College Accounting 11 th Edition

1. 5 Closing Entries and the Post-Closing Trial Balance chapter College Accounting 11th Edition Teacher Version 5–1

2. Learning Objectives • After you have completed this chapter, you will be able to do the following: • 5–2

3. Steps in the Accounting Cycle • 5–3

4. 5–4

5. Purpose of Closing Entries • The purpose of closing entries is to close (or zero) the temporary-equity or nominal accounts. • Closing entries are made after the last adjusting entry and after the financial statements have been prepared. • Closing entries update the owner’s capital account. • 5–5

6. Practice Exercise 1 5–6

7. Procedure for Closing • The procedure for closing is simply to balance off the account; in other words, to make the balance is Equal to Zero. An account to be closed has a debit balance of $1,400. To make the balance equal to zero, we credit the account for $1,400. • An account to be closed has a debit balance of $870. To make the balance equal to zero, we credit the account for $870. • 5–7

8. Steps in the Closing Procedure • 5–8

9. Steps in the Closing Procedure • 5–9

10. 2,832 • 1,250 • 460 • 620 • 225 • 625 • 512 6,524 • 5–10

11. In cases where a net loss exists, Income Summary and Capital are both reduced. Assume J. Doe Company experienced a $600 net loss. • 5–11

12. 5–12

13. Closing Entries Taken Directly from the Work Sheet • You can gather information for the closing entries either directly from the ledger accounts or from the work sheet (figures for three of the four entries can be taken from the last four columns). • You may plan the closing entries by balancing off all the figures that appear in the Income Statement columns. • In the Item column of the ledger account, we write the word Closing. • 5–13

14. Posting the Closing Entries • Accountants call the accounts that are to be closed (such as revenue, expenses, Income Summary, and Drawing) nominal (temporary-equity) accounts. • Accountants call the accounts that remain open from one fiscal period to the next real (permanent) accounts. • 5–14

15. General Ledgers After Closing Entries • 5–15

16. 5–16

18. The Post-Closing Trial Balance • To verify the balances of the accounts that remain open, a Post Closing Trial Balance is prepared using the final balance figures from the ledger accounts. • Note that the accounts listed in the post-closing trial balance are the real or permanent accounts. • 5–18

19. Tracking Down an Error • If the totals of the post-closing trial balance are not equal, here’s the recommended procedures for tracking down the error. • Re-add the trial balance columns. • Check to see that the figures were correctly transferred from the ledger accounts to the post-closing trial balance. • Verify the posting of the adjusting entries and the recording of the new balances. • Make sure that the closing entries have been posted and that all revenues, expense, Income Summary, and Drawing accounts have zero balances. • 5–19

20. Cash and Accrual Accounting • Under the cash basis of accounting, revenue is recorded when it is receivedincash, and generally expenses are recorded when they are paid in cash. • Under the accrual basis of accounting, revenue is recorded when it is earned, and expenses are recorded when they are incurred. • 5–20

21. Interim Statements • Financial statements prepared during the fiscal year, for periods of less than twelve months, are called interim statements. • A business may prepare the financial statements monthly to provide up-to-date information about the results of operations. • 5–21