6-1 Skyline College Chapter 6

6-2 Closing entries are journal entries that transfer the results of operations (net income or net loss) to owner’s equity and reduce the revenue, expense, and drawing account balances to zero. Only balance sheet accounts carry forward a balance. The Closing Process

6-3 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. The Income Summary Account Classified as a temporary owner’s equity account Only time it has a balance is during the closing process Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period

Transfer the expense account balances to the Income Summary account. There are four steps in the closing process: 4. Transfer the balance of the drawing account to the owner’s capital account. 3. Transfer the balance of the Income Summary account to the owner’s capital account. 1. Transfer the balance of the revenue account to the Income Summary account.

6-5 On December 31 the worksheet for JT ‘s Consulting Services shows one revenue account, Fees Income of $35,000. Step 1: Transfer Revenue Account Balances The Fees Income account is closed to the Income Summary account.

6-6 Net Income 22,633 35, ,000 JT’s Consulting Services Worksheet Month Ended December 31, 2007 It has a credit balance of $35,000.

6-7 Fees Income - Closing 35,000 + Bal 35,000 Income Summary Closing 35,000 Step 1: Close Revenue The revenue account, Fees Income, is decreased by $35,000 to zero. The $35,000 is transferred to the temporary owner’s equity account, Income Summary.

6-8 The words “Closing Entries” are written in the Description column of the general journal. GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Dec. 31 Fees Income 35,000 Income Summary 35,000 Step 1: Close Revenue

6-9 The Income Statement section of the worksheet for JT’s Consulting Services lists five expense accounts. Salaries Expense $7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Expense 367 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: Transfer Expense Account Balances

6-10 The five expense account balances are reduced to zero. Step 2: Close Expenses The total, $12,367 of expenses are transferred to the temporary owner’s equity account, Income Summary.

, ,000 JT’s Consulting Services Worksheet Month Ended December 31, 2007 It has a credit balance of $35, JT’s Consulting Services Worksheet Month Ended December 31, 2007 JT’s Consulting Services Worksheet Month Ended December 31, , ,000 JT’s Consulting Services Worksheet Month Ended December 31, ,633 It has a debit balance of $12, ,000

6-12 Income Summary Step 2: Close Expenses Salaries Expense Closing 12,367 Bal 35,000 - Closing 7,000 + Bal 7,000 Utilities ExpenseSupplies Expense + Bal Bal Closing 1,000 - Closing 500 Depr. Expense – Equip. Rent Expense - Closing 3,500 + Bal 3,500 + Bal Closing 367 Bal 22,633

6-13 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF Closing Entries Dec. 31 Income Summary 12,367 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Exp.-Equip. 367 Step 2: Close Expenses

6-14 The Income Summary account reflects all entries in the Income Statement section of the worksheet. Income Summary Dr. Closing 12,367 Cr. Balance 22,633 Closing 35,000 Net Income

6-15 The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Jason Taylor, Capital because Income Summary has a credit balance of $22,633. The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income. Step 3: Close Net Income to Owner’s Capital

6-16 The Income Summary account is reduced to zero. The net income amount, $22,633, is transferred to the owner’s capital account. Jason Taylor, Capital is increased by $22,633. Step 3: Close Net Income to Capital Wooohoooo! I made some money this month!

6-17 Income Summary Jason Taylor, Capital Closing 22,633 Bal 22,633 + Bal 90,000 Step 3: Close Net Income to Capital Closing 22,633

6-18 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Income Summary 22,633 Jason Taylor, Capital 22,633 Step 3: Close Net Income to Capital

6-19 The drawing account balance is reduced to zero. The balance of the drawing account, $4,000, is transferred to the owner’s capital account. Remember that withdrawals appear in the statement of owner’s equity as a deduction from capital. Step 4: Close Drawing to Capital

6-20 Jason Taylor, Capital Jason Taylor, Drawing - Closing 4,000 + Bal 112,633 - Closing 4,000 + Bal 4,000 Step 4: Close Drawing to Capital Bal 108,633 The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet.

6-21 GENERAL JOURNAL PAGE 4 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries Dec. 31 Jason Taylor, Capital 4,000 Jason Taylor, Drawing 4,000 Step 4: Close Drawing to Capital

6-22 Summary of Closing Entries GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,367 Salaries Expense 511 7,000 Utilities Expense Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip Income Summary ,633 Jason Taylor, Capital , Jason Taylor, Capital 301 4,000 Jason Taylor, Draw ,000 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT

6-23 “Closing” is entered in the Description column of the ledger accounts. The ending balances of the drawing, revenue, and expense accounts are zero. Posting the Closing Entries All journal entries are posted to the general ledger accounts.

6-24 GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,367 Salaries Expense 511 7,000 Utilities Expense Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip Income Summary ,633 Jason Taylor, Capital , Jason Taylor, Capital 301 4,000 Jason Taylor, Draw ,000 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT ACCOUNT Fees Income ACCOUNT NO. 401 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2007 Dec. 31 J2 26,000 26,000 Dec. 31 J2 9,000 35,000 Dec. 31 Closing J4 35,000 – 0 –

6-25 GENERAL JOURNAL PAGE 4 POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries Dec. 31 Fees Income ,000 Income Summary , Income Summary ,367 Salaries Expense 511 7,000 Utilities Expense Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip Income Summary , Jason Taylor, Capital , Jason Taylor, Cap 301 4,000 Jason Taylor, Draw ,000 STEPS 1. CLOSE REVENUE 2. CLOSE EXPENSE ACCOUNTS 3. CLOSE INCOME SUMMARY 4. CLOSE DRAWING ACCOUNT ACCOUNT Income Summary ACCOUNT NO. 309 POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT 2007 Dec. 31 Closing J4 35,000 35,000

6-26 A postclosing trial balance is a statement that is prepared to prove the equality of general ledger: Preparing the Postclosing Trial Balance Proves that total debits equal total credits Verifies that revenue, expense, and drawing accounts have zero balances Only permanent accounts appear on the postclosing trial balance (assets, liabilities and owner’s capital).

6-27 JT’s Consulting Services Postclosing Trial Balance December 31, 2007 ACCOUNT NAME DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment 22,000 Accumulated Depreciation–Equipment 367 Accounts Payable 7,000 Jason Taylor, Capital _______ 108,633 Totals 116, ,000 Postclosing Trial Balance

6-28 To interpret means to understand and explain the meaning and importance of something. Interpret financial statements.

6-29 Consider the financial statements for JT’s Consulting Services at the end of the accounting period. What is the cash balance? How much do customers owe the business? How much does the business owe suppliers? What is the profit or loss?

6-30 JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $ 83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation 21,633 Total Assets $ 115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 What is the cash balance?

6-31 JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $ 83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation 21,633 Total Assets $ 115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 How much do the customers owe the business?

6-32 JT’s Consulting Services Balance Sheet December 31, 2007 Assets Cash $ 83,500 Accounts Receivable 5,000 Supplies 2,000 Prepaid Rent 3,500 Equipment $ 22,000 Less Accumulated Depreciation 21,633 Total Assets $ 115,633 Liabilities and Owner’s Equity Liabilities Accounts Payable $ 7,000 Owner’s Equity Jason Taylor, Capital 108,633 Total Liabilities and Owner’s Equity $115,633 How much does the business owe its suppliers?

6-33 JT’s Consulting Services Income Statement Month Ended December 31, 2007 Revenue Fees Income 35,000 Expenses Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depr. Expense--Equipment 367 Total Expenses Net Income for the Month 22,633 What is the profit?

6-34 The Accounting Cycle Step 1 Analyze transactions Analyze the source documents. Sales slips Purchase invoices Credit memorandums Check stubs Step 1 Analyze transactions

6-35 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Record the effects of the transactions in a journal. Step 2 Journalize the data about transactions

6-36 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Transfer data from the journal to the general ledger accounts. Step 3 Post the data about transactions

6-37 The Accounting Cycle Step 1 Analyze transactions Step 2 Journalize the data about transactions Step 3 Post the data about transactions Prepare a worksheet with five sections. Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet Step 4 Prepare a worksheet

6-38 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 Prepare financial statements. Income Statement Statement of Owner’s Equity Balance Sheet Step 5 Prepare financial statements

6-39 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 The adjusting entries are a permanent record of the changes in account balances shown on the worksheet. Step 6 Journalize and post adjusting entries

6-40 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 Transfer net income or net loss to owner’s equity. Reduce the balances of the temporary accounts to zero. Step 7 Journalize and post closing entries

6-41 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 Confirm that the general ledger is in balance. Confirm that the revenue, expense, and drawing accounts have zero balances. Step 8 Prepare a postclosing trial balance

6-42 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 Use financial statements to understand and communicate the financial information and to make decisions. Step 9 Interpret the financial information

6-43 Flow of Data Through a Simple Accounting System Source documents Source documents are analyzed. General journal General ledger Worksheet Financial statements Source Documents

6-44 Transactions are recorded in the general journal. Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements General journal

6-45 Transactions are posted from the general journal to the general ledger. Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements General ledger

6-46 Financial information is proved, adjusted, and summarized on the worksheet. Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements Worksheet

6-47 Financial information is reported on financial statements. Flow of Data Through a Simple Accounting System Source documents General journal General ledger Worksheet Financial statements Financial statements