Understanding Closing Entries in Accounting

1. LESSON 8-2 Recording Closing Entries Original created by M.C. McLaughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School

2. Permanent & Temporary Accounts • Accounts used to accumulate information from one fiscal period to the next are called permanent accounts (also referred to as real accounts) • Assets, Liabilities, Owner’s Equity • Accounts used to accumulate information until it is transferred to the owner’s capital account are called temporary accounts (also referred to as nominal accounts) • Revenue, Expense, Owner’s Drawing, Income Summary LESSON 8-2

3. NEED FOR CLOSING TEMPORARY ACCOUNTS page 207 • Journal entries used to prepare temporary accounts for a new fiscal period are called closing entries • Temporary account balances must be reduced to zero at the end of each fiscal period • To close a temporary account, an amount equal to its balance is recorded in the account on the side opposite to its balance • A temporary capital account titled Income Summary is used to summarize the closing entries for the revenue & expense accounts LESSON 8-2

4. NEED FOR THE INCOME SUMMARY ACCOUNT page 207 • The income summary account is unique because it does not have a normal balance side • The balance of this account is determined by the amounts posted to the account at the end of a fiscal period LESSON 8-2

5. NEED FOR THE INCOME SUMMARY ACCOUNT • Business record four closing entries: • An entry to close Income statement accounts with credit balances • An entry to close income statement accounts with debit balances • An entry to record net income or net loss and close Income Summary • An entry to close the owner’s drawing account LESSON 8-2

6. (Debit to close) 3 4 CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE page 208 1 2 1. Write the heading. 2. Write the date. 3. Write the title of the account debited. Record the debit amount. 4. Write the title of the account credited. Record the credit amount. LESSON 8-2

7. (Credit to close) 3 CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES page 209 1. Date 2. Income Summary 3. Credit 4. Debit amount 2 4 1 LESSON 8-2

8. (Capital: credit torecord net income) (Income Summary:debit to close) 2 3 CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT page 210 1. Date 2. Debit 3. Credit 1 LESSON 8-2

9. (Credit to close) 2 3 CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT page 211 1. Date 2. Debit 3. Credit 1 LESSON 8-2

10. TERMS REVIEW page 212 • permanent accounts • temporary accounts • closing entries LESSON 8-2