COMPLETION OF THE
ACCOUNTING CYCLE
- Closing Entries -
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Balance Sheet Trial Balance Adjustments Adjusted Trial Balance Income Statement
1. Prepare trial balance
on the worksheet.
2. Enter adjustment
data.
3. Enter adjusted balances
4. Extend adjusted balance to appropriate
columns.
5. Calculate income/loss and complete the
worksheet.
Worksheet Overview
1. Source Documents:
Analyse
Transactions 2. Journalize the transactions 3. Post to ledger
accounts 4. Prepare a trial balance
5. Journalize and post adjusting
entries 6. Prepare
adjusted trial balance 7. Prepare
financial statements 8. Journalize
and post closing
entries 9. Prepare post-closing trial balance
Steps in the Accounting Cycle
Closing the Books
What is “closing the books” for?
How would you do it?
The final stage of the accounting cycle is to
prepare the accounts for the next fiscal
period.
To do this, you must understand which
accounts have balances that continue from
one period to the next and which do not.
Closing Entry Concepts
When a new accounting period begins, the
revenue and expense accounts should show
zero balances so that they contain only data
that refer to the new period.
This allows the calculation of net income
according to the matching principle, which
states:
Revenue for each accounting period is
matched with expenses for that
accounting period to determine the net
income or net loss.
Closing Entry Concepts Continued
Purpose of Closing Entries
1. Updates the owner’s capital account in the
ledger by transferring net income (loss) and
owner’s drawings to owner’s capital.
2. Prepares the temporary accounts (revenue,
expense, drawings) for the next period’s
postings by reducing their balances to zero.
The revenue and expense accounts are
reduced to zero by a process called closing the
books.
Closing the books is the process by which
revenue and expense accounts are reduced
to zero of the end of each accounting period.
Closing the accounts is sometimes called
clearing the accounts.
Closing Entries
Real Accounts and Nominal Accounts
All asset and liability accounts, as well as the
owner's capital account, are considered to be
real accounts.
Real accounts have balances that continue
into the next fiscal period.
Examples of real accounts are Bank, Vehicles,
and Accounts Payable.
Real Accounts
Nominal accounts (Revenue, Expense, and Drawings)
have balances that do not continue into the next
fiscal period.
Nominal accounts, with the exception of the
Drawings account, are related to the income
statement, and the income statement deals only
with a single fiscal period.
All nominal accounts begin each fiscal period with a
nil balance.
Nominal Accounts
Real Accounts and Nominal Accounts
A special nominal account, called the Income
Summary account, is used only during the closing
entry process.
The Income Summary account summarizes the
revenues and expenses of the period.
The temporary balance in this account represents
either the amount of net income or the amount
of net loss.
Real Accounts and Nominal Accounts
Income Summary
Other names for REAL and NOMINAL accounts are
PERMANENT and TEMPORARY accounts.
These alternative terms help you remember which
accounts will continue to have balances
(PERMANENT) and which will be closed out
(TEMPORARY).
Real Accounts and Nominal
Accounts
Temporary Versus Permanent
TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Owner’s drawings ** Owner’s capital account
(Balance Sheet Accounts) (Income Statement /
Drawings Accounts)
(INDIVIDUAL) REVENUES
1
Diagram of the Closing Process
1 Debit each revenue account for its balance, and credit the owner’s capital account for total revenues.
2 Debit the owner’s capital account for total expenses, and credit
(INDIVIDUAL) EXPENSES Normal Dr.
Balance
Normal Cr.
Balance
Cr. to close Dr. to close
- 0 - - 0 -
OWNER’S CAPITAL
Expenses Revenues Opening Balance 2
3
Diagram of the Closing Process
3 Debit owner’s capital for the balance in the owner’s drawings account and credit owner’s drawings for the same amount.
OWNER’S DRAWINGS Normal Dr.
Balance Cr. to close - 0 -
OWNER’S CAPITAL Expenses
Revenues Opening Balance Drawings
Ending Balance
Summary
In summary, there are
4 steps involved in
closing the books:
1. Close the revenue
accounts into
Income Summary.
2. Close the expense
accounts into
Income Summary.
3. Close Income
Summary into
Capital.
2 1
3
4
Journalizing and Posting the
Closing Entries
Closing Entry No. 1
Don’t forget to post to the General Ledger
Journalizing and Posting the
Closing Entries
Closing Entry No. 2
Journalizing and Posting the
Closing Entries
Closing Entry No. 3
Don’t forget to post to the General Ledger
Journalizing and Posting the
Closing Entries
Closing Entry No. 4
Don’t forget to post to the General Ledger
STOP AND CHECK
1. Does the balance in your
Owner’s Capital account
equal the ending capital
balance reported in the
Balance Sheet and Statement
of Owner’s Equity?
2. Are all of your temporary
account balances zero?
Closing Entries
Post - Closing Trial Balance
After all closing entries have been
journalized and posted, a post-closing trial
balance is prepared.
The purpose of this trial balance is to prove
the equality of the permanent (balance
sheet) account balances that are carried
forward into the next accounting period.
Debit Credit
Cash $ 15,200
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000
Accumulated Amortization $ 83
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 25
C.R. Byrd, Capital 12,342
21,950
$ $ 21,950
After Adjustment Pioneer Advertising Agency
Post-Closing Trial Balance October 31, 2012
The post-closing trial balance is prepared from the permanent accounts in the ledger.
The post-closing trial balance provides evidence
that the journalizing and posting of closing entries
has been properly completed.
Post - Closing Trial Balance
1. Source Documents:
Analyse
Transactions 2. Journalize the transactions 3. Post to ledger
accounts 4. Prepare a trial balance
5. Journalize and post 7. Prepare
8. Journalize and post
closing entries 9. Prepare post-closing trial balance
