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Mastering Closing Entries in Accounting - Chapter 10 Lecture Notes

Discover the essence of closing entries in accounting through Chapter 10 Lecture Notes. Learn to prepare the business for a new accounting period by closing temporary accounts and summarizing revenue and expenses using Income Summary.

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Mastering Closing Entries in Accounting - Chapter 10 Lecture Notes

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  1. PREPARING CLOSING ENTRIES Chapter 10 Lecture Notes

  2. CONGRATULATIONS! • Guess what? • You have done an amazing thing … • You have made it to the end of an accounting cycle! • WHOOO HOOOOOOO! • Now what?

  3. IT’S CLOSING TIME! • Time to get the books ready for the new year. • Did the business make money or lose money? • Who gets that money? • How do we prepare the business for the next accounting period? • That’s what Chapter 10 is all about! With a bit of hard work and my expert tutelage, you’ll be fine! 

  4. What are Closing Entries? • Well first, let’s review: • Permanent accounts are used to accumulate information from one fiscal period to the next! (Also known as real accounts.) • Permanent accounts are your assets, liabilities, and owner’s equity accounts. • Temporary accounts are used to accumulate information until it is transferred to the owner’s capital account. • Temporary accounts are also known as nominal accounts. • Temporary accounts are your revenue, expenses, drawing, and income summary accounts. • Temporary accounts must be reduced to ZERO at the end of each fiscal period!

  5. So what are closing entries then? • Well, closing entries are the special journal entries used to prepare the temporary accounts for the new fiscal period. • To close a temporary account, an amount equal to its balance is recorded on the opposite side of its balance. • For example, if Sales Revenue has a Credit Balance of $4,000, we would give Sales Revenue a Debit for $4,000 to close it!

  6. But can you do that? • You can’t make a journal entry with just a debit or a credit. You need both! • Whenever a temporary account is closed, the closing entry must have equal debits and credits! • INCOME SUMMARY is the temporary account that is used to summarize the closing entries for the revenue and expense accounts.

  7. INCOME SUMMARY! • The Income Summary account is awesome. It sits there all alone, all year… waiting for its one chance at glory. • Closing day is it! • The Income Summary account is unique because it does not have a normal balance. • CREDIT BALANCE = NET INCOME! • DEBIT BALANCE = NET LOSS!

  8. THERE ARE FOUR CLOSING ENTRIES! • Entry to Close Revenue • Entry to Close Expenses • Entry to Close Net Income or Net Loss into Capital. This will also close down Income Summary! (It’s job is done! ) • Lastly, the entry to close the Drawing Account into Capital. • After recording these entries, you post them back to the ledger and watch the magic happen! • Whoever invented this is a genius, man!

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