Presentation on theme: "Completing the Accounting Cycle for Sole Proprietorship"— Presentation transcript:
1 Completing the Accounting Cycle for Sole Proprietorship Chapter 10
2 The Accounting Cycle Steps in the Accounting Cycle Collect and verify source documentsAnalyze each transactionJournalize each transactionPost to the ledgerPrepare a trial balancePrepare a worksheetPrepare financial statements
3 Completing the Accounting Cycle What are the last two steps in the accounting cycle?Journalize and post closing entriesPrepare a post-closing trial balance
4 Preparing 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.
5 Starting the 8th Step What is the purpose of closing entries? The closing process updates accounts through closing entries and brings the balance of the general ledger capital account up-to-date.
6 Income Summary Account Used to accumulate and summarize the revenue and expenses for the period.Expense (debit) balances are transferred to debit side of the Income Summary accountRevenue (credit) balances are transferred to the credit side of the Income Summary accountThe balance equals the net income or net loss for the fiscal periodPart of the Owner’s Equity section of the general ledgerTemporary accountDoes not have a normal balance, meaning it does not have an increase or decrease sideDoes not appear on any financial statementBalance before and after the closing process is zero
7 Preparing Closing Entries How do you journalize closing entries?Transfer the balances of all revenue accounts to the credit side of the Income Summary account.Transfer all expense account balances to the debit side of the Income Summary account.Transfer the balance of the Income Summary account to the capital account (net income to the credit side; net loss to the debit side).Transfer the balance of the withdrawals account to the debit side of the capital account.
8 Journalize Closing Entries Closing Revenue to Income SummaryEnter Closing Entries in the center of the Description columnEnter the date (the last day of the accounting period).Enter the name(s) of the account(s) to be debited and the debit amount(s).Enter the name of the account, Income Summary, and the amount to be credited.
10 Journalizing Closing Entries Closing Expenses to Income SummaryNot necessary to use a separate closing entry for each expense account.Use a compound entryJournal entry with two or more debits or two more credits.Saves both space and posting time
12 Journalize Closing Entries Closing Income Summary to CapitalThe third closing entry transfers the balance of the Income Summary account to the capital accountIncome Summary has a credit balance of $1,150 (net income) in the example belowClosing entry for expenses $1500Closing entry for revenue $2650Income SummaryBalance $1,150
13 Journalize Closing Entries Closing Income Summary to Capital (cont’d)Income SummaryDebitCreditClosing 1150BalanceCapital__+Balance 25,400Closing 1,150
14 Journalize Closing Entries After the third closing entry has been posted, the Income Summary account appears in T-account form as follows:Closing entry for expenses $1,500Closing entry for revenue $2650Income SummaryClosing balance to owner’scapital account $1,150
15 Journalize Closing Entries If there is a net loss in the business then the Income Summary account has a debit balanceIn that case the third closing entry debits the capital account and credits Income Summary for the amount of the net loss.
18 Completing the 8th StepWhat is special about posting the closing entries?The posting procedure is the same as for any other general journal entry, with one exception. The words Closing Entries are written in the Description column of the general ledger account.
19 The 9th Step in the Accounting Cycle Preparing a Post-Closing Trial BalanceWhy do we need a post-closing trial balance?It is prepared to make sure total debits equal total credits after the closing entries are posted.Only accounts with balances are listed on the post-closing trial balance.After the closing process – only permanent accounts have balancesTemporary accounts have zero balances so they are not listed