Unit 2 The Basic Accounting Cycle

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Chapter 3 Business Transactions and the Accounting Equation

Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals Chapter 6 Recording Transactions in a General Journal

Chapter 7 Posting Journal Entries to General Ledger Accounts Chapter 8 The Six-Column Work Sheet

Chapter 9 Financial Statements for a Sole Proprietorship

Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship

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a Sole Proprietorship

What You’ll Learn

Explain why it is necessary to update accounts through closing entries.

Explain the purpose of the Income Summary account.

Explain the relationship between the Income Summary account and the capital account.

Analyze and journalize the closing entries.

Post the closing entries to the general ledger.

Prepare a post-closing trial balance.

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What Do You Think?

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Main Idea

Closing entries transfer the temporary account balances to the owner’s capital account.

You Will Learn

the last two steps of the accounting cycle. the purpose of closing entries.

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Key Terms

closing entries

Income Summary account

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Completing the Accounting Cycle

Closing entries are journal entries made at the end of an accounting period to zero the balances in the

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Starting the Eighth Step in the Accounting

Cycle: Journalizing the Closing Entries

The events leading up to the closing process are: Net income or loss is calculated on the work

sheet.

The income statement is completed.

The capital account ending balance is calculated on the statement of changes in owner’s equity. The ending balance of the capital account

appears on the balance sheet.

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The Income Summary Account

The Income Summary account:

serves as a simple income statement in the general ledger.

is used to accumulate revenue and expenses for the period.

equals the net income or loss for the period. It is a temporary account that:

is used only at the end of the accounting period to summarize revenue and expense balances.

does not have a normal balance.

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Closing Revenue to Income Summary

To record closing entries in the general journal:

Enter Closing Entries in the Description column. Enter the last day of the accounting period.

Enter the name(s) and amount(s) of the account(s) to be debited.

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Closing Expenses to Income Summary

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Closing Expenses to Income Summary

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Closing Income Summary to Capital

This entry transfers the balance of the Income

Summary account to the capital account.

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Closing Income Summary to Capital

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Closing Income Summary to Capital

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Closing Income Summary to Capital

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This entry transfers the balance of the withdrawals account to the capital account.

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Key Terms Review

closing entries

Journal entries made to close, or reduce to zero, the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account.

Income Summary account

The general ledger account used to summarize the revenue and expenses for the period.

compound entry

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Post-Closing Trial Balance

What Do You Think?

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Main Idea

After the closing entries are posted, a post-closing trial balance is prepared to verify that debits equal credits.

You Will Learn

how to post the closing entries to the general ledger.

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Key Term

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Completing the Eighth Step in the

Accounting Cycle: Posting the Closing

Entries to the General Ledger

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The Ninth Step in the Accounting Cycle:

Preparing a Post-Closing Trial Balance

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Key Term

post-closing trial balance

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As a result of the first two closing entries, the Income

Summary account had a debit of $2,250 and a credit of

$4,125.

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Step 1: Calculate the balance of the Income Summary

account.

Credits are more than debits; therefore, $4,125 _{- $2,250 = $1,875 credit balance,} which indicates a net income.

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Step 2: Identify the accounts affected.

The accounts Income Summary and Scott

Jones, Capital are affected.

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Step 3: Classify the accounts affected.

Income Summary is a temporary owner’s

equity account; Scott Jones, Capital is the permanent owner’s capital account.

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Step 4: Are the accounts increased or decreased?

The Income Summary account is decreased by its balance, $1,875, to zero. Scott Jones,

Capital is increased by $1,875.

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Step 5: Apply the debit/credit rule.

To reduce the Income Summary account to zero, debit Income Summary $1,875. To increase the capital account, credit Scott

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All revenues increase owner’s equity, and all expenses reduce owner’s equity. These transactions are

separated from capital so the business can analyze how a profit or loss was made during the year. At the end of the year, the accumulation of these revenues and

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