Closing Entries and the Postclosing Trial Balance

Transcription

1 6-1

2 McGraw-Hill 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter Closing Entries and the Postclosing Trial Balance 6 Section 1: Closing Entries Section Objectives 1. Journalize and post closing entries.

3 6-3 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries The seventh step in the accounting cycle is to journalize and post closing entries.

4 6-4 QUESTION: What is the Income Summary account? ANSWER: The Income Summary account is a special owner s equity account that is used only in the closing process to summarize the results of operations.

5 6-5 Income Summary Account Classified as a temporary owner s equity account. Does not have a normal balance. Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period.

6 Objective 1 Journalize and post closing entries There are four steps in the closing process: 1. Transfer the balance of the revenue account to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the balance of the Income Summary account to the owner s capital account. 4. Transfer the balance of the drawing account to the owner s capital account. 6-6

7 JT s Consulting Services Worksheet Month Ended December 31, 2010 ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr. Equip. Accounts Payable Jason Taylor, Cap. Jason Taylor, Draw. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp. Equip. Totals Net Income TRIAL BALANCE ADJUSTMENTS 6-7 ADJ. TRIAL BAL. DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT 83,500 5,000 3,000 7,000 22,000 4,000 7, ,000 90,000 35,000 (a) 1,000 (b) 3,500 (c) ,500 5,000 (a) 1,000 2,000 (b) 3,500 3,500 22,000 (c) , ,000 4,083 4,083 4,000 7, ,000 3, , ,000 90,000 35, ,583 INCOME STMT. Fees Income has a credit balance of $35,000. DEBIT CREDIT DEBIT 83,500 5,000 2,000 BALANCE SHEET 3,500 22,000 4,000 CREDIT 367 7,000 90,000 35,000 7, ,000 3, ,367 35, ,000 97,367 22,633 22,633 35,000 35, , ,000

8 6-8 Step 1: Close Revenue Fees Income Income Summary Closing 35,000 Balance 35,000 Closing 35,000

9 6-9 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Step 1: Close Revenue Dec. 31 Fees Income 35,000 Income Summary 35,000 The words Closing Entries are written in the Description column of the general journal.

10 6-10 Step 2: Close Expenses The Income Statement section of the worksheet for JT s Consulting Services lists five expense accounts. Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero. This closing entry transfers total expenses to the Income Summary account.

11 6-11 Step 2: Close Expenses The five expense account balances are reduced to zero. The total, $12,367 of expenses are transferred to the temporary owner s equity account, Income Summary.

12 Step 2: Close Expenses 6-12 Closing 12,367 Income Summary BAL 35,000 Balance 7,000 Salaries Expense Closing 7,000 Utilities Expense Supplies Expense Balance 500 Balance 1000 Closing 500 Closing 1000 Rent Expense Depr. Expense Equip. Balance 3,500 Balance 367 Closing 3,500 Closing 367

13 6-13 Step 2: Close Expenses GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Dec. 31 Income Summary 12, Salaries Expense 7, Utilities Expense Supplies Expense 1, Rent Expense 3, Depreciation Exp.-Equip

14 6-14 The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Dr. Closing 12,367 Cr. Closing 35,000 Balance 22,633 Net Income

15 6-15 Step 3: Close Net Income to Capital The journal entry to transfer net income to owner s equity is a debit to Income Summary, and a credit to Jason Taylor, Capital. The balance of Income Summary is reduced to zero; the owner s capital account is increased by the amount of net income. The Income Summary account is reduced to zero. The net income amount, $22,633, is transferred to the owner s capital account. Jason Taylor, Capital is increased by $22,633.

16 6-16 Step 3: Close Net Income to Capital Closing 22,633 Income Summary Balance 22,633 Jason Taylor, Capital Balance 90,000 Closing 22,633

17 6-17 Step 3: Close Net Income to Capital GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 22, Jason Taylor, Capital 22,633.00

18 6-18 Step 4: Close Drawing to Capital Withdrawals appear in the statement of owner s equity as a deduction from capital. The drawing account is closed directly to the capital account. The drawing account balance is reduced to zero. The balance of the drawing account, $4,000, is transferred to the owner s capital account.

19 6-19 Step 4: Close Drawing to Capital Jason Taylor, Capital Jason Taylor, Drawing Closing 4,000 Balance 112,633 Balance 4,000 Closing 4,000

20 6-20 Step 4: Close Drawing to Capital GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Jason Taylor, Capital 4, Jason Taylor, Drawing 4,000.00

21 The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet. Jason Taylor, Drawing Jason Taylor, Capital Dr. Cr. Dr. Cr. Balance 4,000 Closing 4,000 Balance 90,000 Balance 0 Drawing 4,000 Net Inc. 22,633 Balance 108, Jason Taylor, Capital

22 Summary of Closing Entries GENERAL JOURNAL PAGE 4 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary , Salaries Expense 511 7, Utilities Expense Supplies Expense 517 1, Rent Expense 520 3, Depr. Expense-Equip Income Summary , Jason Taylor, Capital , Jason Taylor, Capital 301 4, Jason Taylor, Draw ,

23 6-23 Posting the Closing Entries All journal entries are posted to the general ledger accounts. Closing is entered in the Description column of the ledger accounts. The ending balances of the drawing, revenue, and expense accounts are zero.

24 6-24 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary , Salaries Expense 511 7, Utilities Expense Supplies Expense 517 1, Rent POST. Expense 520 BALANCE 3, Depr. Expense-Equip Income Summary , Jason Taylor, Capital , ACCOUNT Fees Income ACCOUNT NO. 401 DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT CLOSE Dec. INCOME 31 Dec. SUMMARY 31 J2 J2 26, , , , Dec. 4. CLOSE 31 DRAWING ACCOUNT Closing J4 35, Jason Taylor, Capital 301 4, Jason Taylor, Draw ,000.00

25 6-25 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2010 Closing Entries Dec. 31 Fees Income , Income Summary , Income Summary , Salaries Expense 511 7, Utilities Expense Supplies Expense 517 1, POST. Rent Expense 520 BALANCE 3, Depr. Expense-Equip Income Summary , Jason Taylor, Capital , ACCOUNT Income Summary ACCOUNT NO. 309 DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 3. CLOSE 2010 INCOME Dec. 31 Closing J4 35, , SUMMARY 4. CLOSE DRAWING ACCOUNT 31 Jason Taylor, Cap 301 4, Jason Taylor, Draw ,000.00

26 McGraw-Hill 2009 The McGraw-Hill Companies, Inc. All rights reserved. Chapter Closing Entries and the Postclosing Trial Balance 6 Section 2: Using Accounting Information 2. Prepare a postclosing trial balance. 3. Interpret financial statements. 4. Review the steps in the accounting cycle.

27 6-27 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries

28 QUESTION: What is the postclosing trial balance ANSWER: A postclosing trial balance is a statement that is prepared to prove the equality of total debits and credits after the closing process is completed. It verifies that revenue, expense, and drawing accounts have zero balances. 6-28

29 6-29 Postclosing Trial Balance JT s Consulting Services Postclosing Trial Balance December 31, 2010 ACCOUNT NAME DEBIT CREDIT Cash 83, Accounts Receivable 5, Supplies 2, Prepaid Rent 3, Equipment 22, Accumulated Depreciation Equipment Accounts Payable 7, Jason Taylor, Capital 108, Totals 116, ,000.00

30 6-30 Finding and Correcting Errors If the postclosing trial balance does not balance, the accounting records contain errors. Use the audit trail to trace data through the accounting records.

31 6-31 Objective 3 Interpret financial statements.

32 6-32 JT s Consulting Services Balance Sheet December 31, 2010 Assets Cash $83, Accounts Receivable 5, Supplies 2, Prepaid Rent 3, Equipment $ 22, Less Accumulated Depreciation , Total Assets $ 115, What is the How much do the customers owe the Liabilities and Owner s Equity Liabilities cash balance? Accounts Payable business? $7, Owner s Equity Jason Taylor, Capital 108, Total Liabilities and Owner s Equity $115,633.00

33 6-33 JT s Consulting Services Balance Sheet December 31, 2010 Assets Cash $83, Accounts Receivable How much does the business 5, Supplies owe its suppliers? 2, Prepaid Rent 3, Equipment $ 22, Less Accumulated Depreciation , Total Assets $ 115, Liabilities and Owner s Equity Liabilities Accounts Payable $7, Owner s Equity Jason Taylor, Capital 108, Total Liabilities and Owner s Equity $115,633.00

34 6-34 JT s Consulting Services Income Statement Month Ended December 31, 2010 Revenue Fees Income 35, Expenses Salaries Expense 7, Utilities Expense Supplies Expense What is the profit? 1, Rent Expense 3, Depr. Expense--Equipment Total Expenses 12, Net Income for the Month 22,633.00

35 6-35 Objective 4 Review the steps in the accounting cycle The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Prepare financial statements. Income Statement Statement of Owner s Equity Balance Sheet Step 4 Prepare a worksheet Step 5 Prepare financial statements

36 6-36 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Transfer net income or net loss to owner s equity. Reduce the balances of the temporary accounts to zero. Step 7 Journalize and post closing entries Step 5 Prepare financial statements Step 6 Journalize and post adjusting entries

37 6-37 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 8 Prepare a postclosing trial balance Step 7 Journalize and post closing entries Step 6 Journalize and post adjusting entries

38 6-38 Flow of Data Through a Simple Accounting System Source Documents documents General journal General ledger Worksheet Financial statements Source documents are analyzed.

39 6-39 Thank You for using College Accounting, 12th Edition Price Haddock Farina