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Completing the Accounting Cycle for a Sole Proprietorship

Chapter 10. $. Completing the Accounting Cycle for a Sole Proprietorship. $. Making Accounting Relevant In the workplace, it is important to be able to manage your time efficiently. $.

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Completing the Accounting Cycle for a Sole Proprietorship

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  1. Chapter 10 $ Completing the Accounting Cycle for a Sole Proprietorship $ Making Accounting Relevant In the workplace, it is important to be able to manage your time efficiently. $ In your job or in your classroom experiences, what personal skills help you manage your time? How have you managed stress during especially busy times? $

  2. Chapter 10 $ Section 1 Preparing Closing Entries • What You’ll Learn • Why temporary capital accounts are closed at the end of the fiscal year. • The purpose of the Income Summary account. • The relationship between the Income Summary account and the capital account. • How to analyze and journalize closing entries. $ $ $

  3. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Why It’s Important Closing entries are made to prepare the financial records for the next fiscal year. $ $ • Key Terms • closing entries • Income Summary account • compound entry $

  4. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries Closing entries are journal entries made to close, or reduce to zero, the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account. $ $ $

  5. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ The Income Summary Account The Income Summary account is used to accumulate and summarize the revenue and expenses for the period. $ $ Income Summary Debit Credit Expenses Revenue If Revenue > ExpensesBalance is net income If Revenue < ExpensesBalance is net loss $

  6. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Preparing Closing Entries 1.The balance of the revenue account is transferred to the credit side of the Income Summary account. 2. The expense account balances are transferred to the debit side of the Income Summary account. $ $ $

  7. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Preparing Closing Entries (con’t.) 3. The balance of the Income Summary account is transferred to the capital account (net income to the credit side; net loss to the debit side). 4. The balance of the withdrawals account is transferred to the debit side of the capital account. $ $ $

  8. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ First Closing Entry Closing Entry $ First Closing Entry—Close Revenue to Income Summary ANALYSISIdentify 1. Roadrunner has only one revenue account, Delivery Revenue. The accounts affected are Delivery Revenue and Income Summary. Classify 2.Delivery Revenue is a revenue account. Income Summary is a temporary capital account. + / – 3. The Delivery Revenue account balance is decreased by $2,650 to zero. That amount, $2,650 is transferred to the Income Summary account. $ $

  9. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ First Closing Entry (con’t.) $ Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary $ DEBIT-CREDIT RULE4. Decreases in revenue accounts are recorded as debits. Debit Delivery Revenue for $2,650. 5. To transfer the revenue to the Income Summary account, credit Income Summary for $2,650. $

  10. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ First Closing Entry (con’t.) $ Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary $ T ACCOUNTS6. Delivery Income Revenue Summary $ Debit – Closing 2,650 Credit + Balance 2,650 Credit Closing 2,650 Debit

  11. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ First Closing Entry (con’t.) $ Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary $ JOURNAL ENTRY $

  12. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Second Closing Entry Closing Entry $ Second Closing Entry—Close Expenses to Income Summary ANALYSISIdentify 1. The accounts affected by the second closing entry are Delivery Revenue, Maintenance Expense, Rent Expense, Utilities Expense, and Income Summary. Classify 2.Advertising Expense, Maintenance Expense, Rent Expense, and Utilities Expense are expense accounts. Income Summary is a temporary capital account. + / – 3. The balances of the four expense accounts are decreased to zero; the total decrease is $1,500. The total amount, $1,500, is transferred to the Income Summary account. $ $

  13. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Second Closing Entry (con’t.) Closing Entry (con’t.) $ Second Closing Entry—Close Expenses to Income Summary $ DEBIT-CREDIT RULE4. To transfer the expenses to the Income Summary account, debit Income Summary for $1,500. 5. Decreases in expense accounts are recorded as credits. Credit Advertising Expense,$75;Maintenance Expense, $600; Rent Expense,$700; Utilities Expense, $125. $

  14. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Second Closing Entry (con’t.) Closing Entry (con’t.) $ Second Closing Entry—Close Expenses to Income Summary T ACCOUNTS6. Income Summary Advertising Expense Debit – Closing 1,500 Credit Debit + Balance 75 Credit – Closing 75 $ Maintenance Expense Rent Expense Credit – Closing 600 Debit + Balance 600 Debit + Balance 700 Credit – Closing 700 $ Utilities Expense Credit – Closing 125 Debit + Balance 125

  15. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Second Closing Entry (con’t.) $ Closing Entry (con’t.) Second Closing Entry—Close Expenses to Income Summary $ JOURNAL ENTRY7. $

  16. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Third Closing Entry Closing Entry $ Third Closing Entry—Close Income Summary to Capital ANALYSISIdentify 1. The accounts Income Summary and Maria Sanchez, Capital are affected. Classify 2.Income Summary is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account. + / – 3. The Income Summary account balance is reduced to zero by transferring $1,150, the net income amount, to the capital account. Maria Sanchez, Capital is increased by $1,150. $ $

  17. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Third Closing Entry (con’t.) $ Closing Entry (con’t.) Third Closing Entry—Close Income Summary to Capital $ DEBIT-CREDIT RULE4. To reduce the Income Summary balance to zero, debit Income Summary for $1,150. 5. Net income is recorded as a credit to the owner’s capital account. Credit Maria Sanchez, Capital for $1,150. $

  18. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Third Closing Entry (con’t.) Closing Entry (con’t.) $ Third Closing Entry—Close Income Summary to Capital T ACCOUNTS6. $ Maria Sanchez Income Summary Capital Credit Balance 1,150 Debit Closing 1,150 Debit – Credit + Balance 25,400 Closing 1,150 $

  19. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Third Closing Entry (con’t.) $ Closing Entry (con’t.) Third Closing Entry—Close Income Summary to Capital JOURNAL ENTRY7. $ $

  20. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Fourth Closing Entry Closing Entry $ Fourth Closing Entry—Close Withdrawals to Capital ANALYSISIdentify 1. The accounts affected by the fourth closing entry are Maria Sanchez, Withdrawals and Maria Sanchez, Capital. Classify 2.Maria Sanchez, Withdrawals is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account. + / – 3. The Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez, Capital is decreased by $500. $ $

  21. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Fourth Closing Entry (con’t.) $ Closing Entry (con’t.) Fourth Closing Entry—Close Withdrawals to Capital DEBIT-CREDIT RULE4. Decreases in owner’s capital accounts are recorded as debits. Debit Maria Sanchez, Capital for $500. 5. Decreases in owner’s withdrawal accounts are recorded as credits. Credit Maria Sanchez, Withdrawals for $500. $ $

  22. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Fourth Closing Entry (con’t.) Closing Entry (con’t.) $ Fourth Closing Entry—Close Withdrawals to Capital T ACCOUNTS6. $ Maria SanchezMaria Sanchez Capital Withdrawals Debit + Balance 500 Credit + Balance 26,550 Credit – Closing 500 Debit – Closing 500 $

  23. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Fourth Closing Entry (con’t.) $ Closing Entry (con’t.) Fourth Closing Entry—Close Withdrawals to Capital JOURNAL ENTRY7. $ $

  24. Section 1 Preparing Closing Entries (con’t.) Chapter 10 $ Check Your Understanding $ Xxx $ $

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