The Accounting Cycle: Step 8 (part 1) Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Types of Accounts Temporary Accounts Accounts that accumulate information during an accounting period Examples are Revenue, Expense and Dividends accounts, and Income Summary Permanent Accounts Accounts that accumulate information across accounting periods Examples are Assets, Liabilities and Equity accounts

The Closing Process Step 1: Close Credit balances in Revenue Accounts to Income Summary Step 2: Close Debit balances in Expense Accounts to Income Summary Step 3: Close Income Summary to Retained Earnings Step 4: Close Distributions (Dividends) to Retained Earnings

The Closing Process - Continued The Closing Process makes what we see reported in the Statement of Retained Earnings happen (i.e, Net Income moves from Income Statement to Retained Earnings Begin. Retained Earnings Plus: Net Income Less: Distributions Equals: Ending Retained Earnings

Example: Closing with Profit

Closing with Profit - Continued revenue rent expense   beg. 10,000 2,000 c1. c2. - wages expense income summary 6,000 8,000 c3. retained earnings dividends 5,000 1,000 c4. Example with Profit: revenue 10,000 rent expense 2,000 wages expense 6,000 total expenses 8,000 net income begin retained earnings 5,000 plus: net income less: dividends 1,000 equals: end retained earnings

Example: Closing with a Loss

Closing with a Loss - Continued revenue rent expense   beg. 10,000 4,000 c1. c2. - wages expense income summary 8,000 12,000 c3. 2,000 retained earnings dividends 5,000 1,000 c4. Example with Loss: revenue 10,000 rent expense 4,000 wages expense 8,000 total expenses 12,000 net income (2,000) begin retained earnings 5,000 plus: net income less: dividends 1,000 equals: end retained earnings 2,000

Retained Earnings Statements Example with Profit: Example with Loss: revenue 10,000 rent expense 2,000 4,000 wages expense 6,000 8,000 total expenses 12,000 net income (2,000) begin retained earnings 5,000 plus: net income less: dividends 1,000 equals: end retained earnings

Step 8 (part 1) Conclusion Next time, we will take what we learned here about the closing process and apply it to the financial statements we created in Step 7. We will create the closing entries and post them to our t-accounts.