1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. Closing Entries and the Postclosing Trial Balance Section 1: Closing Entries Chapter 6 Section Objectives 6-1 Journalize and post closing entries. 6-2

3. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle Step 7 Journalize and post closing entries Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Step 3 Post the data about transactions The seventh step in the accounting cycle is to journalize and post closing entries Step 7 Journalize and post closing entries 6-3

4. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations. ANSWER: QUESTION: What is the Income Summary account? 6-4

5. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Income Summary Account Classified as a temporary owner’s equity account. Does not have a normal balance. Has a zero balance after the closing process and remains with a zero balance until the closing procedure for the next period. 6-5

6. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2. Transfer the expense account balances to the Income Summary account. 4. Transfer the drawing account balance to the owner’s capital account. 3. Transfer the the Income Summary account balance to the owner’s capital account. 1. Transfer the revenue account balances to the Income Summary account. Objective 6-1 Journalize and post closing entries. There are four steps in the closing process: 6-6

7. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Net Income 47,000 137,350 CREDIT BALANCE SHEET INCOME STMT. DEBITCREDITDEBIT 111,350 5,000 1,000 11,000 4,000 183 3,500 100,000 5,000 47,000 8,000 650 500 183 4,000 47,000 103,683 13,333 137,350 183 150,683 TRIAL BALANCEADJ. TRIAL BAL.ADJUSTMENTS DEBITCREDIT DEBITCREDIT ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Carolyn Wells, Cap. Accounts Payable Carolyn Wells, Draw. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals DEBIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 8,000 5,000 1,500 111,350 5,000 11,000 5,000 8,000 650 1,000 3,500 100,000 47,000 500 183 4,000 150,500 4,683 (c) 183 (a) 500 (b) 4,000 (c) 183 (a) 500 (b) 4,000 4,000 150,683 33,667 Wells’ Consulting Services Worksheet Month Ended December 31, 2016 Fees Income has a credit balance of $47,000 6-7

8. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Fees Income Closing 47,000 Balance 47,000 Income Summary Closing 47,000 Step 1: Close Revenue 6-8

9. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The words “Closing Entries” are written in the Description column of the general journal GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2016 Closing Entries Dec. 31 Fees Income 47,000.00 Income Summary 47,000.00 Step 1: Close Revenue 6-9

10. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Income Statement section of the worksheet for Wells’ Consulting Services lists five expense accounts. Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero. This closing entry transfers total expenses to the Income Summary account. Step 2: Close Expenses 6-10

11. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The five expense account balances are reduced to zero. Step 2: Close Expenses The total, $13,333 of expenses are transferred to the temporary owner’s equity account, Income Summary. 6-11

12. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Income SummarySalaries Expense Closing 13,333 Bal 47,000 Closing 8,000 Balance 8,000 Utilities ExpenseSupplies Expense Balance 650Balance 500 Closing 500 Closing 650 Depr. Expense – Equip. Rent Expense Closing 4,000 Balance 4,000 Balance 183 Closing 183 6-12

13. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2016 Closing Entries Dec. 31 Income Summary 13,333.00 Salaries Expense 8,000.00 Utilities Expense 650.00 Supplies Expense 500.00 Rent Expense 4,000.00 Depreciation Exp.-Equip. 183.00 Step 2: Close Expenses 6-13

14. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Dr. Closing 13,333 Cr. Balance 33,667 Closing 47,000 Net Income 6-14

15. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Carolyn Wells, Capital. Step 3: Close Net Income to Capital The Income Summary account is reduced to zero. The net income amount, $33,667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33,667. 6-15

16. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Income Summary Carolyn Wells, Capital Closing 33,667 Balance 33,667 Balance 100,000 Step 3: Close Net Income to Capital Closing 33,667 6-16

17. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 33,667.00 Carolyn Wells, Capital 33,667.00 Step 3: Close Net Income to Capital 6-17

18. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Withdrawals appear in the statement of owner’s equity as a deduction from capital. The drawing account is closed directly to the capital account. The drawing account balance is reduced to zero. The balance of the drawing account, $5,000, is transferred to the owner’s capital account. Step 4: Close Drawing to Capital 6-18

19. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Carolyn Wells, Capital Carolyn Wells, Drawing Closing 5,000 Balance 133,667 Closing 5,000 Balance 5,000 Step 4: Close Drawing to Capital 6-19

20. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Carolyn Wells, Capital 5,000.00 Carolyn Wells, Drawing 5,000.00 Step 4: Close Drawing to Capital 6-20

21. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The new balance of the Carolyn Wells, Capital account agrees with the amount listed on the balance sheet. Carolyn Wells, CapitalCarolyn Wells, Drawing Closing 5,000 Cr. Dr. Balance 5,000 Balance 0 Cr. Balance 100,000 Net Inc. 33,667 Balance 128,667 Dr. Drawing 5,000 Carolyn Wells, Capital 6-21

22. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Summary of Closing Entries GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2016 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 31 Income Summary 309 13,333.00 Salaries Expense 511 8,000.00 Utilities Expense 514 650.00 Supplies Expense 517 500.00 Rent Expense 520 4,000.00 Depr. Expense-Equip. 523 183.00 31 Income Summary 309 33,667.00 Carolyn Wells, Capital 301 33,667.00 31 Carolyn Wells, Capital 301 5,000.00 Carolyn Wells, Draw. 302 5,000.00 STEPS 1. Close Revenue Account 2. Close Expense Accounts 3. Close Income Summary 4. Close Drawing Account 6-22

23. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. “Closing” is entered in the Description column of the ledger accounts. The ending balances of the drawing, revenue, and expense accounts are zero. Posting the Closing Entries All journal entries are posted to the general ledger accounts. 6-23

24. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2016 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 STEPS 1. CLOSE REVENUE ACCOUNT Fees Income ACCOUNT NO. 401 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Dec. 31 J2 36,000.00 36,000.00 Dec. 31 J2 11,000.00 47,000.00 Dec. 31 Closing J4 47,000.00 – 0 – 6-24

25. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. ACCOUNT Income Summary ACCOUNT NO. 309 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Dec. 31 Closing J4 47,000.00 47,000.00 GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2016 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 STEPS 1. CLOSE REVENUE 6-25

26. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Closing Entries and the Postclosing Trial Balance Section 2: Using Accounting Information Chapter 6 6-2. Prepare a postclosing trial balance. 6-3. Interpret financial statements. 6-4. Review the steps in the accounting cycle. 6-26

27. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 7 Journalize and post closing entries Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information The Accounting Cycle Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information 6-27

28. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. What is the postclosing trial balance? A postclosing trial balance is a report that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances. QUESTION: ANSWER: Objective 6-2 Prepare a postclosing Trial Balance. 6-28

29. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Wells’ Consulting Services Postclosing Trial Balance December 31, 2016 ACCOUNT NAMEDEBIT CREDIT Cash 111,350.00 Accounts Receivable 5,000.00 Supplies 1,000.00 Prepaid Rent 4,000.00 Equipment 11,000.00 Accumulated Depreciation–Equipment 183.00 Accounts Payable 3,500.00 Carolyn Wells, Capital 128,667.00 Totals 132,350.00 132,350.00 6-29

30. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. If the postclosing trial balance does not balance, the accounting records contain errors. Use the audit trail to trace data through the accounting records. Finding and Correcting Errors 6-30

31. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Objective 6-3 Interpret financial statements. 6-31

32. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. What is the cash balance? How much do the customers owe the business? Wells’ Consulting Services Partial Balance Sheet December 31, 2016 Assets Cash $ 111,350.00 Accounts Receivable 5,000.00 Supplies 1,000.00 Prepaid Rent 4,000.00 Equipment $ 11,000.00 Less Accumulated Depreciation 183.00 10,817.00 Total Assets $ 132,167.00 6-32

33. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. How much does the business owe its suppliers? Wells’ Consulting Services Balance Sheet December 31, 2016 Assets Cash $ 111,350.00 Accounts Receivable 5,000.00 Supplies 1,000.00 Prepaid Rent 4,000.00 Equipment $ 11,000.00 Less Accumulated Depreciation 183.00 10,817.00 Total Assets $ 132,167.00 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 3,500.00 Owner’s Equity Carolyn Wells, Capital 128,667.00 Total Liabilities and Owner’s Equity $132,167.00 6-33

34. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Wells’ Consulting Services Income Statement Month Ended December 31, 2016 Revenue Fees Income 47,000.00 Expenses Salaries Expense 8,000.00 Utilities Expense 650.00 Supplies Expense 500.00 Rent Expense 4,000.00 Depr. Expense--Equipment 183.00 Total Expenses 13,333.00 Net Income 33,667.00 What is the profit? 6-34

35. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Prepare financial statements Income Statement Statement of Owner’s Equity Balance Sheet Step 5 Prepare financial statements Objective 6-4 Review the steps in the accounting cycle 6-35

36. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Transfer net income or net loss to owner’s equity. Reduce the balances of the temporary accounts to zero. Step 7 Journalize and post closing entries 6-36

37. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 5 Prepare financial statements Step 4 Prepare a worksheet Step 3 Post the data about transactions Step 2 Journalize the data about transactions Step 1 Analyze transactions Step 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries 6-37

38. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Flow of Data Through a Simple Accounting System Source Documents General journal General ledger Worksheet Financial statements Source Documents 6-38

39. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Thank You for using College Accounting, 3rd Edition Haddock Price Farina 6-39