Completing the Accounting Cycle

1. Completing the Accounting Cycle Closing Entries

2. Real and Nominal Accounts • Real (Permanent) Account: an account which carries its balance into the next accounting period. • Nominal (Temporary) Account: an account which transfers its balance into the capital account at the end of an accounting period. Thus, it will begin a new accounting period with a zero balance.

3. Why have Closing Entries? • Because the balance of revenue, expense, and drawings accounts continually cumulate, they must be closed at the end of the fiscal year. Because these accounts do not continue into the next fiscal period, they are called "nominal" accounts. • Closing these accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts. You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts.

4. Exploring the Closing Process Closing accounts is a fundamentally a four-step process

5. Step 1 Transfer the balance of any revenue account(s) to the Income Summary. Date Account Debit Credit Dec. 31 Lawncare Fees Earned 100,000.00 Income Summary 100,000.00

6. Step 2 Transfer the balance of the expense account(s) to the Income Summary. Date Account Debit Credit Dec. 31 Income Summary 65,000.00 Rent Expense 20,000.00 Wages Expense 40,000.00 Hydro Expense 5,000.00

7. Step 3 Transfer the balance of the Income Summary to the Capital account: Date Account Debit Credit Dec. 31 Income Summary 35,000.00 Capital 35,000.00

8. Step 4 Transfer the balance of the Drawings account to the Capital account. Date Account Debit Credit Dec. 31 Capital 5,000.00 Drawings 5,000.00