of the revenue account to the Income Summary account.

Step 1: Transfer Revenue Account Balances Page 165

On December 31 the worksheet for Carter Consulting Services shows one revenue account, Fees Income. Page 165

Carter Consulting Services Worksheet Month Ended December 31, , ,900 18,317 Net Income It has a credit balance of $28,000. Page 165

Page 165 The Fees Income account is closed to the Income Summary account. Step 1: Close Revenue

The revenue account, Fees Income, is decreased by $28,000 to zero. The $28,000 is transferred to the temporary owner’s equity account, Income Summary. Page 166 Step 1: Close Revenue

Revenue Account Record decreases Income Summary No normal balance Page 166 Step 1: Close Revenue

Which account is debited? For what amount? Page 166 Which account is credited? For what amount? Step 1: Close Revenue

Page 166 Fees Income Closing 28,000 Balance 28,000 Income Summary Closing 28,000 Step 1: Close Revenue

The words “Closing Entries” are written in the Description column of the general journal. Page 166 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Dec. 31 Fees Income 28,000 Income Summary 28,000 Step 1: Close Revenue

Step 2: Transfer Expense Account Balances Page 166

The Income Statement section of the worksheet for Carter 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. Page 166 Step 2: Close Expenses

The five expense account balances are reduced to zero. The total, $9,683, is transferred to the temporary owner’s equity account, Income Summary. Page 167 Step 2: Close Expenses

Income SummaryExpense Accounts Record decreases Page 167 Step 2: Close Expenses No normal balance

Page 167 Which accounts are debited? For what amounts? Which accounts are credited? For what amounts? Step 2: Close Expenses

Income Summary Step 2: Close Expenses Page 167 Salaries Expense Closing 9,683Balance 28,000 Closing 5,000 Balance 5,000 Utilities ExpenseSupplies Expense Balance 600 Balance 500Closing 500 Closing 600 Depr. Expense – Equip. Rent Expense Closing 3,000 Balance 3,000 Balance 583Closing 583

Page 167 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Dec. 31 Income Summary 9, Salaries Expense 5, Utilities Expense Supplies Expense Rent Expense 3, Depreciation Exp.-Equip Step 2: Close Expenses

The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Dr. Closing 9,683 Cr. Balance 18,317 Closing 28,000 Net Income Page 167

Step 3: Transfer Net Income or Net Loss to Owner’s Equity Page 168

The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Linda Carter, Capital. The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income. Page 168 Step 3: Close Net Income to Capital

The Income Summary account is reduced to zero. The net income amount, $18,317, is transferred to the owner’s capital account. Linda Carter, Capital is increased by $18,317. Page 168 Step 3: Close Net Income to Capital

Income SummaryOwner’s Capital Record increases Page 168 Step 3: Close Net Income to Capital No normal balance

Page 168 Which account is debited? For what amount? Which account is credited? For what amount? Step 3: Close Net Income to Capital

Income Summary Page 168 Linda Carter, Capital Closing 18,317Balance 18,317 Balance 80,000 Step 3: Close Net Income to Capital Closing 18,317

Page 168 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 18, Linda Carter, Capital 18, Step 3: Close Net Income to Capital

Step 4: Transfer the Drawing Account Balance to Capital Page 169

Withdrawals appear in the statement of owner’s equity as a deduction from capital. The drawing account is closed directly to the capital account. Page 169 Step 4: Close Drawing to Capital

The drawing account balance is reduced to zero. The balance of the drawing account, $3,000, is transferred to the owner’s capital account. Page 169 Step 4: Close Drawing to Capital

Owner’s Capital Record decreases Drawing Account Record decreases Page 169 Step 4: Close Drawing to Capital

Page 169 Which account is debited? For what amount? Which accounts is credited? For what amount? Step 4: Close Drawing to Capital

Linda Carter, Capital Page 169 Linda Carter, Drawing Closing 3,000Balance 98,317 Closing 3,000Balance 3,000 Step 4: Close Drawing to Capital

Page 170 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Linda Carter, Capital 3, Linda Carter, Drawing 3, Step 4: Close Drawing to Capital

The new balance of the Linda Carter, Capital account agrees with the amount listed on the balance sheet. Page 170 Linda Carter, CapitalLinda Carter, Drawing Closing 3,000 Cr. Dr. Balance 3,000 Balance 0 Cr. Balance 80,000 Net Inc. 18,317 Balance 95,317 Dr. Drawing 3,000 Linda Carter, Capital

Summary of Closing Entries GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2004 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary 309 9, Salaries Expense 511 5, Utilities Expense Supplies Expense Rent Expense 520 3, Depr. Expense-Equip Income Summary , Linda Carter, Capital , Linda Carter, Capital 301 3, Linda Carter, Draw , STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT Page 170

“Closing” is entered in the Description column of the ledger accounts. The ending balances of the drawing, revenue, and expense accounts are zero. Page 170 Posting the Closing Entries

GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2004 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary 309 9, Salaries Expense 511 5, Utilities Expense Supplies Expense Rent Expense 520 3, Depr. Expense-Equip Income Summary , Linda Carter, Capital , Linda Carter, Capital 301 3, Linda Carter, Draw , STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT ACCOUNT Fees Income ACCOUNT NO. 401 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2004 Dec. 31 J2 21, , Dec. 31 J2 7, , Dec. 31 Closing J4 28, – 0 – Page 171

GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2004 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary 309 9, Salaries Expense 511 5, Utilities Expense Supplies Expense Rent Expense 520 3, Depr. Expense-Equip Income Summary , Linda Carter, Capital , Linda Carter, Capital 301 3, Linda Carter, Draw , STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT ACCOUNT Income Summary ACCOUNT NO. 309 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2004 Dec. 31 Closing J4 28, , Page 171

All journal entries are posted to the general ledger accounts. Page 171

REVIEWREVIEW _____________ transfer the results of operations to owner’s equity and reduce the revenue, expense, and drawing account balances to zero. The Income Summary account is classified as a(n) _________ _____________ account. The first step in the closing process is to transfer _______ account balances. revenue temporary Closing entries Complete the following sentences: owner’s equity

REVIEWREVIEW The journal entry to close the drawing account is debit ______ and credit ________. After the closing entries are posted, the Income Summary account has a(n) ____ balance. After the closing entries are posted, all _________ accounts have zero balances. temporary zero Capital Complete the following sentences: Drawing

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