 At the end of each fiscal period, the company wants to clear out certain accounts, so that they have zero balances carrying forward › This is done after financial statements have been prepared (there must be totals in all accounts to do this process)  The business will clear out the Nominal Accounts and leave the Real Accounts alone

WHY DO WE CLOSE OUT ACCOUNTS? WHY DO WE CLOSE OUT ACCOUNTS? Closing various accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts.  You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts. › Easier to analyze the numbers if we know we made x amount of money in 2011 and spent y.

 REAL ACCOUNTS – balances that continue into the next fiscal period ex. Bank, trucks, accounts payable etc. ONLY  NOMINAL ACCOUNTS – have balances that do not continue into the next fiscal period ONLY Expenses, drawing and revenue

 CLOSING OUT AN ACCOUNT – means to make it have no balance. Nominal accounts are closed out at the end of the fiscal period. –  INCOME SUMMARY ACCOUNT – summarizes the revenues and expenses of the period. Represents either the net income or net loss for the fiscal period › A temporary account that aids us in the closing entry process › This will never have a balance at the end of the month, therefore is not necessary to classify as an asset, liability, expense or revenue account

HOW DO WE DO THIS? At the end of each month, there is an order in which we close out accounts 1. Close out all the accounts that have credit balances by debiting them and crediting the Income Summary account 2. Close out all the accounts that have debit balances by crediting them and debiting the Income Summary account 3. Close out the Income Summary account to the Capital account 4. Close out the Drawing account to the Capital account

 Closing Entry #1: Close out the debit account(s) to the Income Summary account Because sales, purchase discounts, purchase returns and allowances and ending inventory is a CR balance account, a DR entry is needed to close it off DateParticulars P.R. DebitCredit 1 DEC 31Sales XX 2 Purchase Discounts XX Purchase Returns and Allowances XX 3 Ending Inventory XX Income Summary XX To close income statement accounts with a credit balance, and establish ending inventory

 Closing Entry #2: Close out the debit account(s) to the Income Summary account DateParticulars P. R. DebitCredit 1 DEC 31Income Summary XX 2 Sales Discounts XX Sales Returns and Allowances XX 3 Purchases XX Freight-In XX Freight-Out XX Any Other Expenses XX Beginning Inventory XX To close income statement accounts with a debit balance, and remove the beginning inventory balance

 Closing Entry #3: Close out the Income Summary account to the Capital account If the Income Summary account has a CR balance, then a DR entry is needed to close it. (profit  capital increases) If the Income Summary account has a DR balance, then a CR entry is needed to close it. (loss  capital decreases) DateParticulars P.R. DebitCredit 1 DEC 31 Income Summary XX 1 2 K. Smith Capital XX 2

 Closing Entry #4: Close out the Drawing account to the Capital account Because Drawings is a DR balance account, a CR entry is needed to close it

HOW DO WE DO THIS? At the end of each month, there is an order in which we close out accounts 1. Close out the sales account that has a credit balance by debiting it and crediting the Income Summary account 2. Close out all the accounts that have debit balances by crediting them and debiting the Income Summary account 3. Close out the Income Summary account to the Capital account 4. Close out the Drawing account to the Capital account

 Closing Entry #1: Close out the sales account to the Income Summary account Because sales is a CR balance account, a DR entry is needed to close it off DateParticulars P.R. DebitCredit 1 DEC 31Sales XX Income Summary XX To close income statement accounts with a credit balance

 Closing Entry #2: Close out the debit account(s) to the Income Summary account DateParticulars P. R. DebitCredit 1 DEC 31Income Summary XX 2 Sales Discounts XX Sales Returns and Allowances XX 3 COGS XX Freight-Out XX Any Other Expenses XX Inventory Shortage XX To close income statement accounts with a debit balance

 Closing Entry #3: Close out the Income Summary account to the Capital account If the Income Summary account has a CR balance, then a DR entry is needed to close it. (profit  capital increases) If the Income Summary account has a DR balance, then a CR entry is needed to close it. (loss  capital decreases) DateParticulars P.R. DebitCredit 1 DEC 31 Income Summary XX 1 2 K. Smith Capital XX 2

 Closing Entry #4: Close out the Drawing account to the Capital account Because Drawings is a DR balance account, a CR entry is needed to close it

 Homework › Page 254- #15 a, #16 › Page 312 #12b, c, d