Completing the Accounting Cycle

1. 5 Completing the Accounting Cycle

2. Resets revenue, expense and withdrawal account balances to zero at the end of the period. Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. Closing Process

3. Revenues Assets Owner’s Capital Permanent Accounts Temporary Accounts Liabilities Withdrawals Expenses Income Summary Temporary and Permanent Accounts The closing process applies only to temporary accounts.

4. Let’s see how the closing process works! Recording and Posting Closing Entries • Close Revenue accounts to Income Summary. • Close Expense accounts to Income Summary. • Close Income Summary account to Owner’s Capital. • Close Withdrawals to Owner’s Capital.

5. Closing Process for a Proprietorship Balances before closing.

6. Closing Process for a Proprietorship • Close Revenue accounts to Income Summary.

7. Closing Process for a Proprietorship • Close Expense accounts to Income Summary. The balance in Income Summary equals net income.

8. Closing Process for a Proprietorship • Close Income Summary to Owner’s Capital. • Close Withdrawals account to Owner’s Capital.

9. Exh. 5.3 Using the adjusted trial balance, let’s prepare the closing entries for FastForward.

10. Exh. 5.3 • Close Revenue accounts to Income Summary.

11. Prepare the entry to close Revenues by debiting the revenue accounts and crediting Income Summary. Exh. 5.3 Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

12. Exh. 5.3 Close Revenue Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

13. Close Revenue Accounts to Income Summary

14. Exh. 5.3 • Close Expense accounts to Income Summary.

15. Prepare the entry to close Expenses by crediting the expense accounts and debiting Income Summary. Exh. 5.3 Close Expense Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

16. Exh. 5.3 Close Expense Accounts to Income Summary Now, let’s look at the ledger accounts after posting this closing entry.

17. Close Expense Accounts to Income Summary Net Income

18. Exh. 5.3 • Close Income Summary to Owner’s Capital.

19. Exh. 5.3 Close Income Summary to Owner’s Capital Now, let’s look at the ledger accounts after posting this closing entry.

20. Close Income Summary to Owner’s Capital

21. Exh. 5.3 • Close Withdrawals to Owner’s Capital.

22. Exh. 5.3 Close Withdrawals to Owner’s Capital Now, let’s look at the ledger accounts after posting this closing entry.

23. Close Withdrawals to Owner’s Capital

24. Post-Closing Trial Balance • List of permanent accounts and their balances after posting closing entries. • Total debits and credits must be equal. Let’s look at FastForward’s post-closing trial balance.

25. Exh. 5.4

26. Closing Entries for a Corporation The first two entries are the same, but the last two are a little different! • Close Revenue accounts to Income Summary. • Close Expense accounts to Income Summary. • Close Income Summary account to Retained Earnings. • Close Dividends Declared to Retained Earnings.

27. End of Chapter 5 Let’s close this chapter!