Chapter 10

1. Chapter 10 Completing the Accounting Cycle for a Sole Propiertorship

2. Chapter 10 Objectives Explain why it is necessary to update accounts through closing entries Explain the purpose of the Income Summary account Explain the relationship between the IS account and the capital account Analyze and journalize the closing entries Post the closing entries to the GL Prepare a post-closing trial balance

3. What do you think? • When you refer to the close of a period, what do you mean? • End of period • Why is it important to transfer the temporary account balances to the permanent owner’s capital account? • To bring the Capital account balances up to date

4. Discussion • What do you think closing entries will do? • Prepare the accounting records when one period is ending and to get ready for the next period • Why are revenue, expense and owner’s w/d temporary accounts? • They need to have a ZERO balance at end of period

5. Section 10.1 Objectives The last two steps of the accounting cycle The purpose of closing entries The purpose of the Income Summary account How to journalize the closing entries

6. Closing Entries 8th step in the accounting cycle Journal entries made to close, or reduce to zero, the balances of the temporary accounts Transfer the net income or net loss to the owner’s capital account After the closing entries have been journalized and posted, a Post-Closing Trial Balance is prepared to ensure that DR=CR

7. Closing Entries All temporary accounts (expenses, revenue, etc…) need to start each new accounting period with a ZERO balance

8. We already know • Net income or net loss • Calculated from the worksheet and transferred to the Income Statement • From the IS, it’s included in the Statement of Changes of Owner’s Equity • Then listed on the Balance Sheet as the new Capital account • Notice that the capital account from the worksheet and prepared Balance Sheet do not match

9. We already know Maria Sanchez, Capital from the worksheet = $25,400 Maria Sanchez, Capital from the BS = $26,050 These amounts are different because the temporary accounts need to go through the closing process to bring all the accounts up to date

10. Income Summary Account Income Summary Account = general ledger account used to summarize the revenue and expenses for the period.

12. Journalizing Closing Entries Four journal entries are prepared to close the temporary accounts

13. #1: Revenue to Income Summary • Close Revenue to Income Summary • Transfer balances of all revenue accounts to the CR side of IS

14. #2: Expenses to Income Summary • Close expense accounts to Income Summary • Transfer expense account balances to the DR side of Income Summary

15. #2: Expenses to Income Summary

16. #3: Income Summary to Capital Income Summary Expenses $1,500 Revenue $2,650 Balance $1,150 • Close Income Summary to the Owner’s Capital account • Transfer the balance of Income Summary to the Owner’s Capital account

17. #3: Income Summary to Capital

18. #4: Withdrawals to Capital • Close Owner’s Withdrawal to Owner’s Capital • Transfer the balance of the withdrawals to the DR side of the Owner’s Capital account

19. Exit Ticket In what step in the accounting cycle are closing entries made? What is the DR side of Income Summary used for? What is the CR side of Income Summary used for? What is an entry called that has two or more debits or two or more credits?

20. To-Do 10-1: text p. 259; wbk p. 184 10-2: text p. 259; wbk p. 185 9-1 & 9-2 Work Together