Where are we in the Accounting Cycle?

1. Transaction Occurs (Source Document)2. Transaction Recorded in Journal3. Journal Entries Posted to the Ledger4. Trial Balance Prepared5. Worksheet Prepared & Adjusting Entries

completed.6. Financial Statements Prepared.7. Ledger Accounts Adjusted & Closed8.8. Closing Trial Balance Prepared.Closing Trial Balance Prepared.

Chapter 8.3– Closing Entries

The final stage of the accounting cycle is to prepare the accounts for the next fiscal period.

To do this we must understand which accounts have balances that continue from one period to the next.

Time Period Concept (Accounting Standard)

Time period concept states that financial reporting, on net income in particular, is done in equal periods.

The accounts from the income statement must be zeroed out so that they are ready for the next cycle.

Real Accounts & Nominal Accounts

Real Accounts/Permanent Accounts – accounts that have balances that continue into the next fiscal period.

Examples – Bank, Trucks, Accounts Payable

Nominal Accounts/Temporary Accounts – balances that do not continue into the next fiscal period. These are all income statement accounts and the drawings account on the balance sheet.

Examples – Revenue, Advertising Expense, Drawings

Income Summary Account

Income Summary Account – a special nominal account, is used during the closing process. The account will summarize the revenue and expenses for the period. The balance of this account will represent

the net income or net loss for the fiscal period.

This account is used after the Balance Sheet and Income Statement have been prepared.

End-of-Period Procedure

Step 1 – Journalize and post the adjusting entries from the worksheet.

Step 2 – Close the nominal accounts to prepare them for the next fiscal period.

1. Transfer the balances of revenue and expenses to the Income Summary Account.

2. Transfer the balances of the Income Summary and Drawings account to the Capital account.

Step 3 – Take-off a post-closing trial balance.

Step 2 in more depth:

Closing Entry #1 – transfer the balance from the revenue account to the Income Summary

Dec 31 Shipping Revenue 40000.00

Income Summary 40000.00

To Close Income into Income Summary

Closing Entry #2 – transfer the balances from the expense accounts to the Income Summary

Dec 31 Income Summary 5000

Expense A 1250

Expense B 1250

Expense C 1250

Expense D 1250

To Close Expenses Into Income Summary

Closing Entry #3 – transfer the balance in the Income Summary Account to the Owner’s Capital Account

Dec 31 Income Summary 35000

A. Bath Capital 35000

To Close Income Summary Into Capital

Closing Entry #4 – transfer the balance for the Drawings account to the Capital Account.

Dec 31 A. Bath Capital 500

A. Bath Drawings 500

To Close Drawings into Capital

How?

Revenue Expenses

Drawings

Income Summary

CapitalThink R.E.I.DRevenueExpensesIncome SummaryDrawings

Step 3: Post Closing Trial Balance

Global Logistics

Post-Closing Trial Balance

December 31, 2011

Bank 11600

A/R 23400

A/P 500

A. Bath Capital 30000

35000 35000

Notice Only Real Account Remain on the trial balance!