Introduction to Accounting Preparing for a User’s Perspective Closing Entries: Analyze, record & post. Prepare Post-Closing Trial Balance Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store

The Full Accounting Cycle Original Transaction Entries Identify Analyze Record Post Prepare Pre-adjusted TB Adjusting Entries Identify Analyze Record Post Prepare Adjusted TB Financial Statements Closing Entries Identify Analyze Record Post Prepare Post-Closing TB

Steps in the Accounting Cycle 1) Identify 2) Analyze Steps in the Accounting Cycle a) What accounts? Round 3 b) Increase or decrease? Closing Entries c) Amount $? d) Debit or credit? 3) Record 5) Prepare Post-Closing Trial Balance Date Account Debit Credit 12/31 Sales Revenue 1,000 Income Summary DR (CR) 150,570 - (5,000) (65,756) Etc. $0 Cash Etc. Accounts Payable Retained Earnings Total Income Summary Sales Revenue 4) Post 1,000 1,000

Before continuing, make sure you : Know the difference between temporary (aka nominal) and permanent (aka real) accounts. Temporary are ALL accounts that do not appear on the Balance Sheet Permanent are ALL accounts that appear on the Balance Sheet AND carry their balances forward from one year to the next 2) Why are temporary accounts closed into retained earnings each year. Avoid double-counting of net income and dividends Start fresh each year to account for net income and dividends Need a refresher? Watch this 7m:34s video : http://youtu.be/c4Y9UzS3egI

ABC Co. Adjusted Trial Balance For the year ended 12/31/X1 ABC Co. Income Statement For the year ended 12/31/X1 Revenues $90 Expenses (55) = Net Income $35 ABC Co. Statement of Retained Earnings For the year ended 12/31/X1 Retained Earnings 1/1/X1 $25 + Net Income 35 - Dividends (10) Retained Earnings 12/31/X1 $50 Account name Debits (Credits) Assets 100 Liabilities (40) Capital Stock (10) Retained Earnings (25) Dividends 10 Revenues (90) Expenses 55 Balance $0 ABC Co. Balance Sheet As of 12/31/X1 Assets $100 Liabilities $40 Equity: Capital Stock 10 Retained Earnings 50 Total Equity 60 Total liabilities & equity $100 ALL temporary accounts (REID) must be closed to match this ending balance sheet.

R E I D $100 $40 Permanent Accounts 25 10 35 10 Account name Debits Credits 50 R Revenues 90 Income Summary 90 E 55 90 Income Summary 55 Expenses 55 35 35 10 10 I Income Summary 35 Retained Earnings 35 D Retained Earnings 10 90 90 55 55 Dividends 10

All temporary accounts are now $0 and are ready to capture new data for the new year. ABC Co. Adjusted Trial Balance For the year ended 12/31/X1 ABC Co. Post Closing Trial Balance For the year ended 12/31/X1 AFTER ALL temporary accounts have been closed into retained earnings, ONLY permanent accounts will carry amounts forward to next year. Account name Debits (Credits) Assets 100 Liabilities (40) Capital Stock (10) Retained Earnings (25) Dividends 10 Revenues (90) Expenses 55 Balance $0 Account name Debits (Credits) Assets 100 Liabilities (40) Capital Stock (10) Retained Earnings (50) Balance $0 ALL temporary account balances have been closed into retained earnings.

Temporary Accounts Permanent Account

Current asset Current asset Current asset Contra asset Current asset Noncurrent liability Current asset Equity Current asset Contra asset Current asset Current asset Current asset Noncurrent asset Noncurrent asset Contra asset Contra asset Current liability Current liability Current liability Current liability Current liability

R Account name Debits Credits Sales Revenues 200,000 Interest Revenues 600 Dividend Income 200 Income Summary 200,800 R R R

Revenues closed into Income Summary Represents all Revenues closed into Income Summary 200,800

R E Account name Debits Credits Sales Revenues 200,000 Interest Revenues 600 Dividend Income 200 Income Summary 200,800 Income Summary 129,104 Cost of Goods Sold 50,000 R Bad Debt Expense 450 E Commission Expense 4,040 E E Insurance Expense 10,000 E Office Supplies Expense 430 E Utilities Expense 3,390 E Depreciation Expense 6,300 E Bank Fees 30 Interest Expense 6,667 E Income Tax Expense 47,797 E R R E E

Income Summary 129,104 200,800 71,796 Represents all Expenses closed into Income Summary Represents all Revenues closed into Income Summary 129,104 200,800 Represents Net Income which will next be closed into Retained Earnings 71,796

R E I Account name Debits Credits Sales Revenues 200,000 Interest Revenues 600 Dividend Income 200 Income Summary 200,800 Income Summary 129,104 Cost of Goods Sold 50,000 R Bad Debt Expense 450 E Commission Expense 4,040 E E Insurance Expense 10,000 E Office Supplies Expense 430 E Utilities Expense 3,390 E Depreciation Expense 6,300 E Bank Fees 30 Interest Expense 6,667 E Income Tax Expense 47,797 E R I Income Summary 71,796 R Retained Earnings 71,796 E E

Income Summary 129,104 200,800 71,796 71,796 $0 Represents all Expenses closed into Income Summary Represents all Revenues closed into Income Summary 129,104 200,800 Represents Net Income which will next be closed into Retained Earnings 71,796 Represents entry to close Income Summary into Retained Earnings 71,796 Income summary ALWAYS finishes the closing process with a $0 balance $0

R E I D Account name Debits Credits Sales Revenues 200,000 Interest Revenues 600 Dividend Income 200 Income Summary 200,800 Income Summary 129,104 D Cost of Goods Sold 50,000 R Bad Debt Expense 450 E Commission Expense 4,040 E E Insurance Expense 10,000 E Office Supplies Expense 430 E Utilities Expense 3,390 E Depreciation Expense 6,300 E Bank Fees 30 Interest Expense 6,667 E Income Tax Expense 47,797 E R I Income Summary 71,796 R Retained Earnings 71,796 E D E Retained Earnings 5,940 Dividends 5,940

AFTER ALL temporary accounts have been closed into retained earnings, ONLY permanent accounts will carry amounts forward to next year. ALL temporary account balances have been closed into retained earnings.

Temporary Accounts Permanent Account

Retained Earnings 71,796 5,940 65,756 Beginning Retained Earnings 71,796 Net Income 5,940 Dividends Ending Retained Earnings 65,756

Introduction to Accounting Preparing for a User’s Perspective Closing Entries: Analyze, record & post. Prepare Post-Closing Trial Balance Debits and Credits Trainer By Kevin C. Kimball, CPA with support from www.canvas.net Free Jan. 2014 Available on the Google Play Store