STUDY OBJECTIVES After studying this chapter, you should understand: The Closing Process The closing process The post-closing trial balance The classified balance sheet

Closing entries transfer net income/loss and dividends to retained earnings. Journalizing and posting closing entries is a required step in the accounting cycle A temporary account, Income Summary, is used in closing revenue and expense accounts. THE CLOSING PROCESS

TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed All revenue accounts All asset accounts All expense accounts All liability accounts Dividends Equity accounts TEMPORARY VS. PERMANENT ACCOUNTS

12 1 Debit each revenue account for its balance, and credit Income Summary for total revenues. 2 Debit Income Summary for total expenses, and credit each expense account for its balance. 1 Debit each revenue account for its balance, and credit Income Summary for total revenues. 2 Debit Income Summary for total expenses, and credit each expense account for its balance. (INDIVIDUAL) EXPENSES CLOSING PROCESS CORPORATION

3 3 Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss). RETAINED EARNINGS CLOSING PROCESS CORPORATION

4 4 Debit retained earnings for the balance in the dividends account and credit dividends for the same amount. RETAINED EARNINGS CLOSING PROCESS CORPORATION

SERVICE REVENUENo. 350 DateExplanationDebitCreditBalance 2006 Oct. 3110,600 –0– INCOME SUMMARYNo. 400 DateExplanationDebitCreditBalance 2006 Oct. 3110,600 JOURNALIZING CLOSING ENTRIES

INCOME SUMMARYNo. 350 DateExplanationDebitCreditBalance 2006 Oct. 3110, ,860 7,740 5,200 1, (To close expense accounts) 7,740 JOURNALIZING CLOSING ENTRIES GENERAL JOURNAL

INCOME SUMMARY No. 350 Date Explanation Debit Credit Balance 2006 Oct , ,740 2, ,860 –0– GENERAL JOURNAL Date Account Titles and Explanation Ref. Debit Credit 2006 (3) Oct. 31 Income Summary 350 Retained Earnings 301 (To close net income to retained earnings) 2,860 JOURNALIZING CLOSING ENTRIES

) 500 JOURNALIZING CLOSING ENTRIES GENERAL JOURNAL 2860

REVIEW QUESTION CLOSING ENTRIES Which of the following accounts will have a zero balance after the closing process? 1.Unearned Revenue 2.Advertising Supplies 3.Prepaid Insurance 4.Rent Expense Which of the following accounts will have a zero balance after the closing process? 1.Unearned Revenue 2.Advertising Supplies 3.Prepaid Insurance 4.Rent Expense ANSWER Rent Expense is a temporary account. All temporary accounts are closed and thus have a zero balance after the closing process.

AFTER CLOSING ENTRIES ARE POSTED 1.All temporary accounts have zero balances. 2.The balance in retained earnings represents the accumulated undistributed earnings at the end of the accounting period. POST-CLOSING ENTRIES The income summary account is used only in the closing process. No entries are journalized or posted to this account during the year. The permanent accounts are not closed.

Depreciation Expense711 40(2)40 Interest Expense905 50(2)50 Insurance Expense722 50(2)50 Rent Expense (2)900 Advertising Supplies Expense 631 1,500(2)1, Retained Earnings 301 (4) (3) 2, Service Revenue400 (1)10,60010, , POSTING CLOSING ENTRIES

Prepared after all closing entries have been journalized and posted. Purpose is to prove the equality of the permanent account balances. STUDY OBJECTIVE 3 POST-CLOSING TRIAL BALANCE

PIONEER ADVERTISING AGENCY Post-Closing Trial Balance October 31, 2006 Debit Credit Cash 15,200 Accounts Receivable 200 Advertising Supplies 1,000 Prepaid Insurance 550 Office Equipment 5,000 Accumulated Depreciation — Office Equipment 40 Notes Payable 5,000 Accounts Payable 2,500 Unearned Revenue 800 Salaries Payable 1,200 Interest Payable 50 Common stock Retained Earnings ,360 21,950 The post-closing trial balance is prepared from the permanent accounts in the ledger. The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed. $ 21,950 POST-CLOSING TRIAL BALANCE

STEPS IN THE ACCOUNTING CYCLE 1Analyze transactions 2Journalize transactions 3Post to ledger 4Prepare trial balance 5Journalize & post adjustments 6Prepare adjusted trial balance 7Prepare financial statements 8Journalize & post closing entries 9Prepare post-closing trial balance

CLASSIFIED BALANCE SHEET A classified balance sheet usually contains the following elements Intangible assets Stockholders’ equityProperty, plant & equipment Long-term liabilitiesLong-term investments Current liabilitiesCurrent assets LIABILITIES & STOCKHOLDERS EQUITY ASSETS

CURRENT ASSETS Current assets are cash and other resources expected to be realized in cash, sold, or consumed within one year of the balance sheet date or the company’s operating cycle, whichever is longer. Listed on B/S in order of liquidity. Examples: Cash Accounts Receivable Inventory

LONG-TERM INVESTMENTS Long-term investments are resources that can be converted to cash. Conversion is not expected within one year or the operating cycle, whichever is longer. Examples: 10 shares XYZ stock Bond Investments Long-term receivables Land held for resale

PROPERTY, PLANT & EQUIPMENT Tangible resources of a relatively permanent nature used in the business and not intended for sale are classified as property, plant, and equipment. Examples: EquipmentMachineryBuildings

INTANGIBLE ASSETS Intangible assets are non-current resources lacking physical substance. Examples: Patents Trademarks Copyrights

CURRENT LIABILITIES Obligations expected to be paid from existing current assets, or by creation of another current liability, within one year/operating cycle, whichever is longer. Examples: Accounts Payable Interest Payable Wages Payable

LONG-TERM LIABILITIES Obligations expected to be paid after one year. Examples: Long term notes payable Bonds payable Mortgages payable Lease obligations

The content of the owner’s equity section varies with the form of business organization. STOCKHOLDERS’ EQUITY Owners Capital Partner 2 Capital Partner 1 Capital Capital Stock Retained Earnings Proprietorship CorporationPartnership

A classified balance sheet helps the financial statement user determine 1 the availability of assets to meet debts as they come due and 2 the claims of short- and long-term creditors on total assets. $ 15, , ,950 $5, ,960 $21,910 CLASSIFED BALANCE SHEET

The balance sheet is most often presented in the report form, with the assets above liabilities and owner’s equity. CLASSIFED BALANCE SHEET