1. Where are we in the Accounting Cycle? 1. Transaction Occurs (Source Document) 2. Transaction Recorded in Journal 3. Journal Entries Posted to the Ledger 4. Trial Balance Prepared 5. Worksheet Prepared & Adjusting Entries completed. 6. Financial Statements Prepared. 7. Ledger Accounts Adjusted & Closed 8. Closing Trial Balance Prepared.

2. Chapter 8.3– Closing Entries The final stage of the accounting cycle is to prepare the accounts for the next fiscal period. To do this we must understand which accounts have balances that continue from one period to the next.

3. Time Period Concept (Accounting Standard) Time period concept states that financial reporting, on net income in particular, is done in equal periods. The accounts from the income statement must be zeroed out so that they are ready for the next cycle.

4. Real Accounts & Nominal Accounts Real Accounts/Permanent Accounts – accounts that have balances that continue into the next fiscal period. Examples – Bank, Trucks, Accounts Payable Nominal Accounts/Temporary Accounts – balances that do not continue into the next fiscal period. These are all income statement accounts and the drawings account on the balance sheet. Examples – Revenue, Advertising Expense, Drawings

5. Income Summary Account Income Summary Account – a special nominal account, is used during the closing process. The account will summarize the revenue and expenses for the period. The balance of this account will represent the net income or net loss for the fiscal period. This account is used after the Balance Sheet and Income Statement have been prepared.

6. End-of-Period Procedure Step 1 – Journalize and post the adjusting entries from the worksheet. Step 2 – Close the nominal accounts to prepare them for the next fiscal period. 1. Transfer the balances of revenue and expenses to the Income Summary Account. 2. Transfer the balances of the Income Summary and Drawings account to the Capital account. Step 3 – Take-off a post-closing trial balance.

7. Step 2 in more depth: Closing Entry #1 – transfer the balance from the revenue account to the Income Summary Dec31 Shipping Revenue 40000.00 Income Summary 40000.00 To Close Income into Income Summary

8. Closing Entry #2 – transfer the balances from the expense accounts to the Income Summary Dec31 Income Summary 5000 Expense A 1250 Expense B 1250 Expense C 1250 Expense D 1250 To Close Expenses Into Income Summary

9. Closing Entry #3 – transfer the balance in the Income Summary Account to the Owner’s Capital Account Dec31 Income Summary 35000 A. Bath Capital 35000 To Close Income Summary Into Capital

10. Closing Entry #4 – transfer the balance for the Drawings account to the Capital Account. Dec31 A. Bath Capital 500 A. Bath Drawings 500 To Close Drawings into Capital

11. How? Revenue Expenses Drawings Income Summary Capital Think R.E.I.D Revenue Expenses Income Summary Drawings

12. Step 3: Post Closing Trial Balance Global Logistics Post-Closing Trial Balance December 31, 2011 Bank11600 A/R23400 A/P500 A. Bath Capital30000 35000 Notice Only Real Account Remain on the trial balance!