Accounting 3

1. Accounting 3 Chapter 26 Section 4 Adjusting, Closing, and Reversing Entries for a Corporation

2. Adjusting Entries • Adjusting Entries for a corporation are similar to those of proprietorships and partnerships except for the adjustment for federal income tax expense and payable. • The adjusting entries are made from the Adjustments column of a work sheet. • To assure that each work sheet adjustment is journalized, the entries should be recorded in the order of the letters assigned to each adjustment.

3. Winning Edge’s worksheet is shown in Chapter 25. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 15 Adjusting Entries Dec 31 Interest Receivable 2 0 00 Interest Income 2 0 00 31 Uncollectible Accounts Expense 9 8 2 8 00 Allowance for Uncollect. Accts 9 8 2 8 00 31 Merchandise Inventory 6 1 5 8 00 Income Summary 6 1 5 8 00 31 Supplies Expense 7 4 7 2 00 Supplies 7 4 7 2 00 31 Insurance Expense 9 8 5 0 00 Prepaid Insurance 9 8 5 0 00 31 Depreciation Exp. Office Equip 4 6 5 0 00 Acc. Dep. Office Equip 4 6 5 0 00 31 Depreciation Exp. Store Equip 8 7 5 0 00 Acc. Dep. Store Equip 8 7 5 0 00 31 Interest Expense 2 0 0 00 Interest Payable 2 0 0 00 31 Federal Income Tax Expense 13 2 0 6 46 Federal Income Tax Payable 13 2 0 6 46

4. Closing Entries • Closing entries for a corporation are made from information on the worksheet. • Closing entries for revenue and expense accounts and net income and temporary equity accounts are similar to those of proprietorships and partnerships. • However, these closing entries affect different accounts.

5. Closing Entries • Corporations record four closing entries: • For income statement accounts with credit balances (revenue and contra accounts). • For income statement accounts with debit balances (cost, contra revenue, and expense accounts). • To record net income or net loss in the retained earnings account and close the income summary account. • For the dividends account.

6. Closing Entry for Accounts with Credit Balances • Income statement credit balance accounts are the revenue (Sales, Gain on Plant Assets, and Interest Income) and the contra cost accounts (Purchases Discount, and Purchases Returns and Allowances). • For this closing entry, you must debit all of the accounts listed above and credit Income Summary.

7. I apologize for the small number at the beginning General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 16 Closing Entries Dec 31 Sales 1917 9 5 5 50 Purchases Discount 10 5 4 8 00 Purchases Ret. And Allow. 5 1 4 2 00 Gain on Plant Assets 5 6 0 00 Interest Income 8 8 00 Income Summary 1934 2 9 3 50

8. Closing Entry for Accounts with Debit Balances • Income statement debit balance accounts are the contra revenue accounts (Sales Discount and Sales Returns and Allowances) and the cost (Purchases) and expense accounts. • If Cash Short and Over has a credit balance, the account balance amount is closed to Income Summary with the credit balance accounts. • To record this closing entry you must debit Income Summary and credit all of the accounts listed in the first bullet.

9. I do not have room on this slide to show all of this closing entries’ accounts. • Please refer to page 677 in your textbook to see a picture of this example.

10. Closing Entry to Record Net Income • After closing entries for the income statement accounts are posted, Income Summary should have a credit balance. • This credit balance should equal the net income calculated on the worksheet. • A corporation’s net income should be recorded in the retained earnings account at the end of the fiscal year.

11. Closing Entry to Record Net Income • After the closing entry is posted, Income Summary should have a zero balance. • If a corporation has a net loss, Income Summary has a debit balance. • Retained Earnings would then be debited and Income Summary credit for the net loss amount.

12. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 16 31 Income Summary 163 7 0 7 54 Retained Earnings 163 7 0 7 54

13. Closing Entry for Dividends • Because dividends decrease the earnings retained by a corporation, the dividends account is closed to Retained Earnings. • After the closing entry is posted, Dividends has a zero balance. • The amount of dividends reduces the amount of Retained Earnings.

14. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 16 31 Retained Earnings 40 0 0 0 00 Dividends 40 0 0 0 00

15. Post-Closing Trial Balance • The Post-Closing Trial Balance is prepared after all closing entries have been journalized and posted. • It is used to check for accuracy in the general ledger at the end of the fiscal period. • This is done just as it is for proprietorships and partnerships by listing all of the accounts with balances and checking to see that debits and credits equal.

16. Reversing Entries • If an adjusting entry creates a balance in an asset or liability account, the adjusting entry should be reversed at the beginning of the next fiscal period. • Usually there are three adjusting entries that create a balance in an asset or liability account. • These are detailed on the next slide.

17. Reversing Entries • The adjusting entry… • For accrued interest income creates a balance in the interest receivable account. • For accrued interest expense creates a balance in the interest payable account. • For federal income tax expense creates a balance in the federal income tax payable account.

18. General Journal Page ___ Doc. No. Post Ref. Date Account Title Debit Credit 17 Reversing Entries Jan 1 Interest Income 2 0 00 Interest Receivable 2 0 00 1 Interest Payable 2 0 0 00 Interest Expense 2 0 0 00 1 Federal Income Tax Payable 13 2 0 6 46 Federal Income Tax Expense 13 2 0 6 46

19. Work Together p. 681 • Due to the nature of the length of this Work Together problem, I am not including it in this presentation. • However, you may refer to my workbook as you look at the situation given on page 681 to further understand the adjusting, closing, and reversing entries of a corporation. Assignments

20. Assignments • Do application 26-4 by hand. • Turn it in. • Complete the mastery problem by using the Automated Accounting software (yes this chapter has a problem unlike Ch. 25). • Take your test. • Congratulations! You have completed the Corporate Accounting Cycle!!! • Move on to your simulation