Presentation on theme: "Closing Entries Closing Entries are journal entries made to close the balances in the temporary capital accounts and to transfer the net income or net."— Presentation transcript:
1 Closing EntriesClosing Entries are journal entries made to close the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account.After journalizing Closing Entries the accounting cycle is almost complete.2Analyzeeachtransaction2Analyzeeachtransaction3Journalizeeachtransaction3Journalizeeachtransaction1Collectand verifysourcedocuments1Collectand verifysourcedocuments4Post to theledger4Post to theledger9Prepare apost-closingtrialbalance5Prepare atrialbalance5Prepare atrialbalance8Journalizeand postclosingentries8Journalizeand postclosingentries6Prepare aworksheet6Prepare aworksheet7Preparefinancialstatements7Preparefinancialstatements
2 The Purpose of Closing Entries The net income appears on the income statementNet income is included in ending capital balance.Ending capital balance goes on the balance sheet.This capital balance does not match the capital balance in the general ledger.
3 The Income Summary Account It’s about time we started using this account.How do we use the income summary account?Income Summary is used to accumulate and summarize the revenue and the expenses for the accounting period.Income SummaryIncome Summary is a simple version of the income statement for the period.DebitCreditExpensesRevenueRevenue goes in as a credit, and expenses go in as debits. The balance of Income Summary is the net income or net loss for the accounting period.Debit balanceMeansNet LossCredit balanceMeansNet Income
4 Quick Summary of Closing Entries The balance of the revenue account is transferred to Income SummaryThe expense balances are transferred to Income SummaryThe balance of Income Summary is transferred to the Capital accountThe balance of withdrawals is transferred to the Capital account
5 Remember to always keep balance Daniel Son. Revenue Closing EntrySince a revenue account has a credit balance, in order to make the balance zero, the account must be debited.Since for every debit there must be a credit of equal value, Income Summary is credited.Remember to always keep balance Daniel Son.Refer to the worksheet on page 192 of your textbook to follow the examples.
6 Expense Closing EntrySince an expense account has a debit balance, in order to make the balance zero, the account must be credited.Since for every credit there must be a debit of equal value, Income Summary is debited.Debit Income Summary for the total of all expenses, and credit each individual expense account.
7 Income Summary Closing Entry Let’s take a look at what the income summary account looks like.1,5002,6501, BalA credit balance represents a net income.Since income summary has a credit balance, in order to make the balance zero, the account must be debited.Since for every debit there must be a credit of equal value, capital is credited.A credit to capital increases the net worth of the company.
8 Withdrawals Closing Entry Since withdrawals has a debit balance, in order to make the balance zero, the account must be credited.Since for every credit there must be a debit of equal value, capital is debited.When the closing entries are complete, all the temporary accounts have zero balances, and the capital account has the balance that was calculated as the ending balance on the Statement of Changes in Owner’s Equity.
9 Completed Closing Entries 1) Close Revenue Accounts3) Close Income Summary Account2) Close Expense Accounts4) Close Withdrawal Account