Chapter 7 – Closing Entries

Bellringer: Solve the following formulas: 1.10,000 – X = ,000 – X = 0 What is the opposite of $10,000? What is the opposite of $40,000? What is the opposite of Debit? What is the opposite of Credit?

Objectives – SWBAT: Explain the purposes of the closing process. Record closing entries.

Identify, Analyze and Record Events in the General Journal (or special journals if Appropriate) Post General Journal Entries to The General Ledger (and subsidiary Ledgers, if appropriate). Prepare a Trial Balance Enter Adjusting Journal Entries to The General Journal and Post Them to the General Ledger Prepare an Adjusted Trial Balance Prepare Financial Statements Using Adjusted Trial Balance Or General Ledger Enter Closing Entries in General Ledger and Post Them to the General Ledger Prepare a Post-Closing Trial Balance

STEP # 5 – Adjusted Trial Balance A trial balance completed after the adjusting entries have been made and posted to the appropriate accounts.

How does the periodicity concept affect the accounting cycle? Accounting periods MUST be kept separate For example, if we have a fiscal Calendar year as our accounting cycle… January 1, 2010 – December 31, 2010 We would track and keep this separate from…. January 1, 2011 – December 31, 2011 We must prepare financial statements and closing entries.

How does the periodicity concept affect the accounting cycle? What is a closing entry? This is step # 7 in Accounting Cycle. ▫An entry prepared to close (zero-out) income statement accounts. ▫Recall: Net income belongs to the owners. ▫Closing entries transfers the balance in an income statement account to an account classified as owner’s equity. Corporation – Net income closes to Retained Earnings (Net income or “earnings” that have not been distributed to owners/shareholders) Sole Proprietorship or Partnership – Account balances are transferred to the Owner’s Capital accounts.

How does the periodicity concept affect the accounting cycle? What is the formula for Net Income? ▫Revenue – Expenses = Net Income or Net Loss Revenues with a credit and Owner’s Equity Owner’s Equity is on the right side of the accounting equation: right side ▫Assets = Liabilities + Owner’s Equity Therefore, Revenues have CREDIT BALANCES

How does the periodicity concept affect the accounting cycle? We MUST ZERO-OUT these accounts and transfer the balances to retained earnings or capital. How do we do this? If, Revenues have CREDIT BALANCES … AND we have a $175,000 “Sales” Credit balance… THEN what is the opposite of $175,000 Sales Credit? $175,000 Sales Debit

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCredit 1/31/10Sales 175,000 Retained Earnings 175,000 To close out Sales account DateDescriptionDebitCreditBalance 1/17/10175,000 1/31/10175, Sales Account: General Journal: DateDescriptionDebitCreditBalance 1/31/10 5,000 1/31/10175, ,000 Retained Earnings

How does the periodicity concept affect the accounting cycle? What is the formula for Net Income? ▫Revenue – Expenses = Net Income or Net Loss Expense with a debit and Owner’s Equity Owner’s Equity is on the right side of the accounting equation: right side ▫Assets = Liabilities + Owner’s Equity Therefore, Expenses have DEBIT BALANCES

How does the periodicity concept affect the accounting cycle? We MUST ZERO-OUT these accounts and transfer the balances to retained earnings or capital. How do we do this? If, Expenses have DEBIT BALANCES … AND we have a $100,000 Debit balance in Cost of Goods Sold … THEN what is the opposite of $100,000 Debit - Cost of Goods Sold? $100,000 Credit in Cost of Goods Sold

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCredit 1/31/10Retained Earnings 100,000 Cost of Goods Sold 100,000 To close out Cost of Goods Sold Cost of Goods Sold Account: DateDescriptionDebitCreditBalance 1/17/10 100,000 1/31/10 100,

How does the periodicity concept affect the accounting cycle? Now look at Page 199. Look at the Expenses and total them up, how much do you have? 112,375 These expense accounts all have Debit Balances, therefore we need to Credit each balance for all of these accounts and …….Debit $112,375 to ?????

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCredit 1/31/10Retained Earnings 112,375 Cost of Goods Sold 100,000 Salary Expense 5,000 Utilities Expense 1,500 Depreciation Expense 4,000 Interest Expense 1,875

DateDescriptionDebitCreditBalance 1/17/10100,000 1/31/10100, Cost of Goods Sold: General Journal: DateDescriptionDebitCreditBalance 1/15/10 5,000 1/31/10 5, Salary Expense: DateDescriptionDebitCredit 1/31/10Retained Earnings 112, Cost of Goods Sold 100,000 Salary Expense 5, Utilities Expense 1, Utilities Expense: DateDescriptionDebitCreditBalance 1/16/10 1,500 1/31/10 1,

General Journal: DateDescriptionDebitCreditBalance 1/31/10 4,000 1/31/10 4, Depreciation Expense: DateDescriptionDebitCredit 1/31/10Retained Earnings 112,375 Cost of Goods Sold 100,000 Salary Expense 5,000 Utilities Expense 1,500 Depreciation Expense 4,000 Interest Expense 1,875 Interest Expense: DateDescriptionDebitCreditBalance 1/31/10 1,875 1/31/10 1,

How does the periodicity concept affect the accounting cycle? What is the Net income? Revenue – Expenses $175,000 - $112,375 = $62,625. The difference between the in Retained Earnings of $175,000 due to closing the Revenue account and the in Retained Earnings of $112,375 due to closing the expense accounts is the …… $62,625 NET INCOME that belongs to the owners. Note: Revenues – Expenses = Net Income or LOSS!

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCreditBalance 1/31/10Beginning Balance 1/31/10175, ,000 1/31/10112,375 62,625 Retained Earnings Account: General Journal: DateDescriptionDebitCredit 1/31/10Sales 175,000 Retained Earnings 175,000 To close out Sales account

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCredit 1/31/10Retained Earnings 112,375 Cost of Goods Sold 100,000 Salary Expense 5,000 Utilities Expense 1,500 Depreciation Expense 4,000 Interest Expense 1,875 General Journal: Retained Earnings Account: DateDescriptionDebitCreditBalance 1/31/10Beginning Balance 1/31/10175, ,000 1/31/10 112,375 62,625

How does the periodicity concept affect the accounting cycle? IF you have a Withdrawal or Drawing account, you will need to ZERO-OUT this account too. Withdrawals with a debit and Owner’s Equity Owner’s Equity is on the right side of the accounting equation: right side ▫Assets = Liabilities + Owner’s Equity Therefore, Withdrawals have DEBIT BALANCES

How does the periodicity concept affect the accounting cycle? DateDescriptionDebitCredit 1/31/10Retained Earnings 300 Drawing Account 300 To close out Cost of Goods Sold Drawing Account: DateDescriptionDebitCreditBalance 1/31/ /31/

WHAT HAPPENS AFTER CLOSING ENTRIES? A POST – CLOSING TRIAL BALANCE IS PREPARED WHY? TO ensure DEBITS = CREDITS to begin the new accounting period… This is STEP # 8

Identify, Analyze and Record Events in the General Journal (or special journals if Appropriate) Post General Journal Entries to The General Ledger (and subsidiary Ledgers, if appropriate). Prepare a Trial Balance Enter Adjusting Journal Entries to The General Journal and Post Them to the General Ledger Prepare an Adjusted Trial Balance Prepare Financial Statements Using Adjusted Trial Balance Or General Ledger Enter Closing Entries in General Ledger and Post Them to the General Ledger Prepare a Post-Closing Trial Balance