1. Chapter 10 Closing Entries
Closing the period out
Chapter 10 Closing Entries

2. Main Idea
Closing entries transfer the temporary account balances to the owner’s capital account. After the closing entries are posted, a post-closing trial balance is prepared to verify that debits equal credits.

3. Objectives
Explain why it is necessary to update accounts through closing entries.
Explain the purpose of the Income Summary account.
Explain the relationship between the Income Summary Account and the capital account.
Analyze and journalize the closing entries.
Post the closing entries to the general ledger.
Prepare a post-closing trial balance

4. Vocabulary Temporary Accounts Permanent Accounts
Accounts used to collect information that will be transferred to a permanent capital (permanent) account.
Permanent Accounts
Accounts that are continuous from one accounting period to the next; balances are carried forward to the next period.

5. The permanent account to which balances are transferred depend upon the type of business. In case of a company, retained earnings account, and in case of a firm or a sole proprietorship, owner's capital account receives the balances of temporary accounts.
Income summary account is a temporary account which facilitates the closing process.

6. Vocabulary Closing entries
Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account.

7. Vocabulary The Income Summary Account Income Summary account
Used to accumulate revenue and expenses for the period
Equals the net income or loss for the period
Income Summary account
The general ledger account used to summarize the revenue and expenses for the period.
The Income Summary account is a temporary account
has a zero balance before and after the closing.
does not appear on any financial statement.

8. vocabulary Closing entries
Are journal entries made at the end of an accounting period which transfer the balances of temporary accounts to permanent accounts. Closing entries are based on the account balances in an adjusted trial balance.
Temporary accounts include:
Revenue, Income and Gain Accounts
Expense and Loss Accounts
Dividend, Drawings or Withdrawals Accounts
Income Summary Account

9. Closing entries Closing Entry
First Closing Entry—Close Revenue to Income Summary

10. Closing entries Closing Entry
Second Closing Entry—Close Expenses to Income Summary

11. Closing entries Closing Entry
Second Closing Entry—Close Expenses to Income Summary

12. Closing entries Closing Entry
Third Closing Entry—Close Income Summary to Capital

13. Reasons for the work
Why are all of the temporary accounts reset to zero at the end of the fiscal year?
All revenues increase owner’s equity, and all expenses reduce owner’s equity.
These transactions are separated from capital so the business can analyze how a profit or loss was made during the year.
At the end of the year, the accumulation of these revenues and expenses are transferred into the capital account.
The temporary accounts are reset to zero, which allows the business to compare the revenue and expense data from one period to the next.

14. Example
The following example shows the closing entries based on the adjusted trial balance of Company A.
Note
Date
Account
Debit
Credit 1
Jan 31
Service Revenue
85,600
Income Summary 2
77,364
Wages Expense
38,200
Supplies Expense
18,480
Rent Expense
12,000
Miscellaneous Expense
3,470
Electricity Expense
2,470
Telephone Expense
1,494
Depreciation Expense
1,100
Interest Expense
150 3
8,236
Retained Earnings 4
5,000
Dividend