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Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Closing entries transfer the temporary account balances to the owner’s.

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Presentation on theme: "Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Closing entries transfer the temporary account balances to the owner’s."— Presentation transcript:

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2 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting 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. Glencoe AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved.

3 Glencoe Accounting 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. Glencoe AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved.

4 Glencoe Accounting Key Terms closing entries Income Summary account compound entry Preparing Closing Entries Section 10.1

5 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Completing the Accounting Cycle 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. After the closing entries have been journalized and posted, a trial balance is prepared. Preparing Closing Entries Section 10.1

6 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries

7 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting The Income Summary Account Preparing Closing Entries Section 10.1 The Income Summary Account Serves as a simple income statement in the general ledger 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.

8 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting The Income Summary Account Preparing Closing Entries Section 10.1 The Income Summary account is a temporary account that: is used only at the end of the accounting period to summarize revenue and expense balances. does not have a normal balance. has a zero balance before and after the closing. does not appear on any financial statement.

9 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing the Closing Entries Preparing Closing Entries Section 10.1 To record closing entries in the general journal: Enter Closing Entries in the Description column. Enter the last day of the accounting period. Enter the name(s) and amount(s) of the account(s) to be debited. Enter Income Summary as the name of the account to be credited and the amount to be credited.

10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Closing Entry First Closing Entry—Close Revenue to Income Summary See page 257

11 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Closing Entry Second Closing Entry—Close Expenses to Income Summary See page 258

12 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Closing Entry Second Closing Entry—Close Expenses to Income Summary See pages 258–259

13 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Closing Entry Third Closing Entry—Close Income Summary to Capital See page 259–260

14 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Preparing Closing Entries Section 10.1 Closing Entry Fourth Closing Entry—Close Withdrawals to Capital See page 261

15 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Key Term post-closing trial balance Posting Closing Entries and Preparing a Post-Closing Trial Balance Section 10.2

16 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Completing the Eighth Step in the Accounting Cycle: Posting the Closing Entries to the General Ledger Posting Closing Entries and Preparing a Post-Closing Trial Balance Section 10.2 Closing Entries Posted to the General Ledger See page 263

17 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Posting Closing Entries and Preparing a Post-Closing Trial Balance Section 10.2 Post-Closing Trial Balance The Ninth Step in the Accounting Cycle: Preparing a Post-Closing Trial Balance post-closing trial balance A list of the permanent general ledger account balances; it is prepared to prove the ledger after the closing entries are posted. See page 265

18 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 1 Calculate the balance of the Income Summary account. Credits are more than debits; therefore, $4,125 - $2,250 = $1,875 credit balance, which indicates a net income. (continued)

19 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 2 Identify the accounts affected. The accounts Income Summary and Scott Jones, Capital are affected. (continued)

20 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 3 Classify the accounts affected. Income Summary is a temporary owner’s equity account; Scott Jones, Capital is the permanent owner’s capital account. (continued)

21 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 4 Are the accounts increased or decreased? The Income Summary account is decreased by its balance, $1,875, to zero. Scott Jones, Capital is increased by $1,875. (continued)

22 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 As a result of the first two closing entries, the Income Summary account had a debit of $2,250 and a credit of $4,125. (a) What does the debit of $2,250 represent? (b) What does the credit of $4,125 represent? List the process to use to complete the third closing entry to close the balance of the Income Summary account to Scott Jones, Capital. Step 5 Apply the debit/credit rule. To reduce the Income Summary account to zero, debit Income Summary $1,875. To increase the capital account, credit Scott Jones, Capital for $1,875.

23 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 2 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.

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