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C OMPLETING T HE A CCOUNTING C YCLE

CHAPTER 4. C OMPLETING T HE A CCOUNTING C YCLE. Analyze source documents. Journalize transactions in the journal. Post entries to the accounts in the ledger. Prepare a trial balance. Journalize and post closing entries. Journalize and post adjusting entries.

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C OMPLETING T HE A CCOUNTING C YCLE

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  1. CHAPTER 4 COMPLETING THE ACCOUNTING CYCLE

  2. Analyze source documents. Journalize transactions in the journal. Post entries to the accounts in the ledger. Prepare a trial balance. Journalize and post closing entries Journalize and post adjusting entries Prepare financial statements. Do post-closing trial balance Steps in Accounting Cycle 134

  3. Dr. Cr. Dr. Cr. - - + + Bal. Bal. Expanded Accounting Equation ASSETS + EXP. = LIAB. + S/H EQUITY + REV. A + E = L + S/E + R PermanentTemporaryPermanentPermanentTemporary

  4. Each revenue and expense must have a $0 balance at the beginning of the next year. How do we get the revenues and expenses to $0 balances for the beginning of the next year? A Norm, a Rule and a Question Each revenue and expense account normally has a balance at year-end.

  5. The Closing Process • Transferring (“pouring”) the balances in revenue and expense accounts into the Income Summary account. • Transferring the balance in Income Summary to Retained Earnings. • Transferring the balance in the Dividends account to Retained Earnings. .

  6. Revenues Revenues Revenues Revenues Expenses Expenses Expenses Expenses Income Summary The Closing Process CloseRevenues Close Expenses

  7. Income Summary Retained Earnings The Closing Process

  8. Income Summary Income Summary Income Summary Retained Earnings The Closing Process • Income Summary • Temporary account • Exists only during the closing process • Does not appear on any financial statement Close Income Summary

  9. Dividends Retained Earnings The Closing Process

  10. Dividends Dividends Dividends Retained Earnings The Closing Process Summary of Steps • Close Revenues to Income Summary • Close Expenses to Income Summary • Close Income Summary to Retained Earnings • Close Dividends to Retained Earnings Close Dividends

  11. Revenues have a normal balance on the credit side. Revenues 25,000 Closing Journal EntriesT- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year

  12. Closing Journal EntriesT- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year How do we bring Revenues to a $0 balance? Revenues 25,000

  13. Closing Journal EntriesT- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year How do we bring Revenues to a $0 balance? Revenues 25,000 Remember: To reduce a credit balance account, debit the account.

  14. Closing Journal EntriesT- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year How do we bring Revenues to a $0 balance? Revenues 25,000 We need to debit the account for $25,000 to reduce the account to $0.

  15. Closing Journal EntriesT- Account Example Used to bring revenue and expense accounts to $0 balances for the start of the next fiscal year How do we bring Revenues to a $0 balance? Revenues 25,000 25,000 We need to debit the account for $25,000 to reduce the account to $0. 0

  16. Income Summary Revenues 25,000 25,000 0 Closing Journal EntriesT- Account Example • In the previous example, a $25,000 debit was made to close out Revenues. • A corresponding $25,000 credit must be made to Income Summary.

  17. Closing Journal EntriesT- Account Example • In the previous example, a $25,000 debit was made to close out Revenues. • A corresponding $25,000 credit must be made to Income Summary. Income Summary Revenues 25,000 25,000 25,000 0

  18. Closing Journal EntriesGeneral Journal Example Closing Journal Entries use the same format as other journal entries: GENERAL JOURNAL 1 Page: Date Description PR Debit Credit Account Name ### $$$ MM/DD Account Name ### $$$ To record closing entry

  19. Closing Journal EntriesGeneral Journal Example On 12/31/99, Revenues has a $25,000 balance at year-end. Prepare the journal entry to close the account. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit

  20. Closing Journal EntriesGeneral Journal Example On 12/31/99, Revenues has a $25,000 balance at year-end. Prepare the journal entry to close the account. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Revenues 25,000 Income Summary 25,000 to close Revenues

  21. Closing Journal EntriesGeneral Journal Example Post the entry to the Revenue account. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Revenues 25,000 Income Summary 25,000 to close Revenues ACCOUNT NAME: REVENUES ACCOUNT No. 400 Date Description PR Debit Credit Balance End of Year Balance 25,000 25,000

  22. Closing Journal EntriesGeneral Journal Example Post the entry to the Revenue account. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Revenues 400 25,000 Income Summary 25,000 to close Revenues ACCOUNT NAME: REVENUES ACCOUNT No. 400 Date Description PR Debit Credit Balance End of Year Balance 25,000 25,000 31-Dec Close to Income Summary G97 25,000 0

  23. Closing Journal EntriesGeneral Journal Example Also, post to the Income Summary account. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Revenues 400 25,000 Income Summary 600 25,000 to close Revenues ACCOUNT NAME: INCOME SUMMARY ACCOUNT No. 600 Date Description PR Debit Credit Balance 31-Dec To close Revenues G97 25,000 25,000

  24. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit Closing Journal EntriesGeneral Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry.

  25. Closing Journal EntriesGeneral Journal Example On 12/31/99, Rent Expense was $8,000 and Salaries Expense was $15,000. Prepare the closing journal entry. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Income Summary 23,000 Rent Expense 8,000 Salaries Expense 15,000 to close expenses

  26. 31-Dec Income Summary G97 8,000 0 31-Dec Income Summary G97 15,000 0 Closing Journal EntriesGeneral Journal Example After posting, the Rent Expense and Salaries Expense accounts have $0 balances. ACCOUNT NAME: RENT EXPENSE ACCOUNT No. 515 Date Description PR Debit Credit Balance 31-Dec Balance 8,000 8,000 ACCOUNT NAME: SALARIES EXPENSE ACCOUNT No. 507 Date Description PR Debit Credit Balance 31-Dec Balance 15,000 15,000

  27. Closing Journal EntriesGeneral Journal Example After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings. ACCOUNT NAME: INCOME SUMMARY ACCOUNT No. 600 Date Description PR Debit Credit Balance 31-Dec To close Revenues G97 25,000 25,000 31-Dec To close Expenses G97 23,000 2,000 GENERAL JOURNAL Page: 97 Page: Date Description PR Debit Credit

  28. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Income Summary 600 2,000 Retained Earnings 2,000 Closing Journal EntriesGeneral Journal Example After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings. ACCOUNT NAME: INCOME SUMMARY ACCOUNT No. 600 Date Description PR Debit Credit Balance 31-Dec To close Revenues G97 25,000 25,000 31-Dec To close Expenses G97 23,000 2,000 97 Page:

  29. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Income Summary 600 2,000 Retained Earnings 2,000 Closing Journal EntriesGeneral Journal Example After posting, the Income Summary account has a $2,000 balance that must be closed to Retained Earnings. ACCOUNT NAME: INCOME SUMMARY ACCOUNT No. 600 Date Description PR Debit Credit Balance 31-Dec To close Revenues G97 25,000 25,000 31-Dec To close Expenses G97 23,000 2,000 31-Dec To close R/E G97 2,000 0

  30. Closing Journal EntriesGeneral Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit

  31. GENERAL JOURNAL 97 Page: Date Description PR Debit Credit 31-Dec Retained Earnings 1,300 Dividends 1,300 to close dividends Closing Journal EntriesGeneral Journal Example On 12/31/99, the Dividends account has a $1,300 balance. Prepare the closing entry.

  32. 31-Dec To close Income Summary G97 2,000 9,000 31-Dec To close Dividends G97 1,300 7,700 Closing Journal EntriesGeneral Journal Example Assuming Retained Earnings had a pre-closing ending balance of $7,000, ... ACCOUNT NAME: Retained Earnings ACCOUNT No. 310 Date Description PR Debit Credit Balance 31-Dec Balance 7,000 7,000 … after posting the closing of the Income Summary and Dividends accounts, the ending balance is $7,700.

  33. Closing Journal EntriesOnce More! Expenses Revenues 25,000 Bal. Bal. 18,100 Overview of accounts affected. Retained Earnings Income Summary 7,000 Beg. bal.

  34. Closing Journal EntriesOnce More! Expenses Revenues 25,000 Bal. Bal. 18,100 Owner’s Capital Income Summary Once more, close out Revenues with a debit to Revenues and a credit to Income Summary. $ 7,000

  35. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 Owner’s Capital Income Summary Once more, close out Revenues with a debit to Revenues and a credit to Income Summary. 25,000 $ 7,000

  36. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 Owner’s Capital Income Summary In effect, you have “poured” the Revenues credit balance into the Income Summary. 25,000 $ 7,000

  37. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 Income Summary Close out Expenses with a credit to Expenses and a debit to Income Summary. 25,000

  38. Closing Journal EntriesOnce More! Expenses Revenues 18,100 25,000 25,000 Bal. Bal. 18,100 Owner’s Capital Income Summary Close out Expenses with a credit to Expenses and a debit to Income Summary. 18,100 25,000 $ 7,000

  39. Closing Journal EntriesOnce More! Expenses Revenues 18,100 25,000 25,000 Bal. Bal. 18,100 Owner’s Capital Income Summary In effect, you have “poured” the Expenses debit balance into the Income Summary. 18,100 25,000 $ 7,000

  40. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 18,100 Owner’s Capital Income Summary Determine the ending balance in Income Summary. 18,100 25,000 $ 7,000

  41. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 18,100 Owner’s Capital Income Summary Determine the ending balance in Income Summary. 18,100 25,000 $ 7,000 6,900

  42. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 18,100 Then, close Income Summary to Retained Earnings. Retained Earnings Income Summary 18,100 25,000 7,000 Beg. bal. 6,900 bal.

  43. Closing Journal EntriesOnce More! Expenses Revenues $ 25,000 25,000 25,000 Bal. Bal. 18,100 18,100 Then, close Income Summary to Retained Earnings. Retained Earnings Income Summary 18,100 25,000 7,000 Beg. bal. 6,900 6,900 6,900 bal.

  44. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 18,100 The $6,900 credit to Retained Earnings represents what? Retained Earnings Income Summary 18,100 25,000 7,000 Beg. bal. 6,900 6,900 6,900 bal.

  45. Closing Journal EntriesOnce More! Expenses Revenues 25,000 25,000 Bal. Bal. 18,100 18,100 Net Income! Retained Earnings Income Summary 18,100 25,000 7,000 Beg. bal. 6,900 6,900 6,900 bal.

  46. Closing Journal EntriesOnce More! • Dividends must also be closed to Retained Earnings at the end of the year. Dividends Retained Earnings 2,000 7,000 B. bal. 6,900 N.I.

  47. Closing Journal EntriesOnce More! • Dividends must also be closed to Retained Earnings at the end of the year. Dividends Retained Earnings 2,000 7,000 B. bal. 6,900 N.I. Close Dividends with a credit to Dividends and a debit to Retained Earnings.

  48. Closing Journal EntriesOnce More! • Dividends must also be closed to Retained Earnings at the end of the year. Dividends Retained Earnings 2,000 2,000 2,000 7,000 B. bal. 6,900 N.I. Close Dividends with a credit to Dividends and a debit to Retained Earnings.

  49. Closing Journal EntriesOnce More! • Dividends must also be closed to Retained Earnings at the end of the year. Dividends Retained Earnings 2,000 2,000 Div. 2,000 7,000 B. bal. 6,900 N.I. Determine the ending balance in Retained Earnings.

  50. Closing Journal EntriesOnce More! • Dividends must also be closed to Retained Earnings at the end of the year. Dividends Retained Earnings 2,000 2,000 Div. 2,000 7,000 B. bal. 6,900 N.I. 11,900 E. bal. Determine the ending balance in Retained Earnings.

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