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Closing Entries and The Post-Closing Trial Balance

Closing Entries and The Post-Closing Trial Balance. Chapter 5. Learning Outcomes. List the steps of the accounting cycle Journalize and post closing entries Prepare a post-closing trial balance. 9 Steps of Accounting Cycle. Analyze transactions and record in journal (Chapters 1 and 2)

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Closing Entries and The Post-Closing Trial Balance

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  1. Closing Entries and The Post-Closing Trial Balance Chapter 5

  2. Learning Outcomes • List the steps of the accounting cycle • Journalize and post closing entries • Prepare a post-closing trial balance

  3. 9 Steps of Accounting Cycle • Analyze transactions and record in journal (Chapters 1 and 2) • Post journal entries to the ledger accounts (Chapter 3) • Prepare a trial balance (Chapter 3) • Gather adjustment data and record in worksheet (Chapter 4)

  4. 9 Steps of Accounting Cycle • Complete the worksheet (Chapter 4) • Prepare financial statements from worksheet (Chapter 4) • Journalize and post the adjusting entries from worksheet (Chapter 4) • Journalize and post the closing entries (Chapter 5) • Prepare a post-closing trial balance (Chapter 5)

  5. Closing Entries • Purpose: to clear the “temporary” or “nominal” accounts • Revenue • Expenses • Drawing • Income Summary • We “close” the books because this information pertains to only one fiscal period

  6. Closing Entries • These accounts provide information for • Income Statement • Statement of Owner’s Equity • “Permanent” or “real” accounts provide information for the balance sheet • Real/Permanent accounts are: • Assets • Liabilities • Owner’s Equity

  7. New Account For Closing • Income Summary • Used only for closing accounts and adjusting for merchandise (later on) • You “zero out” the account you are closing with a debit or a credit (the opposite of which side the account’s balance is on) and the second entry is to the Income Summary account

  8. Steps in Closing Accounts (1) • Close Revenue to Income Summary • Normal balance of revenue accounts is credit • Debit the revenue account the same amount making balance zero • Credit Income Summary Income from Services Income Summary $5,000 $5,000(normal balance side) $5,000

  9. Steps in Closing Accounts (2) • Close each Expense Account to Income Summary • Normal balance of each Expense account is debit • Credit the expense account the same amount making balance zero • debit Income Summary Utilities Expense Income Summary $350(normal balance side) $350 $350 $5,000 Bal: $4,650

  10. Steps in Closing Accounts • Close each Expense Account to Income Summary • Normal balance of each Expense account is debit • Credit the expense account the same amount making balance zero • debit Income Summary Depreciation Expense, Equipment Income Summary $550(normal balance side) $550 $350 $550 $5,000 Bal: $4,100

  11. Steps in Closing Accounts • Close each Expense Account to Income Summary • Normal balance of each Expense account is debit • Credit the expense account the same amount making balance zero • debit Income Summary Salary Expense Income Summary $1,000(normal balance side) $1,000 $350 $550 $1,000 $5,000 Bal: $3,100

  12. Steps in Closing Accounts • Close each Expense Account to Income Summary • Normal balance of each Expense account is debit • Credit the expense account the same amount making balance zero • debit Income Summary Rent Expense Income Summary $1,200(normal balance side) $1,200 $350 $550 $1,000$1,200 $5,000 Bal: $1,900

  13. Steps in Closing Accounts (3) • Close Income Summary to Capital • Normal balance of Income Summary account is credit (if you show Net Income) • Debit the Income Summary account the same amount making balance zero • Credit the Capital account by the same amount Capital Income Summary $1,900 Previous balance: 20,000 $1,900 New balance: 21,900 $1,900 Bal: $1,900(Normal balance side)New balance = $0

  14. Steps in Closing Accounts (4) • Close Drawing to Capital • Normal balance of Drawing is debit (contra) • Credit the Drawing account the same amount, making balance zero • Debit the Capital account to “reduce” it by how much the owner took out of the business Drawing Capital Previous balance $21,900 $1,000 $1,000(normal balance side) $1,000 (new balance: $20,900)

  15. Next, Journalize the Closing Entries • Center the title “Closing Entries” on a line in the Journal • No explanation is necessary after each entry • Debits must equal credits

  16. Next, Post the Closing Entries • Post the journal closing entries to the ledger accounts. • Cross reference your journal and ledger page numbers. • Draw a line through both the debit column and the credit column to show that the balance is zero.

  17. Lastly, prepare the Post-Closing Trial Balance • This is to make sure the “books” are ready for the new fiscal period • List only those accounts that have balances • Debits must equal credits

  18. Do not list the accounts shown here in red – they will not have balances after they are closed. The difference (net income) is shown on the Income Statement.

  19. Chapter 5 Demonstration Problems • Monday, October 8 E 5-1   E 5-3 • Wednesday, October 10 E 5-4   E 5-7 P 5-1A

  20. Chapter 5 Homework • Problem 5-2A   (E-20)(textbook - page 168-169 + working papers - pages 109-110)   • Problem 5-3A   (E-20)(textbook - page 169 + working papers - pages 112-113, 116-119)    due October 17

  21. Next Week: • Monday: In-class Assignment #3(Look at textbook pages 178 through 180 – could you do this problem?) • Journalize transactions • Post transactions to ledger accounts • Prepare a Trial Balance • Complete the work sheet with adjustments (continued)

  22. In-Class Assignment (continued) • Prepare the Income Statement • Prepare the Statement of Owner’s Equity • Prepare the Balance Sheet • Journalize the adjusting entries • Post adjusting entries to ledger accounts • Journalize closing entries (continued)

  23. In-Class Assignment (continued) • Post the closing entries to the ledger accounts • Prepare a post-closing Trial Balance You will have all class period on Monday, 10/15 – plus class time after quiz on Wednesday, 10/17 – plus all class period the following Monday (if needed)

  24. Midterm (Ch. 1-5) on Wednesday, October 24 (100 points) Monday Wednesday

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