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YOUR course WORKS Home work Group 1: Chapters; 1 – 2 – 11 – 12 – 13 and 14, Last day is 3/31/2017, for 50 Points each. [6 X 50 = 300 Points] Home work Group 2: Chapters; 15 – 18 – 20 – 22 – 23 – 25 and 29, Last day is 5/8/2017, for 50 Points each . [7 X 50 = 350 Points] EXAMS: # 1 Due 1/31, for 65 Points – MID TERM 3/23, for 90 Points – # 2 Due 4/17, for 65 Points – FINAL Due 5/9 , for 90 Points. [65 + 90 + 65 + 90 = 310 Points] Case Study: # 1 Due 1/31 – # 2 Due 2/14 - # 3 Due 3/2 – # 4 Due 3/27 - # 5 Due 4/10 – # 6 Due 4/27 – # 7 Due 5/5, for 5 Points each. [7 X 5 = 35 Points] Atef Abuelaish

MID TERM EXAM RESULTS Atef Abuelaish

A corporation’s net income or net loss is closed to Retained Earnings A corporation’s net income or net loss is closed to Retained Earnings. After posting the closing entries, accountants prepare a post-closing trial balance. Atef Abuelaish Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Journalize closing entries for a merchandising corporation. Post closing entries to the general ledger accounts. Prepare a post-closing trial balance. Describe the steps in the accounting cycle. Atef Abuelaish Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Closing the General Ledger Section 20.2 Posting Closing Entries When closing the general ledger, write Closing Entry for each posting in the Description column of the general ledger account. Atef Abuelaish

Flow of Data Through a Simple Accounting System Source Documents Source Documents General journal General ledger Worksheet Financial statements After studying the accounting cycle of Wells’ Consulting Services, you should have an understanding of how data flows through a simple accounting system for a small business. Review the flow and make certain that you are comfortable with the documents and reports. Atef Abuelaish

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 6 Journalize and post adjusting entries Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 9 Interpret the financial information Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 6 Journalize and post adjusting entries In Step 8, we prepare a postclosing trial balance. In step 9, we interpret the financial information. These nine steps comprise an entire accounting cycle. Take a look at each one and see if you can remember what was involved in each step of the cycle. Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Atef Abuelaish

What adjustments must Wells’ Consulting Services record for the month? QUESTION: Adjustment for supplies used. Adjustment for expired rent. Adjustment for depreciation. ANSWER: Atef Abuelaish

Prepare adjustments for unrecorded business transactions. TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. Adjusting entries are first entered in the Adjustments section of the worksheet Now it is time to move to the next set of columns. We need to prepare adjustments for unrecorded business transactions. Let’s make some adjustments. The process of updating accounts at the end of an accounting period for unrecorded items that belong to the period is referred to as making adjustments or adjusting entries. The adjustments are made in the ADJUSTMENTS column. Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals Atef Abuelaish 150,500 150,500

The Supplies Adjustment Wells’ Consulting Services began the month with $1,500 in supplies. At the end of the month, $1,000 in supplies remained. QUESTION: What dollar amount of supplies was used during the month? $1,500 1,000 ANSWER: Let’s first discuss the supplies adjustment. The business purchased $1,500 of supplies during the month but by the end of the month, only $1,000 of supplies are left. This implies that we must have used $500 of supplies. Wells’ Consulting Services must make an adjustment to show that the company used $500 in supplies during the month. To do this we debit supplies expense and credit the asset supplies for the $500 used up. $500 Atef Abuelaish

Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. We can use the worksheet to show this adjustment. We credit the Supplies account $500 and debit the Supplies Expense account $500. Notice the letter (a) by both of the adjustments. By “keying” the adjustment with a letter reference the accountant can better see the debit and credit amounts of the adjustment. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense Depr. Exp.—Equip. Totals Atef Abuelaish

The Prepaid Adjustment On November 20, 2016, Wells’ Consulting Services paid $8,000 for the December and January rent. As of December 31, 2016, one month’s rent had already been used up. QUESTION: What dollar amount of rent was used during the month of December? $8,000 4,000 ANSWER: Now let’s take a look at the adjustment for expired rent. Recall that the company paid for two months rent in advance. By the end of the month, one month had expired so we need to reduce the Prepaid Rent account by the amount for one month’s rent. $4,000 Atef Abuelaish

Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent (b) 4,000 Equipment Accum. Depr.—Equip. Accounts Payable Carolyn Wells, Cap. Carolyn Wells, Draw. When we originally paid the two months of rent we debited prepaid rent and credited cash. This means that one month of rent was equal to $4,000. Wells’ Consulting Services must make an adjustment to show that $4,000 of the prepaid rent has expired. We will debit the Rent Expense account by $4,000 and credit the Prepaid Rent account by $4,000. Here is how we enter the adjustment in the worksheet. Notice the letter “b” has been placed next to both the debit and the credit. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense (b) 4,000 Depr. Exp.—Equip. Totals Atef Abuelaish

Calculating Depreciation Wells’ Consulting Services purchased equipment in November, 2016. · Cost = $11,000 · Useful life = 5 yrs or 60 months (5 yrs x 12 months) · Salvage value = $0 QUESTION: What dollar amount of depreciation expense should be recorded for the month? $11,000 - $0 60 months Cost - salvage value Estimated months of useful life When figuring depreciation, we need to understand what salvage value means. Salvage value is an estimate of the amount that may be received by selling or disposing of an asset at the end of its useful life. The equipment does not have any salvage value and we expect to use it for five years in the business. In applying the straight-line formula, we calculate a monthly depreciation amount of $183. ANSWER: $183 Atef Abuelaish

Adjustment for Depreciation Accumulated Depreciation— Instead of decreasing the asset account directly, the adjustment for depreciation is recorded in a contra account named Accumulated Depreciation—Equipment. Equipment Accumulated Depreciation— Equipment + + Asset account has a normal debit balance In making the $183 depreciation adjustment, we do not credit the asset account directly, instead we credit a different account. We will credit a contra-asset account called Accumulated Depreciation –Equipment. This account will accumulate the amount of the asset’s cost that has been expensed (depreciated) over the life of the asset. Contra asset account has a normal credit balance Atef Abuelaish

When all adjustments are entered, total and rule the Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE DEBIT CREDIT 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash Accounts Receivable Supplies (a) 500 Prepaid Rent (b) 4,000 Equipment Accum. Depr.—Equip. (c) 183 Accounts Payable When all adjustments are entered, total and rule the Adjustments columns. Carolyn Wells, Cap. Carolyn Wells, Draw. Letter “c” is written next to the debit and credit of the journal entry in the worksheet that shows the depreciation adjustment. When all of the adjustments have been completed, “foot” the columns to insure that they balance. Fees Income Salaries Expense Utilities Expense Supplies Expense (a) 500 Rent Expense (b) 4,000 Depr. Exp.—Equip. (c) 183 Totals Atef Abuelaish 4,683 4,683

Step 1: Combine the figures from the Trial Balance section and the Adjustments section. Record the results in the Adjusted Trial Balance columns. ADJUSTMENTS CREDIT ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals DEBIT (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 111,350 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Notice that the third section of the work sheet is the Adjusted Trial Balance section. This is where we do “horizontal math” and combine the first set of columns with the second set of adjustments columns. Atef Abuelaish

The accounts that do not have adjustments are extended from the Trial Balance section to the Adjusted Trial Balance section. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 5,000 11,000 3,500 100,000 8,000 650 47,000 Cash had no adjustments so its balance carries over to the Adjusted Trial balance section. The same with Accounts Receivable and so on. Atef Abuelaish

($1,500 debit and $500 credit = $1,000) The Supplies account has a $1,500 debit balance in the Trial Balance section and a $500 credit in the Adjustments section. ($1,500 debit and $500 credit = $1,000) 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 5,000 11,000 3,500 100,000 8,000 650 47,000 1,000 4,000 183 Our first account which had an adjustment is Supplies. It started with a $1,500 debit balance, then we credited it for $500. We carry the new adjusted balance of $1,000 to the Adjusted Trial Balance section. The second adjustment was to record the expired rent. The third adjustment was for depreciation. After each one, the new extended total is carried over to the trial balance. 500 4,000 183 Atef Abuelaish

Step 2: Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 500 4000 183 1,000 4,000 INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 183 Make sure to “foot” the columns of the Adjusted Trial Balance section to insure that they balance. Atef Abuelaish 150,683 150,683

The Accounting Cycle Review the steps in the accounting cycle Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Prepare financial statements Income Statement Statement of Owner’s Equity Balance Sheet Step 5 Prepare financial statements Step 5 Prepare financial statements Objective 4 is the last objective in this chapter. In step 5, we use the worksheet to prepare our financial statements. Atef Abuelaish

The Accounting Cycle Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 1 Analyze 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 5 Prepare financial statements Step 6 Journalize and post adjusting entries In step 6, we journalize and post adjusting entries. In step 7, we journalize and post our end of period closing entries. Step 7 Journalize and post closing entries Step 7 Journalize and post closing entries Atef Abuelaish

For accounts that appear on the balance sheet, enter the amount in the appropriate column of the Balance Sheet section. For accounts that appear on the income statement, enter the amount in the appropriate column of the Income Statement section. 111,350 ADJ. TRIAL BAL. DEBIT CREDIT ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 3,500 100,000 5,000 47,000 8,000 650 11,000 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 500 4000 183 1,000 4,000 INCOME STMT. BALANCE SHEET DEBIT CREDIT DEBIT CREDIT 183 Now we move to the final steps of completing the worksheet. Transfer the accounts which belong on the Balance sheet to the Balance Sheet section. Transfer the accounts which belong on the income statement to the Income statement section. Only assets, liabilities, and the owner’s capital account belong on the balance sheet. Revenues and Expenses belong on the income statement. The only exception to this rule of “balance sheet” and “income statement” is the drawing account. This account, when included in the adjusted trial balance is moved over to the “Balance Sheet” section even though it doesn‘t’ show up on that statement; rather it shows up on the statement of Owner’s Equity. Atef Abuelaish 150,683 150,683

After all the account balances are transferred to the financial statement sections, total the Debit and Credit columns. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 After all balances have been transferred, “foot” the four columns. Notice that the totals of the last two sections, “Income Statement” and “Balance Sheet” do NOT balance. More on the next slide. Fees Income 47,000 47,000 47,000 Salaries Expense 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals Atef Abuelaish 150,500 150,500 4,683 4,683 150,683 150,683 13,333 47,000 137,350 103,683

Subtract the smaller total from the larger total in the Income Statement section to find the Net Income or Net Loss. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Salaries Expense Focus on the Income Statement section and subtract the smaller column total from the larger column total. You will notice that the totals of the columns do not balance. The difference is considered net income or net loss. 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals 150,500 150,500 4,683 4,683 150,683 150,683 13,333 47,000 137,350 103,683 Net Income Atef Abuelaish

Enter the amount on the Net Income line. (47,000 – 13,333 = 33,667) If the credit total is more than the debit total, the firm has net income. . . Enter the amount on the Net Income line. (47,000 – 13,333 = 33,667) Net Income 150,683 150,683 CREDIT BALANCE SHEET INCOME STMT. DEBIT 111,350 5,000 1,000 4,000 11,000 3,500 100,000 47,000 8,000 650 500 183 13,333 137,350 103,683 ADJ. TRIAL BAL. ADJUSTMENTS ACCOUNT NAME Cash Accounts Receivable Supplies Prepaid Rent Equipment Accum. Depr.—Equip. Accounts Payable Fees Income Salaries Expense Utilities Expense Supplies Expense Rent Expense Depr. Exp.—Equip. Totals (a) 500 (b) 4,000 (c) 183 4,683 TRIAL BALANCE 1,500 150,500 150,500 Carolyn Wells, Cap. Carolyn Wells, Draw. 4000 33,667 183 183 For Wells’ Consulting Services, they had $33,667 of net income for the period. Place this amount in the debit column so that both of the income statement columns now balance. Place the same amount of $33,667 in the credit column of the Balance Sheet section. After doing this, the two columns of the Balance Sheet section will also balance. This has the effect of “adding” the net income to the owner’s capital account. (Notice it’s on the credit side of the Balance Sheet section.) Atef Abuelaish

Total the Income Statement and the Balance Sheet sections. TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Salaries Expense 8,000 8,000 8,000 You can see that the “footed” columns of the Income Statement and Balance Sheet sections now balance. Utilities Expense 650 650 650 Supplies Expense (a) 500 500 500 Rent Expense (b) 4,000 4000 4,000 Depr. Exp.—Equip. (c) 183 183 183 Totals 150,500 150,500 4,683 4,683 150,683 150,683 13,333 47,000 137,350 103,683 Net Income 33,667 33,667 47,000 47,000 137,350 137,350 Atef Abuelaish

What is the Income Summary account? QUESTION: What is the Income Summary account? 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. ANSWER: The Income Summary account is only used during the closing process. Atef Abuelaish

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 the closing procedure for the next period. The Income Summary account is classified as a temporary owner’s equity account which will have a zero balance at the end of the accounting period. Atef Abuelaish

The Accounting Cycle Step 2 Journalize the data about transactions Step 3 Post the data about transactions Step 1 Analyze transactions Step 4 Prepare a worksheet Step 5 Prepare financial statements Step 9 Interpret the financial information Step 9 Interpret the financial information Step 6 Journalize and post adjusting entries We need to prepare another trial balance called the post-closing trial balance. Step 8 is to prepare a postclosing trial balance and Step 9 is to interpret the financial information. Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance Step 8 Prepare a postclosing trial balance Atef Abuelaish

Journalize and post closing entries. There are four steps in the closing process: 1. Transfer the revenue account balances to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the Income Summary account balance to the owner’s capital account. Let’s further discuss the closing process. Objective one is to journalize and post closing entries. There are four steps in the closing process: close the revenue accounts, close the expense accounts, close the income summary account, and close the drawing account. 4. Transfer the drawing account balance to the owner’s capital account. Atef Abuelaish

Wells’ Consulting Services Worksheet Month Ended December 31, 2016 TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET ACCOUNT NAME DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 111,350 111,350 111,350 Accounts Receivable 5,000 5,000 5,000 Supplies 1,500 (a) 500 1,000 1,000 Prepaid Rent 8,000 (b) 4,000 4,000 4,000 Equipment 11,000 11,000 11,000 Accum. Depr.—Equip. (c) 183 183 183 Accounts Payable 3,500 3,500 3,500 Carolyn Wells, Cap. 100,000 100,000 100,000 Carolyn Wells, Draw. 5,000 5,000 5,000 Fees Income 47,000 47,000 47,000 Salaries Expense 8,000 8,000 8,000 Utilities Expense 650 650 650 Supplies Expense The closing process begins by closing out all revenue accounts to zero. By reviewing the worksheet from the previous chapter, we will note that we only have one revenue account, Fees Income. So, we need to close the one revenue account to zero. Currently Fees Income has a $47,000 credit balance on the worksheet. Fees Income is closed to the Income Summary account. (a) 500 500 500 Rent Expense (b) 4,000 4,000 4,000 Depr. Exp.—Equip. 150,500 150,500 (c) 183 183 183 103,683 Totals 4,683 4,683 150,683 150,683 13,333 47,000 137,350 Net Income Fees Income has a credit balance of $47,000 33,667 33,667 47,000 47,000 137,350 137,350 Atef Abuelaish

Step 1: Close Revenue Fees Income Income Summary Balance 47,000 Closing 47,000 Closing 47,000 To record a decrease in a revenue account, debit it and then make a corresponding entry into the Income Summary account. The revenue account, Fees Income, is decreased by $47,000 to zero. The $47,000 is transferred to the temporary owner’s equity account, Income Summary. Fees Income would be debited for $47,000 and Income Summary would be credited for $47,000. Here is our first closing entry represented in T accounts. Please note that after this closing entry, Fees Income has a zero balance. That was the goal of our closing entry to get the account ready for next year with a starting balance of zero. Atef Abuelaish

Step 1: Close Revenue GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2016 Closing Entries Dec. 31 Fees Income 47,000.00 Income Summary 47,000.00 Here is the first closing general journal entry. Notice that the notation “closing entry” was written above the first closing journal entry. The words “Closing Entries” are written in the Description column of the general journal Atef Abuelaish

Step 2: Close Expenses The Income Statement section of the worksheet for Wells’ 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. Step 2 is to close all of the expense accounts. Since expense accounts have a debit balance, we need to credit them to close their balances to zero. Atef Abuelaish

Step 2: Close Expenses The five expense account balances are reduced to zero. The total, $13,333 of expenses are transferred to the temporary owner’s equity account, Income Summary. When closing the expense accounts, we will transfer their balances to the Income Summary account. Atef Abuelaish

Income Summary Salaries Expense Bal 47,000 Balance 8,000 Closing 13,333 Closing 8,000 Utilities Expense Supplies Expense Balance 650 Balance 500 Closing 650 Closing 500 Rent Expense Depr. Expense – Equip. Since the expense accounts have a debit balance, we need to credit them to close them to zero. A corresponding debit will be made to the Income Summary account. The Income Summary account will be debited for the total of all the credits made to the expense accounts. Each expense account will be credited to bring their balance down to zero. Here is what the T accounts look like. Each expense account was closed to zero and a corresponding debit was made to the Income Summary account for $13,333. Balance 4,000 Balance 183 Closing 4,000 Closing 183 Atef Abuelaish

Step 2: Close Expenses GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. 2016 Closing Entries Dec. 31 Income Summary 13,333.00 Salaries Expense 8,000.00 Utilities Expense 650.00 Supplies Expense 500.00 Rent Expense 4,000.00 Depreciation Exp.-Equip. 183.00 Here is the second closing journal entry. Notice that Income Summary is listed first because it is the only debited account. Atef Abuelaish

The Income Summary account reflects all entries in the Income Statement section of the worksheet. Cr. Balance 33,667 Closing 47,000 Dr. Closing 13,333 After making the first two closing entries, Income Summary has a balance of $33,667. This is the difference between the revenues and the expenses, or net income. This amount will be transferred to the capital account of the owner. Net Income Atef Abuelaish

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 Carolyn Wells, Capital. The Income Summary account is reduced to zero. The net income amount, $33,667, is transferred to the owner’s capital account. Carolyn Wells, Capital is increased by $33,667. Our third closing entry transfers net income to Carolyn Wells, Capital. Atef Abuelaish

Step 3: Close Net Income to Capital Income Summary Carolyn Wells, Capital Balance 33,667 Balance 100,000 Closing 33,667 Closing 33,667 Income Summary has a credit balance of $33,667 at this point, so to close it we would debit it for this amount and make a corresponding credit to the Owner’s capital account for the same amount. Here is an illustration of what the third closing entry would look like in the T accounts. Atef Abuelaish

Step 3: Close Net Income to Capital GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 33,667.00 Carolyn Wells, Capital 33,667.00 Here is the third closing journal entry. Atef Abuelaish

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, $5,000, is transferred to the owner’s capital account. Our final step is to close the owner’s drawing account. Step 4—The owner’s drawing account has a debit balance and is closed directly to the owner’s capital account. In this step, we are reducing the drawing account balance of $5,000 to zero. Atef Abuelaish

Step 4: Close Drawing to Capital Carolyn Wells, Capital Carolyn Wells, Drawing Balance 133,667 Balance 5,000 Closing 5,000 Closing 5,000 We need to debit Carolyn Wells, Capital for $5,000 and credit Carolyn Wells, Drawing for $5,000 to close it to zero. After making the credit to the Drawing account, its balance is zero and the capital account has been reduced by the withdrawals made during the period. This was another goal of the closing process; to update the owner’s capital account. Atef Abuelaish

Step 4: Close Drawing to Capital GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Carolyn Wells, Capital 5,000.00 Carolyn Wells, Drawing 5,000.00 The last closing journal entry is shown here. Atef Abuelaish

The new balance of the Carolyn Wells, Capital account agrees with the amount listed on the balance sheet. Carolyn Wells, Drawing Carolyn Wells, Capital Dr. Balance 5,000 Balance 0 Cr. Balance 100,000 Net Inc. 33,667 Balance 128,667 Closing 5,000 Cr. Dr. Drawing 5,000 Carolyn Wells, Capital will show a balance of $128,667 on the Balance Sheet. Carolyn Wells, Capital Atef Abuelaish

Summary of Closing Entries STEPS GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2016 Closing Entries 1. Close Revenue Account Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 2. Close Expense Accounts 31 Income Summary 309 13,333.00 Salaries Expense 511 8,000.00 Utilities Expense 514 650.00 Supplies Expense 517 500.00 Rent Expense 520 4,000.00 Depr. Expense-Equip. 523 183.00 Here are all four of the closing journal entries: Step 1—close the revenue accounts Step 2—close the expense accounts Step 3—close the Income Summary account Step 4—close the Drawing account 3. Close Income Summary 31 Income Summary 309 33,667.00 Carolyn Wells, Capital 301 33,667.00 4. Close Drawing Account 31 Carolyn Wells, Capital 301 5,000.00 Carolyn Wells, Draw. 302 5,000.00 Atef Abuelaish

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. Now all of the closing journal entries need to be posted to the general ledger. When posting the closing entries, make sure you write “closing” in the description column of the general ledger. Atef Abuelaish

GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT STEPS 2016 Closing Entries Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 STEPS 1. CLOSE REVENUE ACCOUNT Fees Income ACCOUNT NO. 401 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Dec. 31 J2 36,000.00 36,000.00 Dec. 31 J2 11,000.00 47,000.00 Dec. 31 Closing J4 47,000.00 – 0 – Here is the Fees Income account in the general ledger. Notice that after posting the closing journal entry of a $47,000 debit, it now has an end of period balance of zero. Atef Abuelaish

GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT STEPS 2016 Closing Entries 1. CLOSE REVENUE Dec. 31 Fees Income 401 47,000.00 Income Summary 309 47,000.00 ACCOUNT Income Summary ACCOUNT NO. 309 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2016 Dec. 31 Closing J4 47,000.00 47,000.00 After posting to the Fees Income account in the general ledger, we post to the Income Summary. The remaining three closing entries are posted in a similar fashion. Atef Abuelaish

To journalize the closing entries, put the following in order: Question 1 To journalize the closing entries, put the following in order: Close temporary accounts with debit balances. ________ Close temporary accounts with credit balances. ________ Close the Income Summary account to Capital. ________ 2 1 3 Atef Abuelaish

Other trial balances include both temporary and permanent accounts. Question 2 How is a post-closing trial balance different from other trial balances? The post-closing trial balance is prepared after closing entries in which temporary account balances have been transferred to the capital account. The post-closing trial balance has only permanent or balance sheet accounts. Other trial balances include both temporary and permanent accounts. Atef Abuelaish

Thank you and See You On Tuesday at the Same Time, Take Care Atef Abuelaish