Presentation on theme: "RECORDING ADJUSTING AND CLOSING ENTRIES FOR A SERVICE BUSINESS"— Presentation transcript:
1 RECORDING ADJUSTING AND CLOSING ENTRIES FOR A SERVICE BUSINESS Chapter 9RECORDING ADJUSTING AND CLOSING ENTRIES FOR A SERVICE BUSINESS
2 Objectives:Define accounting terms related to adjusting and closing entries for a service business organized as a proprietorshipIdentify accounting concepts and practices related to adjusting and closing entries for a business organized as a proprietorshipRecord adjusting and closing entries for a service business organized as a proprietorshipPrepare a post-closing trial balance for a service business organized as a proprietorship
3 Adjusting EntriesAdjustments from the work sheet MUST BE recorded in the general journal then POSTED to ledgerNo source document is prepared so “Adjusting Entries” is written above the entries in the journal to identify the entries.They are recorded on the next general journal page following the page on which last daily transactions for month are recordedEncore records 2 adjusting entries to:bring Supplies account up to datebring Prepaid Insurance account up to date
4 ADJUSTING ENTRY FOR SUPPLIES Lesson 9-1 (GJ)ADJUSTING ENTRY FOR SUPPLIES31241. Write the heading.2. Write the date.3. Record the debit.4. Record the credit.
5 ADJUSTING ENTRY FOR PREPAID INSURANCE 2131. Write the date.2. Record the debit.3. Record the credit.
6 TERMS REVIEW adjusting entries TO DO: Work Together, pg 196 On your own, pg 196
8 Two Classifications of Accounts Permanent – (Real)Used to accumulate information from period to periodAsset, Liability, Owner’s EquityEnding Account balances are Beginning balances for next periodTemporary-(Nominal)Closed at the end of the fiscal period.Revenue, Expense, Drawing, Income SummaryThese accounts show changes in Owner’s Equity in ONE single periodSummarized and transferred into capital accountBegin each fiscal period with 0 balance
9 Reasons for Closing Temporary Accounts: CLOSING ENTRY: journal entries used to prepare temporary account for a new fiscal periodWHY?????????We are starting a new month (fiscal period) so we must close the accounts and start fresh (ZERO balances) with the temporary accounts.To match expenses with revenue for each period.To be able to make comparisons of income and expenses from one period to another.Makes it easier to figure net income or loss for a period.
10 Income summary is the temporary account used to close accounts. Classification - Owner’s EquityUsed to summarize the closing entries.To close temporary accounts amount equal to balance is recorded on opposite side in Income SummaryWhen temp. account is closed DR = CR!!!!!DOES NOT HAVE A NORMAL BALANCE
11 Income Summary No Normal Balance If the balance of the account is a CREDIT after closing revenueand expense accounts there is a NET INCOME.If the balance is a DEBIT, there is a NET LOSS.Income SummaryDebit SideTotal ExpensesDebit Balance = Net LossCredit SideTotal RevenueCredit Balance = Net IncomeNo Normal Balance
12 Four Closing EntriesClose revenue accounts to Income Summary.Close expense accounts to Income Summary.Close Income Summary account to Capital account (Balance must be income or loss on work sheet).Close drawing account to capital account NOT a revenue or expenseThere are no source documents for the closing entries.To indicate closing entries in the journal, the words “closing entries” is centered in the account title column of the general journal.
13 CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE Lesson 9-1 (GJ)CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE(Debit to close)31241. Write the heading.2. Write the date.3. Record the debit.4. Record the credit.
14 CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES 1. Write the date.2. Income Summary.(Credit to close)33. Record the credits.4. Record the TOTAL debit.421
15 *If business incurs a net loss opposite entry CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT(Capital: credit to record net income)(Income Summary: debit to close)213*If business incurs a net loss opposite entry*This entry CLOSES income summary1. Write the date.2. Record the debit.3. Record the credit.
16 CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT (Capital: credit to close)2131. Write the date.2. Record the debit.3. Record the credit.
17 TERMS REVIEW permanent accounts temporary accounts closing entries ************************************TO DO:Work Together pg. 203On Your Own pg. 203Application Problem 9-1, 9-2
18 Post-Closing Trial Balance Prepared after closing entries are posted.Lists all OPEN accounts (permanent accounts) with their balances. (No Temp accounts are listed)All permanent accounts: assets, liabilities, and owner’s capital accounts.Purpose is to verify the equality of debits and credits in the general ledger.It completes the accounting cycle.Debits must equal Credits in your post closing trial balance.
19 POST-CLOSING TRIAL BALANCE 1. Write the heading.12. Write titles of all general ledger accounts with balances in the Account Title column.233. Write each account’s balance.464. Rule a single line.8755. Compare the two column totals.6. Write Totals.7. Write the column totals.8. Rule double lines.
20 ACCOUNTING CYCLE FOR A SERVICE BUSINESS 1. Source documents checked for accuracy, and transactions are analyzed.122. Transactions are recorded in a general journal.83. Journal entries are posted to the general ledger.34. Work sheet is prepared.5. Financial statements are prepared.746. Adjusting and closing entries are journalized.67. Adjusting and closing entries are posted.58. A post-closing trial balance is prepared.
21 CHAPTER 9-3How do you know if account has a 0 balance or is closed?Which accounts have an adjusting entry posted?Which accounts are temporary accounts?Which accounts have been closed?
22 Net Losses on an Income Statement Negative numbers are not shown with a minus signNegative numbers are denoted by parentheses, but still treated as a negative numberIE: (500) = -500
23 TERMS REVIEW post-closing trial balance accounting cycle TO DO: Work Together pg 209On Your Own pg 209Application Problem 9-3Mastery 9-4Challenge 8-4, 9-5Extra Problem 8/9Study Guide Ch 8/9