1. Recording Adjusting & Closing Entries for a Service Business
Accounting
Chapter 8

2. Adjusting Entries Remember the Adjustment Column of the Work Sheet?
Adjustments must be journalized and posted
WHY?
Accounting Period Cycle
Adequate Disclosure
Matching Expenses with Revenue
Adjusting Entries are journal entries recorded to update general ledger accounts at the end of a fiscal period

3. Recording Adjusting Entries
Information for adjusting entries are found in the Adjustment columns of the Work Sheet
Which accounts are impacted?
Supplies, Prepaid Insurance, Supplies Exp., Insurance Expense
A new journal page is started for adjusting entries
The title: Adjusting Entries is written in the middle of the Account Title column of the General Journal – WHY?

4. An Adjusting Entry (page 203)
Name of Company
General Journal
Page:
n+1
Date
Account Title
Doc No.
Post. Ref
Debit
Credit
Adjusting Entries 8 31
Supplies Expense
715
Supplies

5. Posting Adjusting Entries
All journal entries must be posted
Posting to the General Ledger insures that all account balances are up to date and match the information on the company’s financial statements
Remember the steps for posting?
Don’t forget to record the account number on the general journal entry
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6. Account Classifications
Permanent Accounts collect information from one fiscal period to the next
AKA Real Accounts
Ending account balances for permanent accounts become the beginning account balances for the next fiscal period
Balance Sheet items are permanent accounts
WHY?

7. Account Classifications
Temporary Accounts accumulate information that is transferred to the owner’s capital account at the end of the fiscal period
AKA Nominal Accounts
Income Statement items are temporary accounts
WHY?
Temporary accounts begin a new fiscal period with a zero balance

8. Closing Entries
Temporary Accounts balances must be reduced to zero at the end of each fiscal period
Closing entries prepare temporary accounts for a new fiscal period
To close a temporary account, an amount equal to its balance is recorded in the amount on the opposite to its balance:
If Advertising Expense has a $100 debit balance, then a $100 credit to Advertising Expense will reduce the balance to zero

9. But Debits Must Equal Credits!!!!!
The Income Summary account is a temporary account that summarizes the closing entries associated with Revenues and Expenses
All expenses (debit normal balances) are debits to Income Summary
All revenues (credit normal balances) are credits to Income Summary
Income Summary is eventually closed to Capital
What is relationship between the Income Summary account and Net Income(Loss)?

10. Four Closing Entries
The balance of the Income Summary account is determined by whether the business earns net income or suffers a net loss
There are four closing entries for a service business (sole proprietorship):
An entry to close income statement accounts with credit balances
An entry to close income statement accounts with debit balances
An entry to record net income or loss and close Income Summary
An entry to close the owner’s drawing account

11. Closing Entry for Income Statement Accounts with Credit Balances
Which accounts are these?

12. Closing Entry for Income Statement Accounts with Debit Balances
Only one closing entry is required to close all expense accounts

13. Closing Entry to Record Net Income or Loss and Close the Income Summary Account
Income Summary is a temporary account that is closed to the Capital account – WHY?
If there is net income:
If there is net loss

14. Closing Entry for the Owner's Drawing Account
Drawing is not a revenue or expense account and cannot be closed through the Income Summary account
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15. Posting Closing Entries
Closing entries must be posted to prepare the company’s books for the next fiscal period
Accounts that are closed have a zero balance at the end of the fiscal period
Lines are drawn in both the Balance Debit and Balance Credit columns of closed temporary accounts to verify that the account has been closed
Delivery Exp
Acct No. 510
Balance
Date
Item
Post Ref
Debit
Credit 10 27 G1
335.00 11 30
Gn+1

16. Preparing a Post Closing Trial Balance
A Post Closing Trial Balance is a trial balance prepared after the closing entries are posted
Verifies that debits equal credits in the general ledger
Only general ledger accounts with balances are included on a post-closing trial balance
Only balance sheet items – WHY?
A Post-Closing Trial Balance is included on page 216
It follows a similar format to the Trial Balance prepared on the Work Sheet

17. CONCEPT: Accounting Cycle
The series of accounting activities included in recording financial information for a fiscal period
Since it is a cycle, step 1 begins again after step 8

18. Steps in the Accounting Cycle
Source documents are analyzed
Transactions are recorded in the General Journal
Journal Entries are posted to the General Ledger
A Work Sheet is prepared from the General Ledger
Financial statements are prepared from the Work Sheet
Adjusting and closing entries are journalized from the Work Sheet
Adjusting an closing entries are posted to the General Ledger
A Post-Closing Trial Balance of the General Ledger is preparedWT xls