© 2014 Cengage Learning. All Rights Reserved. Vocabulary Test Review © 2014 Cengage Learning. All Rights Reserved.

Need for Permanent and Temporary Accounts ●Accounts used to accumulate information from one fiscal period to the next are called permanent accounts. ●Permanent accounts are all assets, liabilities and the capital account ●Accounts used to accumulate information until it is transferred to the owner’s capital account are called temporary accounts. ●Temporary accounts are the sales, expenses, drawing and income summary accounts SLIDE 2 Lesson 8-1 LO1

© 2014 Cengage Learning. All Rights Reserved. Need for Closing Temporary Accounts ●Journal entries used to prepare temporary accounts for a new fiscal period are called closing entries. ●The temporary account balances must be reduced to zero at the end of each fiscal period. In other words, temporary accounts must start each new fiscal period with a zero balance. SLIDE 3 LO1 Lesson 8-1

© 2014 Cengage Learning. All Rights Reserved. Adjusting Entries ●Are planned on a work sheet ●Entry to Adjust Supplies: ●Debit Supplies Expense, Credit Supplies ●Entry to Adjust Prepaid Insurance: ●Debit Insurance Expense, Credit Prepaid Insurance ●After posting this adjusting entry, the balance of Insurance Expense is the value of insurance premiums used during the fiscal period. SLIDE 4 LO1 Lesson 8-1

© 2014 Cengage Learning. All Rights Reserved. Accounting Concepts ●Accounting Period Cycle: Work sheets are prepared at the end of a fiscal period to summarize the general ledger information needed to prepare financial statements ●Adequate Disclosure: This concept is applied when. financial statements are prepared from information on the work sheet SLIDE 5 LO1 Lesson 8-1

© 2014 Cengage Learning. All Rights Reserved. Income Summary Debit Total expenses (greater than revenue) (Debit balance is the net loss.) Credit Revenue Income Summary Debit Total expenses Credit Revenue (greater than expenses) (Credit balance is the net income.) Need for the Income Summary Account ●When revenue is greater than total expenses, resulting in a net income, the Income Summary account has a credit balance, as shown in the T account. SLIDE 6 ●When total expenses are greater than revenue, resulting in a net loss, the Income Summary account has a debit balance, as shown in the T account. LO1 Lesson 8-1

© 2014 Cengage Learning. All Rights Reserved. Closing Entry for an Income Statement Account with a Credit Balance SLIDE 7 LO1 Lesson 8-1 Closing5, Closing (revenue)5, Bal. 5, (New Bal.0.00) Sales Income Summary “S” Sales amount comes from the Income Statement column of work sheet.

© 2014 Cengage Learning. All Rights Reserved. Closing Entry for Income Statement Accounts with Debit Balances SLIDE 8 LO1 Lesson 8-1 “E” Amounts come from the Income Statement column of work sheet. Debit Income Summary and Credit expenses to close them.

© 2014 Cengage Learning. All Rights Reserved. Closing Entry to Record Net Income or Loss and Close the Income Summary Account SLIDE 9 LO1 Lesson 8-1 “N” If it is a net income, the amount comes from the Income Statement debit column of work sheet. This entry also ends up closing Income Summary when it is posted. *** If they made money, credit capital to increase it by the amount of net income.

© 2014 Cengage Learning. All Rights Reserved. Closing Entry to Record Net Income or Loss and Close the Income Summary Account SLIDE 10 LO1 Lesson 8-1 “N” If there is a net loss, it will be just the opposite. Capital will be debited to reduce capital by the amount of the loss. Income Summary will be credited to close it.

© 2014 Cengage Learning. All Rights Reserved. Closing Entry for the Owner’s Drawing Account SLIDE 11 LO1 Lesson 8-1 “D” Amounts come from the Balance Sheet column of work sheet. Debit Capital to reduce it by the amount of drawing. Crediting drawing closes the drawing account.

© 2014 Cengage Learning. All Rights Reserved. General Ledger Accounts after Closing Entries Are Posted SLIDE 12 LO2 Lesson 8-2 You can verify the accuracy of the capital account’s new balance after all closing entries are posted by checking it with the amount of capital shown on the balance sheet at the end of the fiscal period.

© 2014 Cengage Learning. All Rights Reserved. General Ledger Accounts after Closing Entries Are Posted SLIDE 13 LO2 Lesson 8-2 Temporary accounts begin the fiscal period with a zero balance. (Sales, Expenses, Drawing and Income Summary)

© 2014 Cengage Learning. All Rights Reserved. Proving Accuracy of Posting ●A trial balance prepared after the closing entries are posted is called a post-closing trial balance. ●You are proving that the general ledger accounts are accurate: Your total debits equal your total credits after you posted the closing entries. SLIDE 14 LO2 Lesson 8-2

© 2014 Cengage Learning. All Rights Reserved. Post-Closing Trial Balance—It is the last step of the accounting cycle. SLIDE 15 LO2 Lesson 8-2 Only accounts that still have a balance are listed. (All permanent accounts)

© 2014 Cengage Learning. All Rights Reserved. Accounting Cycle for a Service Business ●The series of accounting activities included in recording financial information for a fiscal period is called an accounting cycle. ●Eight Steps! Start with analyzing transactions so you can journalize them. End with Closing Entries and a post closing trial balance so you can start out the new fiscal period with zero balances in the temporary accounts. (Sales, Expenses, Drawing and Income Summary) SLIDE 16 LO2 Lesson 8-2

© 2014 Cengage Learning. All Rights Reserved. Accounting Cycle for a Service Business SLIDE 17 LO2 Lesson Prepare post-closing trial balance 7. 7.Journalize and post closing entries 6. 6.Prepare financial statements 5. 5.Journalize and post adjusting entries 4. 4.Prepare work sheet 3. 3.Post 2. 2.Journalize 1. 1.Analyze transactions Review them all, but focus on which step is first and which step is last.

© 2014 Cengage Learning. All Rights Reserved. Chapter Vocabulary Terms © 2014 Cengage Learning. All Rights Reserved. Visit Quizlet and work on the Chapter 8 vocabulary terms.Quizlet You can start with the flash cards to learn the terms, then move on to the scatter game or space race to test your knowledge. Ch. 8 Vocab Test Review