3. CHAPTER TWENTY THREE ADJUSTING AND CLOSING THE GENERAL LEDGER

4. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-3 1. Journalize adjusting and closing entries. 2. Post the adjusting and closing entries. 3. Prepare a postclosing trial balance. ADJUSTING AND CLOSING THE GENERAL LEDGER Objectives:

5. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-4 Recording the Adjusting Entries Adjusting entries are recorded in the general journal. The amounts are obtained from the Adjustments section of the worksheet.

6. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-5 Recording the Adjusting Entries (continued)

7. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-6 Recording the Adjusting Entries (continued)

8. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-7 Recording the Adjusting Entries (continued)

9. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-8 Recording the Adjusting Entries (continued)

10. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-9 Recording the Closing Entries After the adjusting entries are posted, closing entries must be recorded. These entries reduce the balances of the temporary accounts to zero and transfer the results of operations to the capital account.

11. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-10 Recording the Closing Entries (continued) The first step is to close the revenue and other temporary accounts with credit balances. The worksheet provides the necessary information.

12. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-11 Recording the Closing Entries (continued)

13. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-12 Recording the Closing Entries (continued) The second step is to close the cost, expense, and other temporary accounts with debit balances. The worksheet provides the necessary information.

14. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-13 Recording the Closing Entries (continued)

15. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-14 Recording the Closing Entries (continued) The third step is to close the Income Summary account and transfer the net income to the capital account. The worksheet shows the net income for the period.

16. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-15 Recording the Closing Entries (continued)

17. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-16 Recording the Closing Entries (continued) The fourth step is to close the drawing account and transfer its balance to the capital account.

18. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-17 Recording the Closing Entries (continued)

19. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-18 Preparing the Postclosing Trial Balance The accounts that appear on the postclosing trial balance are the asset, liability, and owner’s capital accounts. Debits must equal credits to continue into the next fiscal period.

20. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-19 Accounting Terminology Adjusting entries Closing entries

21. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-20 Chapter Summary Adjusting entries must be journalized and posted so that the amounts in the General Ledger will agree with the amounts reported on the financial statements.

22. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-21 Chapter Summary (continued) Adjusting entries are recorded in the General Journal and then posted to the proper General Ledger accounts. The information for these entries comes from the Adjustments section of the worksheet.

23. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-22 Chapter Summary (continued) After the adjusting entries are completed, it is necessary to journalize and post closing entries. These entries make the General Ledger ready to receive transactions for the next period.

24. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-23 Chapter Summary (continued) The first closing entry is used to close the temporary accounts with credit balances. The necessary information comes from the Income Statement Credit column of the worksheet.

25. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-24 Chapter Summary (continued) The second closing entry is used to close the temporary accounts with debit balances. The necessary information comes from the Income Statement Debit column of the worksheet.

26. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-25 Chapter Summary (continued) The third closing entry is used to close the Income Summary account and transfer the net income or net loss to the capital account.

27. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-26 Chapter Summary (continued) The fourth closing entry is used to close the drawing account and transfer its balance to the capital account.

28. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-27 Chapter Summary (continued) After the closing entries are posted, a postclosing trial balance is prepared to check the equality of the debits and credits in the accounts that remain open.

29. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-28 Investigating on the Internet As a research assignment, access the PEPSI ® web site and report sources of information that might concern financial statements.

30. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-29 1. Closing entries in the General Journal prepare the business for the next fiscal period. 2. Temporary accounts have zero balances after closing activities. 3. Some permanent accounts are closed following the closing activities. Topic Quiz Answer the following true/false questions: TRUE FALSE TRUE

31. McGraw-Hill/Irwin Accounting Fundamentals, 7/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. 23-30 (Return to Topic Quiz) 3. Some permanent accounts are closed following the closing activities. FALSE All the permanent accounts are open for the new fiscal period.