6-1 Skyline College Chapter 6. 6-2 Closing entries are journal entries that transfer the results of...

6-1

Skyline College

Chapter

6

6-2

Closing entries are journal entries that transfer the results of operations (net income or net loss) to owner’s equity and reduce the revenue, expense, and drawing account balances to zero.

Only balance sheet accounts carry forward a balance.

The Closing Process

6-3

The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations.

The Income Summary Account

Classified as a temporary owner’s equity account

Only time it has a balance is during the closing process

Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period

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2. Transfer the expense account balances to the Income Summary account.

There are four steps in the closing process:There are four steps in the closing process:

4. Transfer 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 account.

1. Transfer the balance of the revenue account to the Income Summary account.

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On December 31 the worksheet for JT ‘s Consulting Services shows one revenue account, Fees Income of $35,000.

Step 1: Transfer Revenue AccountBalances

The Fees Income account is closed to the IncomeSummary account.

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Net Income

CREDIT

BALANCE SHEETINCOME STMT.

DEBIT CREDIT DEBIT

83,500

5,0002,000

22,0003,500

3677,000

90,0004,000

35,000 7,000 500

1,000

3673,500

35,000 97,36712,367 120,000

367

120,583

TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS

DEBIT CREDIT CREDIT DEBIT CREDIT

ACCOUNT NAME

CashAccounts ReceivableSuppliesPrepaid RentEquipment

Accum. Depr.—Equip.

Jason Taylor, Cap.Accounts Payable

Jason Taylor, Draw.Fees IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp.—Equip.Totals

DEBIT

83,500

7,00090,000

4,00035,000

7,000 500

22,0007,000

5,0003,000

83,500

5,000

22,000

4,000

7,000 500

2,000

7,00090,000

35,000

1,000

3673,500

132,000

132,000 4,083 4,083

(c) 367

(a) 1,000(b) 3,500(c) 367

(a) 1,000(b) 3,500 3,500

120,58322,633 22,633

35,000 35,000 120,000 120,000

JT’s Consulting ServicesWorksheet

Month Ended December 31, 2007

It has a credit balance of $35,000.

6-7

Fees Income

-Closing 35,000

+Bal 35,000

Income Summary

Closing 35,000

Step 1: Close Revenue

The revenue account, Fees Income, is decreased by $35,000 to zero.

The $35,000 is transferred to the temporary owner’s equity account, Income Summary.

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The words “Closing Entries” are written in the Description column of the general journal.

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT REF.

2007 Closing Entries

Dec. 31 Fees Income 35,000

Income Summary 35,000

Step 1: Close Revenue

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The Income Statement section of the worksheet for JT’s Consulting Services lists five expense accounts.

Salaries Expense $7,000Utilities Expense 500Supplies Expense 1,000Rent Expense 3,500Depreciation Expense 367

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 Summary account.

Step 2: Transfer Expense AccountBalances

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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 Summary.

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35,000 120,000 120,000



It has a credit balance of $35,000.

0

CREDIT


DEBIT CREDIT DEBIT

83,500

5,0002,000

22,0003,500

3677,000

90,0004,000

35,000 7,000 500

1,000

3673,500

35,000 97,36712,367 120,000

367

120,583



ACCOUNT NAME





DEBIT

83,500

7,00090,000

4,00035,000

7,000 500

22,0007,000

5,0003,000

83,500

5,000

22,000

4,000

7,000 500

2,000

7,00090,000

35,000

1,000

3673,500

132,000

132,000 4,083 4,083

(c) 367

(a) 1,000(b) 3,500(c) 367

(a) 1,000(b) 3,500 3,500

120,583



CREDIT


DEBIT CREDIT DEBIT

83,500

5,0002,000

22,0003,500

367 7,00090,000

4,00035,000

7,000 500

1,000

3673,500

35,000 97,36712,367 120,000

367

120,583



ACCOUNT NAME





DEBIT

83,500

7,00090,000

4,00035,000

7,000 500

22,0007,000

5,0003,000

83,500

5,000

22,000

4,000

7,000 500

2,000

7,00090,000

35,000

1,000

3673,500

132,000

132,000 4,083 4,083

(c) 367

(a) 1,000(b) 3,500(c) 367

(a) 1,000(b) 3,500 3,500

120,583



35,000 120,000 120,000



22,633 22,633It has a debit balance of $12,367.

35,000

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Income Summary


Salaries Expense

Closing 12,367 Bal 35,000 -Closing 7,000

+Bal 7,000

Utilities Expense Supplies Expense

+Bal 500

+Bal 1000

-Closing 1,000

-Closing 500

Depr. Expense – Equip.Rent Expense

-Closing 3,500

+Bal 3,500

+Bal 367

-Closing 367

Bal 22,633

6-13


DATE DESCRIPTION POST. DEBIT CREDIT REF.

2007 Closing EntriesDec. 31 Income Summary 12,367 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Exp.-Equip. 367


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The Income Summary account reflects all entries in the Income Statement section of the worksheet.

Income Summary

Dr.

Closing 12,367

Cr.

Balance 22,633

Closing 35,000

Net Income

6-15

The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Jason Taylor, Capital because Income Summary has a credit balance of $22,633.

The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income.

Step 3: Close Net Income to Owner’s Capital

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The Income Summary account is reduced to zero.

The net income amount, $22,633, is transferred to the owner’s capital account. Jason Taylor, Capital is increased by $22,633.

Step 3: Close Net Income to Capital

Wooohoooo! I made some money

this month!

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Income Summary Jason Taylor, Capital

Closing 22,633Bal 22,633

+Bal 90,000


Closing 22,633

6-18


DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Income Summary 22,633

Jason Taylor, Capital 22,633


6-19

The drawing account balance is reduced to zero.

The balance of the drawing account, $4,000, is transferred to the owner’s capital account.

Remember that withdrawals appear in the statement of owner’s equity as a

deduction from capital.

Step 4: Close Drawing to Capital

6-20

Jason Taylor, Capital Jason Taylor, Drawing

-Closing 4,000

+Bal 112,633

-Closing 4,000

+Bal 4,000


Bal 108,633

The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet.

6-21


DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Jason Taylor, Capital 4,000

Jason Taylor, Drawing 4,000


6-22

Summary of Closing Entries


POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries

Dec. 31 Fees Income 401 35,000 Income Summary 309 35,000

31 Income Summary 309 12,367 Salaries Expense 511 7,000 Utilities Expense 514 500 Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip. 523 367

31 Income Summary 309 22,633 Jason Taylor, Capital 301 22,633

31 Jason Taylor, Capital 301 4,000 Jason Taylor , Draw. 302 4,000

STEPS

1. CLOSEREVENUE

2. CLOSEEXPENSEACCOUNTS

3. CLOSEINCOMESUMMARY

4. CLOSEDRAWINGACCOUNT

6-23

“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 Entries

All journal entries are posted to the general ledger accounts.

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31 Income Summary 309 22,633 Jason Taylor, Capital 301 22,633

31 Jason Taylor, Capital 301 4,000 Jason Taylor, Draw. 302 4,000

STEPS

1. CLOSEREVENUE




ACCOUNT Fees Income ACCOUNT NO. 401

POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2007 Dec. 31 J2 26,000 26,000Dec. 31 J2 9,000 35,000Dec. 31 Closing J4 35,000 – 0 –

6-25





31 Income Summary 309 22,633.00 Jason Taylor, Capital 301 22,633.00

31 Jason Taylor, Cap 301 4,000 Jason Taylor, Draw. 302 4,000

STEPS

1. CLOSEREVENUE




ACCOUNT Income Summary ACCOUNT NO. 309

POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT

2007 Dec. 31 Closing J4 35,000 35,000

6-26

A postclosing trial balance is a statement that is prepared to prove the equality of general ledger:

Preparing the Postclosing Trial Balance

Proves that total debits equal total credits

Verifies that revenue, expense, and drawing

accounts have zero balances

Only permanent accounts appear on the postclosing trial balance (assets, liabilities and owner’s capital).

6-27

JT’s Consulting Services Postclosing Trial Balance December 31, 2007

ACCOUNT NAME DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment 22,000Accumulated Depreciation–Equipment 367 Accounts Payable 7,000Jason Taylor, Capital _______ 108,633Totals 116,000 116,000

Postclosing Trial Balance

6-28

To interpret means to understand and explain the meaning and importance of something.

Interpret financial statements.

6-29

Consider the financial statements for JT’s Consulting Services at the end of the accounting period.

What is the cash balance?

How much do customers owe the business?

How much does the business owe suppliers?

What is the profit or loss?

6-30

JT’s Consulting ServicesBalance Sheet

December 31, 2007Assets

Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation <367> 21,633Total Assets $ 115,633

Liabilities and Owner’s EquityLiabilities Accounts Payable $ 7,000Owner’s Equity Jason Taylor, Capital 108,633Total Liabilities and Owner’s Equity $115,633

What is the

cash balance?

6-31



Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation < 367> 21,633Total Assets $ 115,633


How much do the customers owe the business?

6-32



Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation < 367> 21,633Total Assets $ 115,633


How much does the business owe its suppliers?

6-33

JT’s Consulting Services Income Statement


Revenue Fees Income 35,000 Expenses Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depr. Expense--Equipment 367 Total Expenses < 12,367>Net Income for the Month 22,633

What is the profit?

6-34

The Accounting Cycle

Step 1 Analyze

transactionsAnalyze the source documents.

Sales slips Purchase invoices Credit memorandums Check stubs

Step 1 Analyze

transactions

6-35


Step 1 Analyze

transactions

Step 2 Journalize the

data about transactions

Record the effects of the transactions in a journal.



6-36


Step 1 Analyze

transactions



Step 3 Post the


Transfer data from the journal to the general ledger accounts.

Step 3 Post the


6-37


Step 1 Analyze

transactions



Step 3 Post the


Prepare a worksheet with five sections.

Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

Step 4 Prepare

a worksheet

Step 4 Prepare

a worksheet

6-38


Step 1 Analyze

transactions



Step 3 Post the


Step 4 Prepare

a worksheet

Prepare financial statements.

Income Statement

Statement of Owner’s Equity

Balance Sheet

Step 5Prepare financial

statements


statements

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Step 1 Analyze

transactions



Step 3 Post the


Step 4 Prepare

a worksheet


statements

The adjusting entries are a permanent record of the changes in account balances shown on the worksheet.

Step 6 Journalize and post adjusting

entries


entries

6-40


Step 1 Analyze

transactions



Step 3 Post the


Step 4 Prepare

a worksheet


statements


entries

Transfer net income or net loss to owner’s equity. Reduce the balances of the

temporary accounts to zero.

Step 7 Journalize and

post closing entries

Step 7 Journalize and

post closing entries

6-41


Step 1 Analyze

transactions



Step 3 Post the


Step 4 Prepare

a worksheet


statements


entriesStep 7

Journalize and post closing

entries

Confirm that the general ledger is in balance.

Confirm that the revenue, expense, and drawing accounts have zero balances.

Step 8 Prepare a

postclosing trial balance

Step 8 Prepare a


6-42


Step 1 Analyze

transactions



Step 3 Post the


Step 4 Prepare

a worksheet


statements


entriesStep 7

Journalize and post closing

entries

Step 8 Prepare a


Use financial statements to understand and communicate the financial information and to make decisions.

Step 9 Interpret

the financial information

Step 9 Interpret

the financial information

6-43

Flow of Data Through a Simple Accounting System

Source documents

Source documents are analyzed.

General journal

General ledger

Worksheet Financialstatements

Source Documents

6-44

Transactions are recorded in the general journal.


Source documents

General journal

General ledger


General journal

6-45

Transactions are posted from the general journal to the general ledger.


Source documents

General journal

General ledger


General ledger

6-46

Financial information is proved, adjusted, and summarized on the worksheet.


Source documents

General journal

General ledger


Worksheet

6-47

Financial information is reported on financial statements.


Source documents

General journal

General ledger

Worksheet FinancialstatementsFinancial

statements

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