1 The Accounting Cycle Chapter 3 1.Analyze source documents and record business transactions in a journal 2.Post journal entries to the ledger accounts 3.Prepare a trial balance Chapter 4 4.Gather adjustment data and record adjustments in the work sheet 5.Complete the work sheet 6.Create financial reports from data in work sheet 7.Journalize and post the adjusting entries Chapter 5 8.Closing Entries Post Closing Trial Balance

2 Closing Entries Entries made at the end of a fiscal period to close off the REV, EXP,and DRAWing accounts—that is, to make the balances of the temporary-equity accounts equal to ZERO Also called TEMPORARY ACCOUNTS (NOMINAL)

3 Purpose of Closing Entries To close out balances that relate to one fiscal period and start fresh in the next period To zero out the following ledger accounts: –DEBIT – REV –CREDIT- EXPENSES & DRAW To update the owner’s Capital account

4 Nominal or Temporary-Equity Accounts Accounts that apply to only 1 fiscal period and that are to be closed at the end of that fiscal period, such as REV, EXP, Income Summary, and DRAW, accounts May also be described as all accounts except ASSETS, LIABILITIES and the CAPITAL account

5 Real or Permanent Accounts The accounts that remain open (assets, liabilities, and the Capital account in owner’s equity) and that have balances that will be CARRIED FORWARD to the next fiscal period

6 Let’s Look at Closing with T Accounts = DRCRDRCRDRCR DRCRDRCR DRCRDRCR DrawingCapital AssetsLiabilitiesOwner's Equity ExpensesRevenues Real Accounts “Permanent Accounts” Nominal Accounts “Temporary Equity Accounts” Closed & Put Here

7 After Closing = DRCRDRCRDRCR DRCR AssetsLiabilitiesOwner's Equity Capital Revenues, Expenses, Drawings Closed & Put Here

8 Closing Using T-Accounts Closing Procedure 1.Close REV account(s) into Income Summary 2.Close EXPENSES accounts into Income Summary 3.Close INCOME SUMMARY into Capital 4.Close DRAWING FROM CAPITAL

9 Income Summary NO NORMAL BAL, 300’s An account brought into existence to have a DEBIT and CREDIT for each closing entry –It does not have plus or minus sign, just debits and credits Revenue and expense account balances are transferred to this account to allow calculation of NET INCOME OR NET LOSS Serves as the in-between account, or “HOLDING ACCOUNT” before net income or net loss transferred to the CAPITAL account

10 Step 1: Rev > INCOME Sum

11 Step 2: Exp > IS

12 Step 3: IS > Capital (net inc)

13 Step 4: Drawing > capital

14 Closing Entries Entries into the journal made at the end of a fiscal period to close off the revenue, expense, and Drawing accounts—that is, to make the balances of the temporary accounts accounts equal to zero

15 Journalize the Closing Entries Close the ________ accounts into _________ ________________ Close the ____________ accounts into ___________ _____________ Close the Income Summary account into the Capital account (transferring ______ _________ or _____ ______ to the Capital account) Close the ___________ account into Capital Be sure to label the entries “Closing Entries” before you begin to enter them into the journal

16 Journalize Steps 1–4

17 Post the Closing Entries ____________, ______________, and ____________ accounts should end up with zero balances –Draw a line through both the debit and credit balance columns to indicate that they have been zeroed and closed Capital will more than likely have some net change for the period Be sure to write “Closing” in the Item column of the ledger account

18 Post-Closing Trial Balance The listing of the ACCOUNT BALANCES of the real accounts at the end of the fiscal period The STARTING BALANCE for the next period

19 Post-Closing Trial Balance Accountant uses the post-closing trial balance to make sure that DR = CR –Have you done all the work correctly?

20 Errors: Post-Closing Trial Balance If DR ≠ CR –Columns __________ correctly? –Is the Correct amounts transferred from the ___________________? –Adjusting entries ___________ correctly? New balances correct? –_________________posted correctly? New balances correct? –All _________________closed?