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Closing entries transfer the temporary account balances to the owner’s capital account. After the closing entries are posted, a post-closing trial balance is prepared to verify that debits equal credits. Home Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Explain the purpose of the Income Summary account. 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. Home Glencoe Accounting Glencoe Accounting 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 Key Terms closing entries Income Summary account compound entry post-closing trial balance Home Glencoe Accounting

Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries Preparing Closing Entries Section 10.1 Home Glencoe Accounting

Completing the Accounting Cycle Preparing Closing Entries Section 10.1 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. After the closing entries have been journalized and posted, a post-closing trial balance is prepared. Home Glencoe Accounting

The Income Summary Account Preparing Closing Entries Section 10.1 The Income Summary Account Income Summary account The general ledger account used to summarize the revenue and expenses for the period. Serves as a simple income statement in the general ledger Used to accumulate revenue and expenses for the period Equals the net income or loss for the period Home Glencoe Accounting

The Income Summary Account Preparing Closing Entries Section 10.1 is used only at the end of the accounting period to summarize revenue and expense balances. The Income Summary account is a temporary account that: does not have a normal balance. has a zero balance before and after the closing. does not appear on any financial statement. Home Glencoe Accounting

The Income Summary Account Preparing Closing Entries Section 10.1 The Income Summary Account Seen on Chart of Accounts And Trial Balance Home Glencoe Accounting

Preparing the Closing Entries Preparing Closing Entries Section 10.1 Enter Closing Entries in the Description column. To record closing entries in the general journal: Enter the last day of the accounting period. Enter the name(s) and amount(s) of the account(s) to be debited (the Revenue accounts). Enter Income Summary as the name of the account to be credited and the amount to be credited. Home Glencoe Accounting

Preparing Closing Entries Section 10.1 Closing Entry First Closing Entry—Close Revenue to Income Summary See page 257 Home Glencoe Accounting

Preparing Closing Entries Section 10.1 Closing Entry Second Closing Entry—Close Expenses to Income Summary See pages 258–259 Home Glencoe Accounting

Preparing Closing Entries Section 10.1 Closing Entry Third Closing Entry—Close Income Summary to Capital See page 259–260 Home Glencoe Accounting

Preparing Closing Entries Section 10.1 Closing Entry Fourth Closing Entry—Close Withdrawals to Capital See page 261 Home Glencoe Accounting

Completing the Accounting Cycle Preparing Closing Entries Section 10.1 Compound entry Journal entries that include two or more debits or two or more credits Home Glencoe Accounting

Closing Entries Posted to the General Ledger Completing the Eighth Step in the Accounting Cycle: Posting the Closing Entries to the General Ledger Posting Closing Entries and Preparing a Post-Closing Trial Balance Section 10.2 Closing Entries Posted to the General Ledger Home See page 263 Glencoe Accounting

Post-Closing Trial Balance The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance Posting Closing Entries and Preparing a Post-Closing Trial Balance Section 10.2 Post-Closing Trial Balance See page 265 post-closing trial balance A list of the permanent general ledger account balances; it is prepared to prove the ledger after the closing entries are posted. Home Glencoe Accounting

Step 1 (continued) Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 1 Calculate the balance of the Income Summary account. Credits are more than debits; therefore, $4,125 - $2,250 = $1,875 credit balance, which indicates a net income. (continued) Home Glencoe Accounting

Step 2 (continued) Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 2 Identify and classify the accounts affected. The temporary account Income Summary and the permanent account Scott Jones, Capital are affected. (continued) Home Glencoe Accounting

Question Why are all of the temporary accounts reset to zero at the end of the fiscal year? All revenues increase owner’s equity, and all expenses reduce owner’s equity. These transactions are separated from capital so the business can analyze how a profit or loss was made during the year. At the end of the year, the accumulation of these revenues and expenses are transferred into the capital account. The temporary accounts are reset to zero, which allows the business to compare the revenue and expense data from one period to the next. Home Glencoe Accounting

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