There is no “Bob” narration on this series of slides (yea!) (They are pretty self-explanatory.)

The “Closing” Process (called “Withdraw” in non-corp.) (called “Capital” in non-corp.) Temp. accts (also called nominal accounts) are “closed” at the end of every month (or year). This means that any balances are “transferred” to the Retained Earnings (or Capital) account. Temp accts don't perpetually have a balance. Temporary accounts consist of revenue, expense, and distribution/dividend accounts. Asset, Liability, Retained Earnings & Common Stock (Capital) accounts track a company's history forever. These accounts are called permanent accounts and they are never closed. They just keep building on the prior years' balances.

(called “Withdraw” in non-corp.) The “Closing” Process ALL Income Statement accounts are closed ! Closing means to zero-out an account and transfer any balance to Retained Earnings) Dividends (Withdraw in non-corp.) is also closed ! (called “Withdraw” in non-corp.) ALL Income Statement accounts are “temporary” thus they are “closed” (zero’d out) at the end of each acctg period when fin. stmnts are prepared (Small companies do this at year-end. Larger companies “close” and prepare stmnts monthly) Asset, Liability, Retained Earnings & Common Stock (Capital) accounts track a company's history forever. These accounts are called permanent accounts and they are never closed. They just keep building on the prior years' balances.

(called “Capital” in non-corp.) The “Closing” Process Balance Sheet accounts are NOT closed ! (Balance Sheet accounts could have a “zero” balance and not show up in any trial balance or financial statement Ex: business sells off a “truck” that it no longer uses in the business. The “truck” acct would have a zero balance. Th company could just discontinue using the account. (called “Capital” in non-corp.) Asset, Liability, Retained Earnings & Common Stock (Capital) accounts track a company's history forever. These accounts are called permanent accounts and they are never closed. They just keep building on the prior years' balances.

The “Closing Process” consists of these four journal entries The next slides goes through EACH of these FOUR entries.

#1 … of 4 “Step” Closing Process The normal balance of a Revenue account is a credit (same way you increase the account). To make a Revenue account zero (to close it), Debit REVENUE by the same amount as the existing balance, credit Income Summary. balance 10,000 10,000 To begin – create (or use existing) account called: “Income Summary”. “Income Summary” is ONLY used in closing process. It has activity or a balance for a few minutes. Post-closing it will have a zero balance 10,000 Step 1 … Close ALL Revenue accts to Income Summary (Debit the Revenue accounts and credit Income Summary) Hint: Cash and Accounts Receivable are assets accounts – do not close. Unearned Revenue is NOT a “revenue” account – it is a liability account.

(Debit Income Summary and credit all of the Expense accounts) #2 … of 4 “Step” Closing Process balance Balance ZERO 8,000 10,000 8,000 Step 2 … Close ALL Expense accts to Income Summary (Debit Income Summary and credit all of the Expense accounts) The normal balance of any Expense account is a debit (same way you increase the account). To make an Expense account zero (to close it), I credit EACH separate Expense account by the same amount as it’s existing balance and debit Income Summary.

After posting this 3rd entry #3 … of 4 “Step” Closing Process 2,000 Income Summary 0 Balance 2,000 After posting this 3rd entry 2,000 Step 3 … Close “Income Summary” to Retained Earnings To make the Income Summary account zero (to close it), EITHER debit or credit (whichever is opposite to the accounts balance) by the same amount as the balance … and then debit or credit (opposite of the first part of this entry) to Retained Earnings.

#4 … of 4 “Step” Closing Process Bal 0 Bal 0 Bal 0 Step 4 … Close “Dividends” to Retained Earnings Clo 500 2,000 Bal 1,500 Dividends account has a debit balance. To make it zero (to close it), I debit “Retained Earnings” and credit Dividends by the same amount as the account balance. Bal 500 Clo 500

Summary of the 4 “Step” Closing Process “Closing” transfers Profit or Loss (P/L) to Retained Earnings (via Income Summary since Revenue – Expenses = Profit or Loss … Which is the balance in Income Summary that was transferred in step 3). “Closing” zeros-out ALL Revenue and Expense accounts so one period is separate from the next. . (APRIL results are summarized and transferred (closed) to Retained Earnings. Month of MAY begins with zero in every Revenue and Expense account.) Same thing with “Dividends”.

The “Closing” Process “Closing” transfers Profit or Loss (P/L) to Retained Earnings (via Income Summary since Revenue – Expenses = Profit or Loss … Which is the balance in Income Summary transferred in step 3). “Closing” zeros-out ALL Revenue and Expense accounts so one period is separate from the next. . (APRIL results are summarized and transferred (closed) to Ret Earn. Month of MAY begins with zero in every Revenue and Expense account.) Same thing with “Dividends”.

Posting Closing Entries

Preparing a Post-Closing Trial Balance Purpose is to prove the equality of the permanent account balances carried forward into the next accounting period. (No Revenue, Expense or Dividends accounts should be listed - since they ALL should be zero balances). Illustration 4-8

Go to next slide to begin: Correcting Entries

Correcting Entries - An Avoidable Step 1. Analyze business transactions 9. Prepare a post-closing trial balance 2. Journalize the transactions 8. Journalize and post closing entries 3. Post to ledger accounts 7. Prepare financial statements 4. Prepare a trial balance 6. Prepare an adjusted trial balance 5. Journalize and post adjusting entries

Correcting Entries - An Avoidable Step Unnecessary if accounting records are free of errors. Made whenever an error is discovered. Must be posted before closing entries. Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry.

Correcting Entries—An Avoidable Step CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full. Incorrect entry Cash 50 Service Revenue 50 Entry Should Have Been Cash 50 Accts Recble 50 Service Revenue 50 Correcting Entry Accts Recble 50

Correcting Entries—An Avoidable Step CASE 2: On May 18, Mercato purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3. Incorrect entry Equipment 45 Accounts Payable 45 Correct entry Equipment 450 Accounts Payable 450 Correcting entry Equipment 405 Accounts Payable 405