2. Preparing Closing Entries and a Post-Closing Trial Balance
Closing the Books
Preparing Closing Entries and a Post-Closing Trial Balance

3. Closing Entries Concept
The final stage of the accounting cycle is to prepare the accounts for the next fiscal period
To do this, you must understand which accounts have balances that continue from one period to the next and which do not

4. Permanent vs. Temporary Accounts
Permanent accounts have balances that continue into the next fiscal period
e.g. Asset accounts, Liability accounts, and Capital
Temporary accounts have balances that do not continue into the next fiscal period (all nominal accounts begin a fiscal period with a zero balance)
e.g. Income Statement accounts (Revenues and Expenses), Income Summary, and Drawings

5. Closing the Books
By closing the books, you are updating the Owner’s Equity (updating the Capital account)
To update the Owner’s Equity, Net Income must be added to Capital or Net Loss must be subtracted from Capital
In addition, Drawings must be subtracted from Capital

6. Introducing a New Account
Income Summary
Revenue and Expense accounts are closed by transferring their balances to an account called Income Summary
When the Revenue and Expense account balances have been transferred to Income Summary, the balance of the Income Summary account should equal the Net Income or Net Loss amount

7. Steps in Closing the Books
Close Revenue accounts into the Income Summary account
GENERAL JOURNAL
Page
DATE
PARTICULARS PR
DEBIT
CREDIT
20--
Dec. 31
Sales
Income Summary
To close the revenue account

8. Close Expense accounts into the Income Summary account
GENERAL JOURNAL
Page
DATE
PARTICULARS PR
DEBIT
CREDIT
20--
Dec. 31
Income Summary
General Expense
800.00
Rent Expense
700.00
To close the expense accounts

9. Close the Income Summary account into the Capital account
GENERAL JOURNAL
Page
DATE
PARTICULARS PR
DEBIT
CREDIT
20--
Dec. 31
Income Summary
500.00
J. Pat, Capital
To close the income summary account and transfer
the net income into the capital account

10. Close the Drawings account into the Capital account
GENERAL JOURNAL
Page
DATE
PARTICULARS PR
DEBIT
CREDIT
20--
Dec. 31
J. Pat, Capital
300.00
J. Pat, Drawings
To close the Drawings account

11. Post-Closing Trial Balance
The Post-Closing Trial Balance is prepared after the closing entries have been posted to the General Ledger
This means that all Expense accounts, Revenue accounts, and Drawings will not be on the Post-Closing Trial Balance

12. Post-Closing Trial Balance Example
J. Pat’s Electical
Post-Closing Trial Balance
December 31, 20--
Cash
100 $
Supplies
110
Equipment
120
Accounts Payable
200 $
Bank Loan
210
J. Jones, Capital
300
Totals $

13. ACCOUNTING CYCLE Accounting Cycle Post-Closing Trial Balance
Business Transactions
New Accounting Period Begins
Proof
Journalizing
Ledger
Journal
Closing Entries and Adjustments are Posted
Posting
Financial Statements
Ledger
Financial Statements Prepared
Journal
Work Sheet, Including Trial Balance Prepared
Closing Entries and Adjustments Journalized
Work Sheet