Completing the accounting cycle Closing Entries Completing the accounting cycle

Accounting Cycle Summarized Analyze business transactions 1 Prepare post adjusting trial balance 9 Journalize the transactions 2 Journalize & post closing entries 8 Post to ledger accounts 3 Prepare financial statements 7 Prepare a trial balance 4 Prepare adjusted trial balance 6 Journalize & post adjusting entries 5

Closing Entries Final stage of accounting cycle to prepare the accounts for the next fiscal period (remember the TIME PERIOD CONCEPT GAAP?) Some accounts have balances that continue from one period to the next and some do not

Real Accounts Have balances that continue into the next fiscal period Also referred to as permanent accounts All asset, liability and owner’s capital accounts i.e. Bank, Truck, Accounts Payable

Nominal Accounts Balances do not continue into the next fiscal period Also referred to as temporary accounts Revenue, Expense, and drawings accounts Nominal accounts (with the exception of drawings) are related to the income statement which deals only with a single fiscal period

Income Summary Account Summarizes the revenues and expenses of the period Used only during closing entry process Temporary balance in this account presents either the amount of net income or net loss

End of Period Procedure Bring accounts up to date by journalizing and posting adjusting entries Close nominal accounts to prepare them for next fiscal period Take off a post-closing trial balance

Closing Temporary (Nominal) Accounts To determine current Owner’s Equity Put all accounts back together

Closing Entries All revenues and expenses must be reduced to zero to allow new entries next period Use the REID formula: R: close revenues to Income Summary E: close expenses to Income Summary I: close Income Summary to Capital D: close Drawings to Capital http://download.elearningontario.oise.utoronto.ca/repository/1092460000/BAF3MPU04/BAF3MPU04A05/mme/BAF3MPU04A05journal01.swf

The Closing Process (Individual) Expenses Dr. (normal balance) Cr. to close Owner’s Capital is a permanent account. All other accounts shown here are temporary accounts. (Individual) Revenues Cr. (normal balance) Dr. to close Income Summary Dr. Expenses Cr. Revenue Cr. balance = Net Income to close 2 1 Close expenses to income summary 2 Close revenues to income summary 1 3 Owner’s Drawings Dr. (normal balance) Cr. to close Owner’s Capital Drawings Net Income Cr. (normal balance) Close income summary to Owner’s Capital 3 4 Close Owner’s Drawings to Owner’s Capital 4

Close Revenues Close Expenses Cr Income Summary 50000 Dr Fees Income 30000 Dr Management Revenue 20000 Cr Income Summary 50000 Close Expenses Dr Income Summary 40000 Cr Advertising Expense 10000 Wages 15000 General Expense 15000

Close Income Summary Close Drawings Dr Income Summary 10000 Cr J. Schmoo, Capital 10000 Close Drawings Dr J. Schmoo, Capital 5000 Cr J. Schmoo, Drawings 5000

Post-Closing Trial Balance WHY? - To ensure we have closed out the accounts correctly Last stage in the accounting cycle