LESSON 8-2 Recording Closing Entries

PERMANENT ACCOUNTS Permanent Accounts: accounts used to accumulate information from one fiscal period to the next Also called Real Accounts Includes assets, liabilities, and owner’s capital Ending balances of permanent accounts for one fiscal period are the beginning account balances for the next All accounts on the Balance Sheet (except drawing)

TEMPORARY ACCOUNTS Temporary accounts: accounts used to accumulate information until it is transferred to the owner’s capital account Also known as nominal accounts Includes all Income Statement Accounts (Sales & Expenses) Sales, expenses, and drawing Includes Income summary Temp accounts begin a new fiscal period with a Zero Balance Temp accts. show changes in owner’s capital for a single fiscal period Balances transferred to owner’s capital at end of fiscal period

Is Cash a permanent or a temporary account? Permanent Is Account Payables a permanent or temporary account? Permanent Is Sales a permanent or a temporary account Temporary Is drawing a permanent or temporary account? Temporary

CLOSING ENTRIES Closing Entries: journal entries used to prepare temporary accounts for a new fiscal period (to zero) Temporary accounts reduced to zero at end of fiscal period Must start new fiscal period with zero to separate net income or net loss for each fiscal period

How to Get Temp Accounts to Zero? Two Steps Journalize an entry to get account to zero Post the entry to Ledger to get balance to zero If Sales has a credit balance of $3800, how would you get it to zero? Enter a debit transaction equal to its balance Debit of $3800 In Dual entry, if you have a debit you must have a credit…. What account do we credit????? Account:Sales Account No.410 DateAccount Title Post Ref DebitCredit Balance DebitCredit Nov

INCOME SUMMARY ACCOUNT Income Summary: temporary account used to summarize closing entries Does not have a normal balance side Like a holding area before gets to final destination Balance of this account is determined by amounts posted Income Summary also closed at the end of the month as it too is a temporary account

FOUR TYPE OF CLOSEING ENTRIES Sales account: Debit sales account Credit Income Summary Expense accounts: Credit expense account Debit Income summary Income Summary: Either a Debit or Credit to the income summary Either a debit or credit to Capital account Drawing Account: Credit Drawing Account Debit Capital Account

COMPLETING CLOSING ENTRIES Step One: Enter section for closing entries in Journal Recorded on Next Line below the adjusting entries Center Title “Closing Entries” on next line Enter date of Closing entries - No source document used for journal entries – can enter Check mark in “doc. No.” Journal General Sales Credit Cash DateAccount Title Doc No. Post. Ref DebitCreditDebitCredit Adjusting Entries Nov 30 Supplies Expense Supplies Nov 30Insurance Expense Prepaid Insurance 15000

CLOSING REVENUE ACCOUNTS page 208 How do you close Sales with $3800? Debit Sales $3800 Credit Income Summary $3800 Journal General DateAccount Title Doc No. Post. Ref DebitCredit Adjusting Entries Nov 30 Supplies Expense Supplies Nov 30Insurance Expense Prepaid Insurance Closing Entries

CLOSING EXPENSE ACCOUNTS page 208 How do you close Expenses? Debit Income Summary Credit Expense accounts Enter in Journal List each exp. account Sum all expenses and enter total amount as Income summary Journal General DateAccount Title Doc No. Post. Ref DebitCredit Adjusting Entries Nov 30 Supplies Expense Supplies Nov 30Insurance Expense Prepaid Insurance Closing Entries

CLOSING INCOME SUMMARY ACCOUNT page 208 Close Income Summary? If Net Income Debit Income Summary Credit Capital Account Don Arnodt, Cap. If Net Loss: Credit Income Summary Debit Capital Account Journal General DateAccount Title Doc No. Post. Ref DebitCredit Adjusting Entries Nov 30 Supplies Expense Supplies Nov 30Insurance Expense Prepaid Insurance Closing Entries Nov 30Sales Income Summary Nov 30Income Summary Advertising Exp Insurance Exp Miscell. Exp.5000 Rent Exp Supplies Exp Utilities Exp.39000

CLOSING DRAWING ACCOUNT page 208 Journal General DateAccount Title Doc No. Post. Ref DebitCredit Adjusting Entries Nov 30 Supplies Expense Supplies Nov 30Insurance Expense Prepaid Insurance Closing Entries Nov 30Sales Income Summary Nov 30Income Summary Advertising Exp Insurance Exp Miscell. Exp Rent Exp Supplies Exp Utilities Exp Nov 30Income Summary Don Arnodt, Cap Close the Drawing Account Credit the Drawing Account Debit the Capital Account Don Arnodt, Cap.

CLOSING DRAWING ACCOUNT page 208 Journal General DateAccount Title Doc No. Post. Ref DebitCredit Adjusting Entries Nov 31 Supplies Expense Supplies Nov 31Insurance Expense Prepaid Insurance Closing Entries Nov 31Sales Income Summary Nov 31Income Summary Advertising Exp Insurance Exp Miscellaneous Exp.5000 Rent Exp Supplies Exp Utilities Exp Nov 31Income Summary Don Arnodt, Cap Nov 31Don Arnodt, Capital Don Arnodt, Draw Close the Drawing Account Credit the Drawing Account Debit the Capital Account Don Arnodt, Cap.

TERMS REVIEW permanent accounts temporary accounts closing entries page 212