1. Chapter 8! The Accounting Cycle Work Sheet and Adjusting Process Unit 4 Quest (chapter 8 and 10) will be on December 4 (Thursday) Youtube clip: “Closing entries” by Education unlocked

2.  Just as you have to clean out your locker in June in order to start fresh new semester in September, we also have to clean out some ledger accounts in December in order to start brand new year in January.  But we do not clean out all accounts. We only clean out some accounts. Closing Accounts

3.  =Real Accounts = All Balance Sheet accounts are permanent accounts. (except Drawings account)  The balances carry into next year. We do not change the account balances of all permanent accounts except drawings account.  Capital account is a permanent account, but we change its balance as we go to the next fiscal period (or next year)  All asset accounts, liability and most OE accounts are permanent accounts. Permanent Accounts

4.  =Nominal accounts  The balances do not carry into next year.  All income statement accounts and Drawings account are temporary accounts.  The balances of these accounts become zero when we open the new fiscal year  “Closing an account” means that you are making the account balance as zero. Temporary Accounts Temporary Accounts

5.  = Closing Entries  In order to close accounts, you can not just close accounts, but you have to make journal entries to close the temporary accounts.  There are 4 closing entries you have to make: CE#1, CE#2, CE#3 and CE #4 Closing Journal Entries 쉐인 유먼

6.  In order to close (make the accounts as zero) temporary accounts, we will use an account called, “Income Summary”.  The numbers in revenue and expense accounts are people whereas the bus is the income summary account.  Destination is capital Account. Closing Entry# 1 - Revenue

7.  This entry deals with Revenue account.  Since the revenue account has a credit balance of $207 821, (given by fig 8.13 Page 293) in order to make this account zero, I must make a debit entry of $207 821.  Then I also need a credit entry. Which account should it be?  The logical way would be to credit capital account. But many accountants use “Income Summary” account, which is a temporary account we use to facilitate closing process. Closing Entry# 1 - Revenue

8.  “Income Summary” account will summarize revenue and expense amounts in one ledger account. This ledger account will then reveal the amount of net income or loss.  Then we transfer the ending balance of this account to the capital account. Closing Entry# 1 - Revenue

9.  The closing entry #1 will be: DrCr Dec 31 Shipping Rev207821 Income Summary207821 To close the 2004 balance of revenue Closing Entry# 1 - Revenue

10.  The closing entry #2 tries to clear the balance of each expense accounts.  Since expense accounts have debit balances, we should credit these accounts to bring the expense account balances to zero.  We have to add all the expense account balances and the total amount will be debited to Income Summary account. Closing Entry# 2 - Expenses

11. The journal entry would be: DrCr Income Summary14718491 Bank Charges Expense3500 Miscellaneous Expense2036.65 Rent Expense24000 Telephone Expense2045 Truck Expense42447.16 Utilities Expense3750 Wages Expense65957.20 Supplies Expense954.90 Insurance Expense2494 To close the 2004 expense accounts Closing Entry# 2 - Expenses

12.  The amount for the third Closing Entry is also found in the worksheet (P293)  Let’s see the T account of Income Summary account: Income Summary Account 207,821 CE1 (Rev) CE2(Exp) 147,184.91 60,636.09  Right now, the Income Summary Account has an ending balance of 60636.09 credit balance.  Since the total revenue is greater than total expense this 60,636.09 represents net income for 2004. Closing Entry# 3 – Income (or Loss)

13.  Since Income Summary account is a temporary account, we need to close this account by making a debit entry.  Which account should we credit?  We will credit Capital account.  Journal Entry would be: Dr.Cr. Dec 31Income Summary60636.09 P Marshall, Capital60636.09 To close income summary account and transfer the net income to capital account  Remember in chapter 5, we learned that Net Income amount was added to Capital account? By doing this journal entry, we are adding net income number to the capital account. Closing Entry# 3 – Income (or Loss)

14.  The fourth Closing entry transfers the balance of Drawings account to the capital account.  Again this number is easily picked up from the worksheet.  Since Drawings account always has a debit balance, we will credit the same amount to Drawing account.  Which account should we debit?  We will debit Capital account for the same amount. Dr.Cr. Dec 31 P Marshall, Capital42000 P Marshall, Drawing42000 To close the drawings account and transfer its balance to capital account Closing Entry# 4 - Drawings

15.  After all 4 Closing Entries have been posted, the objectives of the closing have been achieved.  The temporary accounts have been closed (cleared) and ready for the next fiscal period.  Also the capital account shows the true balance of equity on the last day of the fiscal period.  Show T account of Capital account Capital Account 28895.42 (BBalance) 60636.09 (Closed IS acc) (closed Draw) 42000 4753151 Closing Entry# 4 - Drawings

16.  Recall that the ending balance of capital account is :  BB of C + Net Income – Drawings = EB of Capital Account  We are doing same thing except that we are now using Income Summary Account to make it more formal process. Recall Chapter 5

17.  P297 Review: #7, 10, 11, 12 and 13  P298 – P300 Exercise #1, 3, #4 and #5 Homework