Chapter 8—Recording Adjusting & Closing Entries

for a Service Business

Accounting Theory

Accounting Period Cycle◦ Preparing financial statements at the end of each fiscal

period Adjusting Entries

◦ Journal entries recorded to update general ledger accounts at the end of the fiscal period

◦ Recorded on the next journal page following the page on which the last daily transaction for the month are recorded

Matching Expenses with Revenue◦ The revenue earned and the expenses incurred to earn

that revenue are reported in the same fiscal period Adjustments are analyzed and planned on a

worksheet

Accounting Concepts

Supplies and Supplies Expense are adjusted for the amount of supplies used during the period◦ Supplies Expense debit shows the supplies used◦ Supplies credit shows supplies used

Prepaid Insurance and Insurance Expense are adjusted for the amount of insurance used during the period◦ Insurance Expense debit shows the insurance

used◦ Prepaid Insurance credit shows insurance used

Supplies & Insurance Adjustments

Accounts used to accumulate information from one fiscal period to the next◦ Assets, Liabilities and Capital

Listed on the post-closing trial balance Ending balances are the beginning balances

for the next accounting period cycle The capital account’s new balance after all

closing entries are posted is verified by checking it with the amount of capital shown on the balance sheet at the end of the fiscal period

Permanent Accounts

Accounts used to accumulate information until it is transferred to the owner’s capital account◦ Sales, Expenses, Income Summary, and Drawing

Balances are summarized and transferred to the owner’s capital account

Must start each fiscal period with a zero balance by making closing entries◦ To close a temporary account, an amount equal to its

balance is recorded in the account on the side opposite its balance

◦ Information needed for closing entries is found in the work sheet income statement and balance sheet columns

Temporary accounts

Sales, Expenses, Income Summary and Drawing ◦ Debit Sales, Credit Income Summary◦ Debit Income Summary, Credit Expenses◦ Depending on the balance of income summary

When expenses are greater than revenue, income summary has a debit balance Debit Capital, Credit Income Summary

When expenses are less than revenue, income summary has a credit balance Debit Income Summary, Credit Capital

◦ Debit Capital, Credit Drawing There is not a source document for closing

entries

Closing Entries

1. Analyzing Transactions2. Journalize the Transactions to the General Journal3. Post the Transaction to the Ledger4. Prepare a Worksheet5. Prepare Financial Statements6. Journalize Adjusting and Closing Entries7. Post Adjusting and Closing Entries8. Prepare Post-Closing Trial Balance

◦ Verifies debits and credits◦ Only ledger accounts with balances are included

Assets, Liabilities and Capital Numbers come from ledgers not the worksheet

8 Steps in the Accounting Cycle