PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 4 C OMPLETING THE A CCOUNTING C YCLE

4 - 2 B ENEFITS OF A W ORK S HEET Aids the preparation of financial statements. Reduces possibility of errors. Links accounts and their adjustments. Assists in planning and organizing an audit. Helps in preparing interim financial statements. Shows the effects of proposed transactions. Not a required report. P 1

4 - 3 FastForward Worksheet For the Month Ended December 31, 2011 P 1

4 - 4 P REPARING THE F INANCIAL S TATEMENTS P 1

4 - 5 P REPARING THE F INANCIAL S TATEMENTS P 1

4 - 6 R ECORDING C LOSING E NTRIES 1.Resets revenue, expense and withdrawal account balances to zero at the end of the period. 2.Helps summarize a period’s revenues and expenses in the Income Summary account. Identify accounts for closing. Record and post closing entries. Prepare post-closing trial balance. C 1

4 - 7 Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital TEMPORARY AND PERMANENT ACCOUNTS The closing process applies only to temporary accounts. C 1

4 - 8 Let’s see how the closing process works! R ECORDING C LOSING E NTRIES  Close Credit Balances in Revenue Accounts to Income Summary.  Close Debit Balances in Expense accounts to Income Summary.  Close Income Summary account to Owner’s Capital.  Close Withdrawals to Owner’s Capital. P 2

4 - 9  Close Credit Balances in Revenue Accounts to Income Summary. P 2

 C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY Now, let’s look at the ledger accounts after posting this closing entry. Dr. Cr. Dec. 31 Consulting revenue 7,850 Rental revenue 300 Income summary 8,150 P 2

P 2  C LOSE C REDIT B ALANCES IN R EVENUE A CCOUNTS TO I NCOME S UMMARY

 Close Debit Balances in Expense Accounts to Income Summary. P 2

Now, let’s look at the ledger accounts after posting this closing entry.  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

Net Income  C LOSE D EBIT B ALANCES IN E XPENSE A CCOUNTS TO I NCOME S UMMARY P 2

S UMMARY OF THE C LOSING P ROCESS 1.Close Credit Balances in Revenue Accounts to Income Summary. 2.Close Debit Balances in Expense Accounts to Income Summary. 3.Close Income Summary to Owner’s Capital. 4.Close Withdrawals Account to Owner’s Capital.

E ND OF C HAPTER 4