Closing Entries Chapter 8.3

We’re almost done, let’s finish it up! Post the Adjusting & Closing Entries to the Ledger Journalize the Adjusting &Closing Entries Prepare the Post-Closing Trial Balance Step 7 Step 8 Step 9

Which accounts will we need in the next financial period? These accounts are not closed. “Real” or Permanent Assets Liabilities Capital (OE)

Which accounts will not apply to the next financial period? Close these accounts “Nominal” or Temporary Revenue Expenses Drawings Bring balance to zero!!

Why are Income Statement accounts not required for next fiscal period? Matching Principle: states Revenue & Expenses must be recorded in same fiscal period to fairly calculate Net income/ loss.

Why do we Prepare the closing Entries? To bring nominal (“RED”) accounts to zero To update Capital

Complete Accounting Cycle Post-closing Trial Balance Chp. 9.3 (9)_____________________________ (1) Transactions occur, gather source documents. Chp. 3 & 6 Journalize & Post adjusting and closing (8)________________________________ ____________________ Entries Chp. 9.3, 9.4 (2) Accounting entries recorded in the journal. Chp. 6 (7) Adjusting entries journalized and posted. Chp. 9.2, 9.5 -supplies -insurance -late bills -depreciation (3) Journal entries posted to the ledger accounts (4) Ledger balanced by means of a trial balance (DR= CR Chp.4) (6) Income statement (chp 5) and balance sheet (chp.2,8) prepared. (5) Work sheet prepared

9.4 Journalizing & Posting the Closing Entries 1. The information to prepare the closing entries comes from the worksheet

2) 4 Steps of Closing Entries: 1. Closing Entry No. 1 Transfers the balances in the REVENUE account(s) (Income Statement) to a new nominal account called Income Summary Since R=CR, DR entries are needed to close them out Therefore: Revenue DR Income Summary CR  

2. Closing Entry No. 2 Closes EXPENSES to Income Summary Since E=DR, CR entries are needed to close them out Therefore: Income Summary DR Expense CR  

3. Closing Entry No. 3 Closes Income Summary to CAPITAL if Income Summary account has a CR balance, DR entry is needed to close it Therefore: Income Summary DR Owner, Capital CR  

3. Closing Entry No. 3 cont. If Income Summary account has a DR balance, CR entry is needed to close it Therefore: Owner, Capital DR Income Summary CR

4. Closing Entry No. 4 Closes DRAWINGS to CAPITAL Since D=DR, CR entries are needed to close them out Therefore: Owner, Capital DR Owner, Drawings CR

Let’s Try It! Complete Exercise #1, 2, 3, 4 p. 298-301 (t), p. 236-241 (w)

Worksheet Pilot Plumbing Month Ended Dec. 31, 2012   Accounts Trial Balance Income Statement Balance Sheet Dr. Cr. Bank 12000.00 A/R - Carmen's Restaurants 1200.00 A/R - Willow Apartments 1800.00 Plumbing Supplies 950.00 Plumbing Equipment 3050.00 Van 16000.00 Bank Loan 4000.00 A/p - Hudson's Plumbing 600.00 L. Wallace, Capital 26450.00 L. Wallace, Drawings 150.00 Plumbing Revenue 4500.00 Advertising Expense 100.00 Bank Charges Expense 20.00 General Expenses 80.00 Telephone Expense 50.00 Van Repairs 35550.00 400.00 4,500.00 35,150.00 31,050.00 Net Income 4,100.00