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Skyline College

Chapter. 6. Skyline College. 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.

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Skyline College

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  1. Chapter 6 Skyline College

  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

  3. TheIncome 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

  4. There are four steps in the closing process: 4.Transfer the balance of the drawing account to the owner’s capital account. 1. Transfer the balance of the revenue account to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the balance of the Income Summary account to the owner’s capital account.

  5. The Fees Income account is closed to the IncomeSummary account. Step 1: Transfer Revenue Account Balances On December 31 the worksheet for JT ‘s Consulting Services shows one revenue account, Fees Income of $35,000.

  6. INCOME STMT. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. BALANCE SHEET ACCOUNT NAME DEBIT DEBIT CREDIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 83,500 83,500 83,500 Cash 5,000 5,000 Accounts Receivable 5,000 2,000 (a) 1,000 3,000 2,000 Supplies 3,500 Prepaid Rent 7,000 (b)3,500 3,500 Equipment 22,000 22,000 22,000 (c) 367 367 367 Accum. Depr.—Equip. 7,000 7,000 7,000 Accounts Payable Jason Taylor, Cap. 90,000 90,000 90,000 4,000 4,000 4,000 Jason Taylor, Draw. Fees Income 35,000 35,000 35,000 Salaries Expense 7,000 7,000 7,000 Utilities Expense 500 500 500 (a) 1,000 Supplies Expense 1,000 1,000 Rent Expense (b) 3,500 3,500 3,500 Depr. Exp.—Equip. (c) 367 132,000 132,000 367 367 Totals 4,083 120,583 120,583 4,083 35,000 97,367 12,367 120,000 JT’s Consulting Services Worksheet Month Ended December 31, 2007 Net Income 22,633 22,633 It has a credit balance of $35,000. 120,000 35,000 35,000 120,000

  7. Step 1: Close Revenue Fees Income Income Summary + Bal 35,000 - Closing 35,000 Closing 35,000 • 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.

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

  9. Step 2: Transfer Expense Account Balances • The Income Statement section of the worksheet for JT’s Consulting Services lists five expense accounts. Salaries Expense $7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation 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.

  10. Step 2: Close Expenses • The five expense account balances are reduced to zero. • The total, $12,367 of expenses are transferred to the temporary owner’s equity account, Income Summary.

  11. 0 INCOME STMT. INCOME STMT. TRIAL BALANCE TRIAL BALANCE ADJUSTMENTS ADJUSTMENTS ADJ. TRIAL BAL. ADJ. TRIAL BAL. BALANCE SHEET BALANCE SHEET ACCOUNT NAME ACCOUNT NAME DEBIT DEBIT DEBIT DEBIT CREDIT CREDIT CREDIT CREDIT DEBIT DEBIT CREDIT CREDIT DEBIT DEBIT CREDIT CREDIT DEBIT DEBIT CREDIT CREDIT 83,500 83,500 83,500 83,500 83,500 83,500 Cash Cash 5,000 5,000 5,000 5,000 Accounts Receivable Accounts Receivable 5,000 5,000 2,000 2,000 (a) 1,000 (a) 1,000 3,000 3,000 2,000 2,000 Supplies Supplies 3,500 3,500 Prepaid Rent Prepaid Rent 7,000 7,000 (b)3,500 (b)3,500 3,500 3,500 Equipment Equipment 22,000 22,000 22,000 22,000 22,000 22,000 (c) 367 (c) 367 367 367 367 367 Accum. Depr.—Equip. Accum. Depr.—Equip. 7,000 7,000 7,000 7,000 7,000 7,000 Accounts Payable Accounts Payable Jason Taylor, Cap. Jason Taylor, Cap. 90,000 90,000 90,000 90,000 90,000 90,000 4,000 4,000 4,000 4,000 4,000 4,000 Jason Taylor, Draw. Jason Taylor, Draw. Fees Income Fees Income 35,000 35,000 35,000 35,000 35,000 35,000 Salaries Expense Salaries Expense 7,000 7,000 7,000 7,000 7,000 7,000 Utilities Expense Utilities Expense 500 500 500 500 500 500 (a) 1,000 (a) 1,000 Supplies Expense Supplies Expense 1,000 1,000 1,000 1,000 Rent Expense Rent Expense (b) 3,500 (b) 3,500 3,500 3,500 3,500 3,500 Depr. Exp.—Equip. Depr. Exp.—Equip. (c) 367 (c) 367 132,000 132,000 132,000 132,000 367 367 367 367 Totals Totals 4,083 4,083 120,583 120,583 120,583 120,583 4,083 4,083 35,000 35,000 97,367 97,367 12,367 12,367 120,000 120,000 JT’s Consulting Services Worksheet Month Ended December 31, 2007 JT’s Consulting Services Worksheet Month Ended December 31, 2007 JT’s Consulting Services Worksheet Month Ended December 31, 2007 JT’s Consulting Services Worksheet Month Ended December 31, 2007 22,633 22,633 It has a credit balance of $35,000. It has a debit balance of $12,367. 120,000 35,000 120,000 120,000 35,000 35,000 120,000

  12. Step 2: Close Expenses Income Summary Salaries Expense + Bal 7,000 - Closing 7,000 Bal 35,000 Closing 12,367 Bal 22,633 Utilities Expense Supplies Expense - Closing 500 + Bal 1000 - Closing 1,000 + Bal 500 Depr. Expense – Equip. Rent Expense - Closing 3,500 - Closing 367 + Bal 3,500 + Bal 367

  13. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2007 Closing Entries Dec. 31 Income Summary 12,367 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Exp.-Equip. 367 Step 2: Close Expenses

  14. Cr. Dr. Closing 12,367 Closing35,000 Balance 22,633 The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Net Income

  15. Step 3: Close Net Income to Owner’s Capital • 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.

  16. Step 3: Close Net Income to Capital • 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. Wooohoooo! I made some money this month!

  17. Step 3: Close Net Income to Capital Income Summary Jason Taylor, Capital + Bal 90,000 Bal 22,633 Closing 22,633 Closing 22,633

  18. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary22,633 Jason Taylor, Capital22,633 Step 3: Close Net Income to Capital

  19. Step 4: Close Drawing to Capital • 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.

  20. Step 4: Close Drawing to Capital Jason Taylor, Drawing Jason Taylor, Capital - Closing 4,000 + Bal 112,633 + Bal 4,000 - Closing 4,000 Bal 108,633 The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet.

  21. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Jason Taylor, Capital4,000 Jason Taylor, Drawing4,000 Step 4: Close Drawing to Capital

  22. Summary of Closing Entries STEPS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income 401 35,000 Income Summary 30935,000 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 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 3. CLOSE INCOME SUMMARY 31 Jason Taylor, Capital 301 4,000 Jason Taylor , Draw. 302 4,000 4. CLOSE DRAWING ACCOUNT

  23. Posting the Closing Entries • “Closing” is entered in the Description column of the ledger accounts. • The ending balances of the drawing, revenue, and expense accounts are zero. All journal entries are posted to the general ledger accounts.

  24. STEPS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income 401 35,000 Income Summary 30935,000 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 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 ACCOUNT Fees Income ACCOUNT NO. 401 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2007 Dec. 31 J2 26,000 26,000 Dec. 31 J2 9,000 35,000 31 Income Summary 309 22,633 Jason Taylor, Capital 301 22,633 3. CLOSE INCOME SUMMARY 31 Jason Taylor, Capital 301 4,000 Jason Taylor, Draw. 302 4,000 4. CLOSE DRAWING ACCOUNT Dec. 31 Closing J4 35,000 – 0 –

  25. STEPS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income 401 35,000 Income Summary 30935,000 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 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 ACCOUNT Income Summary ACCOUNT NO. 309 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2007 31 Income Summary 309 22,633.00 Jason Taylor, Capital 301 22,633.00 3. CLOSE INCOME SUMMARY 31 Jason Taylor, Cap 301 4,000 Jason Taylor, Draw. 302 4,000 4. CLOSE DRAWING ACCOUNT Dec. 31 ClosingJ4 35,000 35,000

  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).

  27. Postclosing Trial Balance JT’s Consulting Services Postclosing Trial Balance December 31, 2007 ACCOUNT NAME DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment 22,000 Accumulated Depreciation–Equipment 367 Accounts Payable 7,000 Jason Taylor, Capital _______108,633 Totals 116,000116,000

  28. To interpret means to understand and explain the meaning and importance of something. Interpret financial statements.

  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?

  30. JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation <367> 21,633 Total Assets $115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 What is the cash balance?

  31. JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation < 367> 21,633 Total Assets $115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 How much do the customers owe the business?

  32. JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation < 367> 21,633 Total Assets $115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 How much does the business owe its suppliers?

  33. JT’s Consulting Services Income Statement Month Ended December 31, 2007 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?

  34. The Accounting Cycle Step 1Analyze transactions Step 1 Analyze transactions • Analyze the source documents. • Sales slips • Purchase invoices • Credit memorandums • Check stubs

  35. The Accounting Cycle Step 2 Journalize the data about transactions Step 2Journalize the data about transactions Step 1Analyze transactions Record the effects of the transactions in a journal.

  36. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 3Post the data about transactions Step 1Analyze transactions Transfer data from the journal to the general ledger accounts.

  37. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 4Prepare a worksheet Step 1Analyze transactions • Prepare a worksheet with five sections. • Trial Balance • Adjustments • Adjusted Trial Balance • Income Statement • Balance Sheet

  38. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions Prepare financial statements. • Income Statement • Statement of Owner’s Equity • Balance Sheet Step 5Prepare financial statements Step 5Prepare financial statements

  39. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions Step 5Prepare financial statements The adjusting entries are a permanent record of the changes in account balances shown on the worksheet. Step 6Journalize and post adjusting entries Step 6 Journalize and post adjusting entries

  40. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions • Transfer net income or net loss to owner’s equity. • Reduce the balances of the temporary accounts to zero. Step 5Prepare financial statements Step 6Journalize and post adjusting entries Step 7Journalize and post closing entries Step 7 Journalize and post closing entries

  41. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions • Confirm that the general ledger is in balance. • Confirm that the revenue, expense, and drawing accounts have zero balances. Step 5Prepare financial statements Step 6Journalize and post adjusting entries Step 7Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 8Prepare a postclosing trial balance

  42. The Accounting Cycle Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions Step 5Prepare financial statements Use financial statements to understand and communicate the financial information and to make decisions. Step 9 Interpret the financial information Step 6Journalize and post adjusting entries Step 9Interpret the financial information Step 7Journalize and post closing entries Step 8Prepare a postclosing trial balance

  43. Flow of Data Through a Simple Accounting System Source Documents Source documents Worksheet General journal General ledger Financial statements Source documents are analyzed.

  44. Source documents Worksheet General journal General ledger Financial statements Flow of Data Through a Simple Accounting System General journal Transactions are recorded in the general journal.

  45. Source documents Worksheet General journal General ledger Financial statements Flow of Data Through a Simple Accounting System General ledger Transactions are posted from the general journal to the general ledger.

  46. Source documents Worksheet General journal General ledger Financial statements Flow of Data Through a Simple Accounting System Worksheet Financial information is proved, adjusted, and summarized on the worksheet.

  47. Source documents Worksheet General journal General ledger Financial statements Flow of Data Through a Simple Accounting System Financial statements Financial information is reported on financial statements.

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