Closing Entries and the Postclosing - MCCC

1 6-1 Closing Entriesand the PostclosingTrial BalanceSection 1: Closing EntriesChapter6 Section and post Closing 2009 The McGraw-Hill Companies, Inc. All rights Accounting CycleStep 7 Journalize and post Closing entriesStep 1 Analyze transactionsStep 2 Journalize the data about transactionsStep 4 Prepare a worksheetStep 5 Prepare financial statementsStep 6 Journalize and post adjusting entriesStep 8 Prepare a Postclosing trial balanceStep 9 Interpret the financial informationStep 3 Post the data about transactionsThe seventh step in the accounting cycle is to journalize and post Closing 7 Journalize and post Closing entries6-4 TheIncome Summaryaccount is a special owner s equity account that is used only in the Closing process to summarize the results of operations. ANSWER:QUESTION:What is the Income Summary account?6-5 Income Summary Account Classified as a temporary owner s equity account. Does not have a normal balance .

2 Has a zero balance after the Closing process and remains with a zero balance until after the Closing procedure for the next Transfer the expense account balances to the Income Summary the balance of the drawing account to the owner s capital account. 3. Transfer the balance of the Income Summary account to the owner s capital Transfer the balance of the revenue account to the Income Summary 1 Journalize and post Closing entriesThere are four steps in the Closing process: 6-7 Net IncomeCREDITBALANCE SHEETINCOME ,5005,0002,00022,0003,5003677,00090,0004 ,00035,0007,0005001,0003673,50035,00097, 36712,367120,000367120,583 TRIAL BALANCEADJ. TRIAL NAMECashAccounts ReceivableSuppliesPrepaid RentEquipmentAccum. Depr. Taylor, PayableJason Taylor, IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp. ,5007,00090,0004,00035,0007,00050022,000 7,0005,0003,00083,5005,00022,0004,0007,0 005002,0007,00090,00035,0001,0003673,500 132,000132,0004,0834,083(c)367(a) 1,000(b)3,500(c)367(a) 1,000(b)3,5003,500120,58322,63322,63335, 00035,000120,000120,000JT s Consulting ServicesWorksheetMonth Ended December 31, 2010 Fees Income has a credit balance of $35, IncomeClosing 35,000 balance 35,000 Income SummaryClosing 35,000 Step 1: Close Revenue6-9 The words Closing Entries are written in the Description column of the general JOURNALPAGE 4 DATE DESCRIPTION POST.

3 DEBIT Closing EntriesDec. 31 Fees Income 35,000 Income Summary 35,000 Step 1: Close Revenue6-10 The Income Statement section of the worksheet for JT s Consulting Services lists five expense accounts. Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero. This Closing entry transfers total expenses to the Income 2: Close Expenses6-11 The five expense account balances are reduced to zero. Step 2: Close Expenses The total, $12,367 of expenses are transferred to the temporary owner s equity account, Income SummaryStep 2: Close ExpensesSalaries ExpenseClosing 12,367 BAL 35,000 Closing 7,000 balance 7,000 Utilities ExpenseSupplies ExpenseBalance 500 balance 1000 Closing 1000 Closing 500 Depr.

4 Expense ExpenseClosing 3,500 balance 3,500 balance 367 Closing 3676-13 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT Closing EntriesDec. 31 Income Summary 12, Expense 7, Expense Expense 1, Expense 3, 2: Close Expenses6-14 The Income Summaryaccount reflects all Entries in the Income Statement section of the 12, 22,633 Closing35,000 Net Income6-15 The journal entry to transfer net income to owner sequity is a debit to Income Summary, and a creditto Jason Taylor, Capital.

5 The balance of Income Summaryis reduced tozero; the owner s capital account is increased bythe amount of net 3: Close Net Income to Capital The Income Summaryaccount is reduced to zero. The net income amount, $22,633, is transferredto theowner s capital account. Jason Taylor, Capitalisincreased by $22, SummaryJason Taylor, Capital Closing 22,633 balance 22,633 balance 90,000 Step 3: Close Net Income to CapitalClosing 22,6336-17 GENERAL JOURNALPAGE 4 DATE DESCRIPTION POST. DEBIT EntriesDec. 31 Income Summary22, Taylor, Capital22, 3: Close Net Income to Capital6-18 Withdrawals appear in the statement of owner s equity as a deduction from capital. The drawing account is closed directly to the capital account. The drawing account balance is reduced to zero. The balance of the drawing account, $4,000, is transferred to the owner s capital account.

6 Step 4: Close Drawing to Capital6-19 Jason Taylor, CapitalJason Taylor, Drawing Closing 4,000 balance 112,633 Closing 4,000 balance 4,000 Step 4: Close Drawing to Capital6-20 GENERAL JOURNALPAGE 4 DATE DESCRIPTION POST. DEBIT EntriesDec. 31 Jason Taylor, Capital4, Taylor, Drawing4, 4: Close Drawing to Capital6-21 The new balance of the Jason Taylor, Capitalaccount agrees with the amount listed on the balance Taylor, CapitalJason Taylor, Drawing Closing 4,000 4,000 balance 90,000 Net Inc. 22,633 balance 108, 4,000 Jason Taylor, Capital6-22 Summary of Closing EntriesGENERAL JOURNAL PAGE 4 DESCRIPTION REF. DEBIT CREDIT2010 Closing EntriesDec. 31 Fees Income401 35, Summary 30935, Income Summary 309 12, Salaries Expense 511 7, Utilities Expense 514 Expense 517 1, Expense 520 3, Depr.

7 Expense-Equip. 523 Income Summary 309 22, Taylor, Capital 301 22, Jason Taylor, Capital 301 4, Taylor , Draw. 302 4, CLOSEREVENUE2. CLOSEEXPENSEACCOUNTS3. CLOSEINCOMESUMMARY4. CLOSEDRAWINGACCOUNT6-23 Closing is entered in the Description column of the ledger accounts. The ending balances of the drawing, revenue,and expense accounts are zero. Posting the Closing EntriesAll journal Entries are posted to the general ledger accounts. 6-24 GENERAL JOURNAL PAGE 4 DESCRIPTION REF. DEBIT CREDIT2010 Closing EntriesDec. 31 Fees Income401 35, Summary 30935, Income Summary 309 12, Salaries Expense 511 7, Utilities Expense 514 Expense 517 1, Expense 520 3, Depr.

8 Expense-Equip. 523 Income Summary 309 22, Taylor, Capital 301 22, Jason Taylor, Capital 301 4, Taylor, Draw. 302 4, CLOSEREVENUE2. CLOSEEXPENSEACCOUNTS3. CLOSEINCOMESUMMARY4. CLOSEDRAWINGACCOUNTACCOUNT Fees Income ACCOUNT NO. 401 DESCRIPTION CREDIT DEBIT CREDIT2010 Dec. 31 J226, , 31 J29, 35, 31 ClosingJ4 35, 0 6-25 GENERAL JOURNAL PAGE 4 DESCRIPTION REF. DEBIT CREDIT2010 Closing EntriesDec. 31 Fees Income401 35, Summary 30935, Income Summary 309 12, Salaries Expense 511 7, Utilities Expense 514 Expense 517 1, Expense 520 3, Depr.

9 Expense-Equip. 523 Income Summary 309 22, Taylor, Capital 301 22, Jason Taylor, Cap 301 4, Taylor, Draw. 302 4, CLOSEREVENUE2. CLOSEEXPENSEACCOUNTS3. CLOSEINCOMESUMMARY4. CLOSEDRAWINGACCOUNTACCOUNT Income Summary ACCOUNT NO. 309 DESCRIPTION CREDIT DEBIT CREDIT2010 Dec. 31 ClosingJ435, , Entriesand the PostclosingTrial BalanceSection 2: Using Accounting InformationChapter62. Prepare a Postclosing trial Interpret financial Review the steps in the accounting 2009 The McGraw-Hill Companies, Inc. All rights 1 Analyze transactionsStep 2 Journalize the data about transactionsStep 7 Journalize and post Closing entriesStep 3 Post the data about transactionsStep 4 Prepare a worksheetStep 5 Prepare financial statementsStep 6 Journalize and post adjusting entriesStep 8 Prepare a Postclosing trial balanceStep 9 Interpret the financial informationThe Accounting CycleStep 8 Prepare a Postclosing trial balanceStep 9 Interpret the financial information6-28 What is the Postclosing trial balanceA Postclosing trial balance is a statement that is prepared to prove the equality of total debits and credits after the Closing process is completed.

10 It verifies that revenue, expense, and drawing accounts have zero : ANSWER: 6-29JT s Consulting ServicesPostclosing Trial BalanceDecember 31, 2010 ACCOUNT NAMEDEBIT CREDIT Cash 83, Accounts Receivable5, 2, Rent3, Equipment22, Depreciation Accounts Payable7, Taylor, Capital 108, 116, , Trial Balance6-30If the Postclosing trial balance does not balance , the accounting records contain the audit trail to trace data through the accounting and Correcting Errors6-31 Objective 3 Interpret s Consulting ServicesBalance SheetDecember 31, 2010 Assets Cash $83, Accounts Receivable 5.