Do Now  In your notebooks: What do you think a “closing” entry is? Why do you think a company may need to close their sales or expense accounts?

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Presentation transcript:

Do Now  In your notebooks: What do you think a “closing” entry is? Why do you think a company may need to close their sales or expense accounts?

Recording Adjusting Entries and Closing Entries Accounting 1 Chapter 8

The Accounting Cycle Here’s what we’ve done through Chapter 7:  Source documents  Transactions are journalized  Journal entries are posted to the general ledger  A work sheet with a working trial balance and working income statement and balance sheet is prepared  Financial statements – Income Statement and Balance Sheet are prepared from the work sheet Now we need to make final adjustments and close the books

1 st - The Adjustments  We need to journalize and post the adjustments from our work sheet  Adjusting entries: journal entries recorded to update general ledger accounts at the end of a fiscal period Insurance expense Supplies expense

1 st - The Adjustments  Adjustments analyzed and planned on a work sheet Adjustments must be journalized so they can be posted to general ledger accounts  Adjusting entries recorded on next journal page following page on which last daily transactions for month are recorded

2 nd – The Closing Entries  Temporary accounts must have a 0 balance at the end of the fiscal period  We want to start with 0 at the beginning of the next fiscal period  Temporary Accounts: Sales Expenses Income Summary Drawing

Adjusting Entries Chapter 8: ADJUSTING ENTRIES (8-1)  Journalize adjusting entries from the work sheet Write “Adjusting Entries” on next journal page Write next page number Record adjustment entries  Supplies adjustment  Debit Supplies Expense  Credit Supplies  Insurance adjustment  Debit Insurance Expense  Credit Prepaid Insurance  Remember to record all debits first XX XX

Adjusting Entries Textbook p. 202 DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 1 Adjusting Entries 2 Aug31Supplies Expense Supplies Insurance Expense Prepaid Insurance Remember: We need to simply transfer the Information from the adjustment columns to our journal, since we haven’t yet journalized these transactions. Next: We transfer the journalized transactions to The ledgers by posting them, and placing Post Ref Numbers in the journal

Adjusting Entries  WT 8-1, Txt p. 205, WP p. 157  OYO 8-1, Txt p. 205, WP p.162  8-1 Application problem

Do Now  What are the “normal balances” of the following accounts: Sales Expenses Drawing  How can we “offset” these accounts to have a balance of zero before the next fiscal period? Why would we want to do this?

Recording Closing Entries  Accounts used to accumulate information from one fiscal period to the next are called permanent (or real) accounts. Include asset and liability accounts and the owner’s capital account Ending account balances for one fiscal period are the beginning account balances for the next fiscal period

Recording Closing Entries  Accounts used to accumulate information until it is transferred to the owner’s capital account are called temporary (or nominal) accounts. Revenue, expense, and owner’s drawing accounts plus income summary account Show changes in owner’s capital for single fiscal period At end of fiscal period, balances of temporary accounts summarized and transferred to owner’s capital account Begin new fiscal period with zero balances

Recording Closing Entries  Journal entries used to prepare temporary accounts for a new fiscal period is called closing entries. Temporary account balances set to zero at end of fiscal period in order to prepare temporary accounts for recording info next fiscal period Can’t have information in temporary accounts from last fiscal period

Closing Entries CHAPTER 8: CLOSING ENTRIES (8-2) Now, we need to “reset” Close our temporary accounts  Bring them back to 0 to get ready for the next fiscal period  Sales  Expenses  Owner’s drawing  AND INCOME SUMMARY Income Summary is used as a temporary holding place for sales, expenses and net income before it is reset

Closing Entries Close our temporary accounts  Write “Closing Entries” on the next line of the Journal DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT Adjusting Entries 2 Aug31Supplies Expense Supplies Insurance Expense Prepaid Insurance Closing Entries

Closing Entries: Sales Account Close our temporary accounts  Close Sales: Find Sales account amount on Work Sheet  Debit Sales acct  Credit Income Summary acct  This “offsets” sales

Closing Entries: Sales Textbook p. 208 Close our temporary accounts  Close Sales: Find Sales account amount on Work Sheet  Debit Sales acct  Credit Income Summary acct DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 7 Closing Entries 8 31Sales Income Summary

Closing Entries: Expenses Textbook p. 209  Close Expense Accounts:  Debit Income Summary acct  Credit each expense acct separately  Be sure to total all expenses to check your accuracy DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 7 Closing Entries 8 31Sales Income Summary Income Summary Advertising Expense Insurance Expense Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense

Closing Entries: Sales and Expenses Practice: 8-2 WT for Sales and Expenses 8-2 OYO for Sales and Expense

Closing Entries: Net Income/Loss  Closing Entry for Net Income/Net Loss: Remember:  Net Income or Net Loss are not accounts  Think of them differently!  Net Income increases owner’s capital (credit)  Net Loss decreases owner’s capital (debit)  Net Income:  Debit Income Summary the net income amt on I/S  Credit Owner’s Capital  Net Loss:  Debit Owner’s Capital the net loss amt on I/S  Credit Income Summary THIS CLOSES YOUR INCOME SUMMARY ACCOUNT! CHECK TO BE SURE!

Closing Entries: Net Income/Loss Textbook p. 210  Net Income:  Debit Income Summary the net income amt on I/S  Credit Owner’s Capital DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 7 Closing Entries 8 31Sales Income Summary Income Summary Advertising Expense Insurance Expense Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense Income Summary Kim Park, Capital

Closing Entries: Net Income/Loss Textbook p. 210 THIS CLOSES YOUR INCOME SUMMARY ACCOUNT! CHECK TO BE SURE! DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 7 Closing Entries 8 31Sales Income Summary Income Summary Advertising Expense Insurance Expense Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense Income Summary Kim Park, Capital – 3565 = 0!

Closing Entries: Net Income/Loss Practice: 8-2 WT for Net Income/Loss 8-2 OYO for Net Income/Loss

Closing Entries: Drawing Account Textbook p. 211  Close Owner’s Drawing Account: Debit Owner’s Capital  Credit Owner’s Drawing DATE DOC. NO. POST. REF. GEN DEBIT ERAL CREDIT 7 Closing Entries 8 31Sales Income Summary Income Summary Advertising Expense Insurance Expense Miscellaneous Expense Rent Expense Supplies Expense Utilities Expense Income Summary Kim Park, Capital Kim Park, Capital Kim Park, Drawing

Closing Entries: Drawing  8-2 WT, 8-2 OYO  Homework: 8-2 App Problem

Do Now  In your notebooks: What was the purpose of the trial balance columns of the worksheet? What were we trying to prove?

POST-CLOSING WORK  GENERAL LEDGER ACCOUNTS Post Adjusting and Closing Entries in General Ledger  If the balance of the account is 0, draw a line through both the Debit and Credit column  Accounting cycle: series of accounting activities included in recording financial information for a fiscal period

POST-CLOSING WORK  POST-CLOSING TRIAL BALANCE Use general ledger accounts to prepare the post-closing trial balance  Only include accounts with balances  What type of accounts will we see?  PERMANENT ACCOUNTS  Total and prove

POST-CLOSING ACTIVITY  Practice 8-3  OYO 8-3  App Problem 8-3