COMPLETING THE ACCOUNTING CYCLE FOR A SOLE PROPRIETORSHIP Chapter 10

Preparing Closing Entries  Closing Entries – Journal entries made to close, or reduce to zero, the balances in temporary accounts  Transfers the net income (loss) to the capital account  Post Closing Trial Balance  Prepared after (post) closing entries

Closing Entries  Temporary Accounts  Revenue, expense, withdrawals  What is wrong with the capital account?  Ledger balance vs. Balance Sheet  Includes net income (loss) and withdrawals  Compound Entry – A journal entry with two or more debits or two or more credits

Income Summary Account  Income Summary Account – Used to accumulate and summarize revenue and expenses for the period  Acts like a simple income statement within the ledger  Represents increases and decreases to capital  Used only at the end of the period  No normal balance  Balance is zero before and after closing process  Does not appear on any financial statement

Preparing Closing Entries 1. Close all revenue accounts Debit Revenues; Credit Income Summary 2. Close all expense accounts Debit Income Summary; Credit Expenses 3. Close Income Summary Debit Income Summary; Credit Capital = Net Income Debit Capital; Credit Income Summary = Net Loss 4. Close Withdrawals Debit Capital; Credit Withdrawals

Preparing Closing Entries  SEND  Send net income and withdrawals to the capital account  S ales (revenue)  E xpenses  N et Income or loss (Income Summary)  D rawings (withdrawals)

Posting Closing Entries  Just like any other journal entry  Write Closing Entry in Description field  All temporary balances finish with zero

Preparing a Post-Closing Trial Balance  Post-closing trial balance – Prepared to make sure total debits equal total credits after closing  Includes only permanent accounts