1. Accounting Practices 501 Chapter 8 Closing entries Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

2. Ch8G - Adj Trial Balance 2 We know that Profit = Income less Expenses Once profit has been calculated, what happens to the income and expense accounts? They get closed off as they only belong to ONE accounting period Mmm……..

3. Ch8G - Adj Trial Balance 3 Extract from trial balance at year end After the financial statements have been prepared from the adjusted trial balance, we then close off the income and expense accounts so that they start at zero in the new financial year The following is an extract from an adjusted trial balance (after balance day adjustments) and only shows some accounts

4. Adjusted Trial Bal DrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 4 Extract from adjusted trial balance at year end After the financial statements have been prepared from the adjusted trial balance, we need to close off the income and expense accounts so that they start at zero for the new period

5. Adjusted Trial Bal DrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 5 ALL the income and expense accounts are closed off to a Profit & Loss account Lets close off the income accounts first. After closing off an account, the balance will be zero.

6. Adjusted Trial Bal DrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 6 General Journal Date Account Titles Ref noDebitCredit 31/3 Interest600 Profit & Loss 90,600 Being entry required to close income accounts Sales90,000

7. Adjusted Trial BalClosingAfter closing DrCrDrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 7 General Journal Date Account Titles Ref noDebitCredit 31/3 Interest600 Profit & Loss 90,600 Being entry required to close income accounts Sales90,000 600NIL 90000NIL Profit & Loss 90,600

8. Adjusted Trial BalClosingAfter closing DrCrDrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 8 600NIL 90000NIL Profit & Loss 90,600 After closing, the balances of the income accounts start at zero for the new accounting period (1 April)

9. Adjusted Trial Bal DrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 9 Lets close off the expense accounts. After closing off an account, the balance will be zero.

10. Adjusted Trial Bal DrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Date Account Titles Ref noDebitCredit 31/3 Purchases40,000 71,000 Closing inventory5,000 Other expenses30,000 Opening inventory6,000 Profit & Loss Being entry required to close expense accounts to Profit & Loss

11. Adjusted Trial BalClosingAfter closing DrCrDrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 600NIL 90000NIL Profit & Loss 90,600 Date Account Titles Ref noDebitCredit 31/3 Purchases 40,000 71,000 Closing inventory5,000 Other expenses30,000 Opening inventory6,000 Profit & Loss Being entry required to close expense accounts to Profit & Loss 40000NIL 30000NIL 6000NIL 5000NIL 71,000 19,600

12. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 12 All the income and expense accounts have now been closed off and have zero balances. Profit & Loss 19,600 NIL

13. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 13 Profit & Loss NIL The last thing to do is to close off the Profit & Loss, Drawings and Funds Introduced accounts and transfer the amounts to the Capital account 19,600

14. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 14 Profit & Loss NIL Owner gets the profit 19,600

15. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 15 Profit & Loss NIL General Journal Date Account Titles Ref noDebitCredit 31/3 Profit & Loss19,600 Capital 19,600 Being entry required to close Profit & Loss to Capital 19,600

16. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 16 Profit & Loss NIL General Journal Date Account Titles DebitCredit 31/3Capital2,000 Drawings 2,000 Being entry required to close Drawings to Capital NIL

17. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 17 Profit & Loss NIL General Journal Date Account Titles DebitCredit 31/3Funds introduced6,000 Capital 6,000 Being entry required to close Funds introduced to Capital NIL

18. Adjusted Trial BalAfter closing DrCrDrCr Purchases40000 Other expenses30000 Interest600 Sales90000 Opening inventory6000 Closing inventory5000 Drawings2000 Funds introduced6000 Ch8G - Adj Trial Balance 18 Profit & Loss NIL General Journal Date Account Titles DebitCredit 31/3Funds introduced6,000 Capital 6,000 Being entry required to close Funds introduced to Capital NIL

19. Ch8G - Adj Trial Balance 19 That wasn’t too bad.... was it?