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

1. Analyze transactions and record in journal (Chapters 1 and 2)

2. Post journal entries to the ledger accounts (Chapter 3)

3. Prepare a trial balance (Chapter 3)

4. Gather adjustment data and record in worksheet (Chapter 4)

9 Steps of Accounting Cycle5. Complete the worksheet (Chapter 4)

6. Prepare financial statements from worksheet (Chapter 4)

7. Journalize and post the adjusting entries from worksheet (Chapter 4)

8. Journalize and post the closing entries (Chapter 5)

9. Prepare a post-closing trial balance (Chapter 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

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

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

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(normal balance side)

$5,000 $5,000

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

$5,000$350(normal balance side)

$350 $350

Bal: $4,650

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

$5,000$550(normal balance side)

$550 $350

$550 Bal: $4,100

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

$5,000$1,000(normal balance side)

$1,000 $350$550

$1,000Bal: $3,100

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

$5,000$1,200(normal balance side)

$1,200 $350$550$1,000

$1,200Bal: $1,900

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

Income Summary

$1,900

Bal: $1,900(Normal balance

side)New balance = $0

$1,900

Capital

Previous balance: 20,000

$1,900New balance: 21,900

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

CapitalPrevious balance $21,900$1,000

Drawing

$1,000$1,000(normal balance side)

(new balance: $20,900)

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

Chapter 5

GENERAL JOURNAL

PAGE____4_____

  DATE DESCRIPTIONPOST. REF. DEBIT CREDIT  

1 2005   Closing Entries                       1

2 June 30 Income from Services   5 0 0 0 00           2

3   Income Summary             5 0 0 0 00 3

4                             4

5   30 Income Summary   3 1 0 0 00           5

6     Utilities Expense               3 5 0 00 6

7     Depreciation Expense, Equipment               5 5 0 00 7

8     Salary Expense             1 0 0 0 00 8

9     Rent Expense             1 2 0 0 00 9

10                             10

11   30 Income Summary   1 9 0 0 00           11

12   R. Gentry, Capital             1 9 0 0 00 12

13                             13

14   30 R. Gentry, Capital   1 0 0 0 00           14

15     R. Gentry, Drawing             1 0 0 0 00 15

16                             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.

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

  R. Gentry Consulting Services

  Post-Closing Trial Balance

  June 30, 2005

  ACCOUNT NAME 

    DEBIT CREDIT

1 Cash   21 4 6 0 00          

  Accounts Receivable   2 0 0 0 00          

2 Supplies     1 0 0 00          

  Prepaid Insurance     3 3 0 00          

3 Equipment   15 0 0 0 00          

4

Accumulated Depreciation, Equipment             12 0 0 0 00

5 Accounts Payable             5 7 0 0 00

  Wages Payable               2 9 0 00

6 R. Gentry, Capital             20 9 0 0 00

7 R. Gentry, Drawing   1 0 0 0 00          

8 Fees Income             5 0 0 0 00

9 Salary Expense   1 0 0 0 00          

10 Rent Expense   1 2 0 0 00          

11 Utilities Expense     3 5 0 00          

12 Depreciation Expense, Equipment     5 5 0 00          

13    

14                        

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.

  R. Gentry Consulting Services

  Post-Closing Trial Balance

  June 30, 2005

  ACCOUNT NAME  

    DEBIT CREDIT

1 Cash   21 4 6 0 00          

  Accounts Receivable   2 0 0 0 00          

2 Supplies     1 0 0 00          

  Prepaid Insurance     3 3 0 00          

3 Equipment   15 0 0 0 00          

4 Accumulated Depreciation, Equipment             12 0 0 0 00

5 Accounts Payable             5 7 0 0 00

  Wages Payable               2 9 0 00

6 R. Gentry, Capital             20 9 0 0 00

13     38 8 9 0 00 38 8 9 0 00

14                        

Chapter 5 Demonstration Problems

Monday, October 8E 5-1

  E 5-3

Wednesday, October 10E 5-4

  E 5-7P 5-1A

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

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)

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)

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)

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

Monday Wednesday