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Do Now

Do Now. In your notebooks: What do you think a “closing” entry is? Why do you think a company may need to close their sales or expense accounts?. Recording Adjusting Entries and Closing Entries. Accounting 1 Chapter 8. The Accounting Cycle. Here’s what we’ve done through Chapter 7:

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Do Now

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  1. Do Now • In your notebooks: • What do you think a “closing” entry is? • Why do you think a company may need to close their sales or expense accounts?

  2. Recording Adjusting Entries and Closing Entries Accounting 1 Chapter 8

  3. The Accounting Cycle Here’s what we’ve done through Chapter 7: • Source documents • Transactions are journalized • Journal entries are posted to the general ledger • A work sheet with a working trial balance and working income statement and balance sheet is prepared • Financial statements – Income Statement and Balance Sheet are prepared from the work sheet Now we need to make final adjustments and close the books

  4. 1st - The Adjustments • We need to journalize and post the adjustments from our work sheet • Adjusting entries: journal entries recorded to update general ledger accounts at the end of a fiscal period • Insurance expense • Supplies expense

  5. 1st - The Adjustments • Adjustments analyzed and planned on a work sheet • Adjustments must be journalized so they can be posted to general ledger accounts • Adjusting entries recorded on next journal page following page on which last daily transactions for month are recorded

  6. 2nd – The Closing Entries • Temporary accounts must have a 0 balance at the end of the fiscal period • We want to start with 0 at the beginning of the next fiscal period • Temporary Accounts: • Sales • Expenses • Income Summary • Drawing

  7. Adjusting Entries Chapter 8: ADJUSTING ENTRIES (8-1) • Journalize adjusting entries from the work sheet • Write “Adjusting Entries” on next journal page • Write next page number • Record adjustment entries • Supplies adjustment • Debit Supplies Expense • Credit Supplies • Insurance adjustment • Debit Insurance Expense • Credit Prepaid Insurance • Remember to record all debits first • X • X

  8. Adjusting Entries Textbook p. 202 Remember: We need to simply transfer the Information from the adjustment columns to our journal, since we haven’t yet journalized these transactions. Next: We transfer the journalized transactions to The ledgers by posting them, and placing Post Ref Numbers in the journal

  9. Adjusting Entries • WT 8-1, Txt p. 205, WP p. 157 • OYO 8-1, Txt p. 205, WP p.162 • 8-1 Application problem

  10. Do Now • What are the “normal balances” of the following accounts: • Sales • Expenses • Drawing • How can we “offset” these accounts to have a balance of zero before the next fiscal period? • Why would we want to do this?

  11. Recording Closing Entries • Accounts used to accumulate information from one fiscal period to the next are called permanent (or real) accounts. • Include asset and liability accounts and the owner’s capital account • Ending account balances for one fiscal period are the beginning account balances for the next fiscal period

  12. Recording Closing Entries • Accounts used to accumulate information until it is transferred to the owner’s capital account are called temporary (or nominal) accounts. • Revenue, expense, and owner’s drawing accounts plus income summary account • Show changes in owner’s capital for single fiscal period • At end of fiscal period, balances of temporary accounts summarized and transferred to owner’s capital account • Begin new fiscal period with zero balances

  13. Recording Closing Entries • Journal entries used to prepare temporary accounts for a new fiscal period is called closing entries. • Temporary account balances set to zero at end of fiscal period in order to prepare temporary accounts for recording info next fiscal period • Can’t have information in temporary accounts from last fiscal period

  14. Closing Entries CHAPTER 8: CLOSING ENTRIES (8-2) Now, we need to “reset” • Close our temporary accounts • Bring them back to 0 to get ready for the next fiscal period • Sales • Expenses • Owner’s drawing • AND INCOME SUMMARY Income Summary is used as a temporary holding place for sales, expenses and net income before it is reset

  15. Closing Entries Close our temporary accounts • Write “Closing Entries” on the next line of the Journal

  16. Closing Entries: Sales Account Close our temporary accounts • Close Sales: • Find Sales account amount on Work Sheet • Debit Sales acct • Credit Income Summary acct • This “offsets” sales

  17. Closing Entries: SalesTextbook p. 208 Close our temporary accounts • Close Sales: • Find Sales account amount on Work Sheet • Debit Sales acct • Credit Income Summary acct

  18. Closing Entries: ExpensesTextbook p. 209 • Close Expense Accounts: • Debit Income Summary acct • Credit each expense acct separately • Be sure to total all expenses to check your accuracy

  19. Closing Entries: Sales and Expenses Practice: 8-2 WT for Sales and Expenses 8-2 OYO for Sales and Expense

  20. Closing Entries: Net Income/Loss • Closing Entry for Net Income/Net Loss: • Remember: • Net Income or Net Loss are not accounts • Think of them differently! • Net Income increases owner’s capital (credit) • Net Loss decreases owner’s capital (debit) • Net Income: • Debit Income Summary the net income amt on I/S • Credit Owner’s Capital • Net Loss: • Debit Owner’s Capital the net loss amt on I/S • Credit Income Summary THIS CLOSES YOUR INCOME SUMMARY ACCOUNT! CHECK TO BE SURE!

  21. Closing Entries: Net Income/LossTextbook p. 210 • Net Income: • Debit Income Summary the net income amt on I/S • Credit Owner’s Capital

  22. Closing Entries: Net Income/LossTextbook p. 210 THIS CLOSES YOUR INCOME SUMMARY ACCOUNT! CHECK TO BE SURE! 1466 + 2099 – 3565 = 0!

  23. Closing Entries: Net Income/Loss Practice: 8-2 WT for Net Income/Loss 8-2 OYO for Net Income/Loss

  24. Closing Entries: Drawing AccountTextbook p. 211 • Close Owner’s Drawing Account: • Debit Owner’s Capital • Credit Owner’s Drawing

  25. Closing Entries: Drawing • 8-2 WT, 8-2 OYO • Homework: 8-2 App Problem

  26. Do Now • In your notebooks: • What was the purpose of the trial balance columns of the worksheet? What were we trying to prove?

  27. POST-CLOSING WORK • GENERAL LEDGER ACCOUNTS • Post Adjusting and Closing Entries in General Ledger • If the balance of the account is 0, draw a line through both the Debit and Credit column • Accounting cycle: series of accounting activities included in recording financial information for a fiscal period

  28. POST-CLOSING WORK • POST-CLOSING TRIAL BALANCE • Use general ledger accounts to prepare the post-closing trial balance • Only include accounts with balances • What type of accounts will we see? • PERMANENT ACCOUNTS • Total and prove

  29. POST-CLOSING ACTIVITY • Practice 8-3 • OYO 8-3 • App Problem 8-3

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