Chapter 10 Closing Entries

1. Chapter 10 Closing Entries Main Points: • The four steps of the closing entries: • 1. The revenue accounts are closed by transferring their balance to the income summary account. • 2. The expense account are closed by transferring their balance to the income summary account.

2. Chapter 10 Closing Entries • 3. The income summary is closed by transferring the net balance to capital account. • 4. The withdraws accounts are closed by transferring the balance to capital account. Time Allocated: 4 Periods

3. Learning Objectives In this chapterthe students are required to:Master the steps of the closing entries • Grasp how to transfer the revenue or expense accounts to the income summary account. • Grasp how to transfer the income. summary or the withdrawals to capital account.

4. Revision (1) • 1. Why is a work sheet essential? --- Statements are prepared directly from the adjusted trial balance, errors are very difficult to avoid. So, a work sheet is very essential. • 2. For whom are financial statements drawn up? --- Financial statements are drawn up for private individual, non-profit organizations, retailers, wholesalers, and service industries.

5. Revision (2) • 3. Who use financial statements? ---Financial statements are used by management, investors, creditors and government regulatory agencies. • 4. What does the income statement show? --- The income statement shows how much revenues are earned and how much expenses so that you can determine the operating performance of the business over a period of time.

6. Revision (3) • 5. What does the statement of the owner’s equity show? ---The statement of the owner’s equity shows the total capital the company owns for a period of time and the investment the owner has made and how much the owner has withdrawn from the company’s account.

7. Presentation • At the end of accounting period, after the completion of the financial statements, the final bookkeeping entries need to be made to transfer income and expense item to the balance sheet accounts.

8. In-class Activities (1) • Step 1. Closing the credit balances from income statement accounts to the Income Summary account. • Jan. 31 • Dr. Photocopy Fees Earned $9,900 • Cr. Income Summary $9,900 • The posting is shown as following:

9. In-class Activities (1)

10. In-class Activities (1)

11. In-class Activities (2) • Step 2. • Closing the debit balances from income statement accounts to the Income Summary account. • The posting is shown as the following:

12. In-class Activities (2) Jan. 31 Dr. Income Summary $ 2,821 • Cr. Office Salary Expense $ 1,100 • Utility Expense 230 • Telephone Expense 120

13. In-class Activities (2) • Dr. Rent Expense $400 • Cr. Insurance Expense $50 • Dr. Photocopy Supplies Expense $ 500 • Cr. Office Supplies Expense $300

14. In-class Activities (2) • Dr. Depreciation Expense, $33 • Cr. Photocopy Equipment $33 • Dr. Depreciation Expense, $88 • Cr. Office Equipment $ 88

15. In-class Activities (2)

16. In-class Activities (2)

17. In-class Activities (3) • Step 3. • Closing the Income Summary account to the capital account. • After the revenue and expense accounts are closed, the Income Summary account is equal to the net income or net loss. If

18. In-class Activities (3) • the Income Summary account has a credit balance, the company has earned a net income, or the company has suffered a net loss.

19. In-class Activities (3) • Close the Income Summary balance to the Capital account as follows: • Jan. 31 • Dr. Income Summary $ 7,079 • Cr. George Ross, Capital $ 7,079

20. In-class Activities (3)

21. In-class Activities (3)

22. In-class Activities (4) • Step 4. • Closing the Withdrawals account to the Capital account. • The Withdrawals account shows the amount that the owner takes from the business account for personal living expenditures.

23. In-class Activities (4) • The existence of the Withdrawals account indicates that the owner’s equity is reduced and the Capital account is decreased.

24. In-class Activities (4) • Close the Withdrawals account as follows: • Jan. 31 • Dr. George Ross, Capital $ 980 • Cr. George Ross, Withdrawals $ 980

25. In-class Activities (4)

26. In-class Activities (4)

27. The accounts after closing entries are posted:(take cash as an example)

28. In-class Activities (4) • Note: • Once posted to the ledger, the balance of these temporary accounts such as revenue, expense, and withdrawals will zero in preparation for the start of the next accounting period.

29. In-class Activities (5) • To find out the errors that were made during the process of posting the adjustments and closing entries to the ledger accounts, it is necessary to make a new trial balance: • George Ross Photocopy Company • Post-Closing Trial Balance • March 31, 20XX

31. Further Practice Exercise One at Page 22. At the end of Dec. , Mike Andrew got the following income statement. Try to close these revenue and expense accounts.

32. Homework 1. Revise Chapter 10 to get further understanding. 2. Finish the exercises in this chapter and discuss Exercise Two at Page 80 the following questions with your partners. 3. Preview Chapter 11.