Completing the Accounting Cycle for a Sole Proprietorship Making Accounting Relevant In the workplace, it is important to be able to manage your time efficiently. Making Accounting Relevant In the workplace, it is important to be able to manage your time efficiently. In your job or in your classroom experiences, what personal skills help you manage your time? How have you managed stress during especially busy times?

Section 1Preparing Closing Entries What You’ll Learn  Why temporary capital accounts are closed at the end of the fiscal year.  The purpose of the Income Summary account.  The relationship between the Income Summary account and the capital account.  How to analyze and journalize closing entries. What You’ll Learn  Why temporary capital accounts are closed at the end of the fiscal year.  The purpose of the Income Summary account.  The relationship between the Income Summary account and the capital account.  How to analyze and journalize closing entries.

Why It’s Important Closing entries are made to prepare the financial records for the next fiscal year. Why It’s Important Closing entries are made to prepare the financial records for the next fiscal year. Section 1Preparing Closing Entries (con’t.) Key Terms  closing entries  Income Summary account  compound entry Key Terms  closing entries  Income Summary account  compound entry

Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries Closing entries are journal entries made to close, or reduce to zero, the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account. Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries Closing entries are journal entries made to close, or reduce to zero, the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account. Section 1Preparing Closing Entries (con’t.)

The Income Summary Account The Income Summary account is used to accumulate and summarize the revenue and expenses for the period. The Income Summary Account The Income Summary account is used to accumulate and summarize the revenue and expenses for the period. Section 1Preparing Closing Entries (con’t.) Income Summary DebitCredit ExpensesRevenue If Revenue > Expenses Balance is net income If Revenue < Expenses Balance is net loss

Preparing Closing Entries 1.The balance of the revenue account is transferred to the credit side of the Income Summary account. 2.The expense account balances are transferred to the debit side of the Income Summary account. Preparing Closing Entries 1.The balance of the revenue account is transferred to the credit side of the Income Summary account. 2.The expense account balances are transferred to the debit side of the Income Summary account. Section 1Preparing Closing Entries (con’t.)

Preparing Closing Entries (con’t.) 3.The balance of the Income Summary account is transferred to the capital account (net income to the credit side; net loss to the debit side). 4.The balance of the withdrawals account is transferred to the debit side of the capital account. Preparing Closing Entries (con’t.) 3.The balance of the Income Summary account is transferred to the capital account (net income to the credit side; net loss to the debit side). 4.The balance of the withdrawals account is transferred to the debit side of the capital account. Section 1Preparing Closing Entries (con’t.)

Closing Entry ANALYSIS Identify1.Roadrunner has only one revenue account, Delivery Revenue. The accounts affected are Delivery Revenue and Income Summary. Classify2.Delivery Revenue is a revenue account. Income Summary is a temporary capital account. + / –3.The Delivery Revenue account balance is decreased by $2,650 to zero. That amount, $2,650 is transferred to the Income Summary account. First Closing Entry—Close Revenue to Income Summary First Closing Entry Section 1Preparing Closing Entries (con’t.)

DEBIT-CREDIT RULE 4.Decreases in revenue accounts are recorded as debits. Debit Delivery Revenue for $2, To transfer the revenue to the Income Summary account, credit Income Summary for $2,650. First Closing Entry (con’t.) Section 1Preparing Closing Entries (con’t.) Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary

T ACCOUNTS 6. DeliveryIncome RevenueSummary Debit – Closing 2,650 Credit Closing 2,650 Debit Section 1Preparing Closing Entries (con’t.) First Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary Closing Entry (con’t.) Credit + Balance 2,650

Closing Entry (con’t.) JOURNAL ENTRY Section 1Preparing Closing Entries (con’t.) First Closing Entry (con’t.) First Closing Entry—Close Revenue to Income Summary

Closing Entry ANALYSIS Identify1. The accounts affected by the second closing entry are Delivery Revenue, Maintenance Expense, Rent Expense, Utilities Expense, and Income Summary. Classify 2.Advertising Expense, Maintenance Expense, Rent Expense, and Utilities Expense are expense accounts. Income Summary is a temporary capital account. + / – 3.The balances of the four expense accounts are decreased to zero; the total decrease is $1,500. The total amount, $1,500, is transferred to the Income Summary account. Second Closing Entry—Close Expenses to Income Summary Second Closing Entry Section 1Preparing Closing Entries (con’t.)

DEBIT-CREDIT RULE 4.To transfer the expenses to the Income Summary account, debit Income Summary for $1, Decreases in expense accounts are recorded as credits. Credit Advertising Expense, $75; Maintenance Expense, $600; Rent Expense, $700; Utilities Expense, $125. Second Closing Entry (con’t.) Section 1Preparing Closing Entries (con’t.) Closing Entry (con’t.) Second Closing Entry—Close Expenses to Income Summary

T ACCOUNTS 6. Income SummaryAdvertising Expense Debit – Closing 1,500 Credit – Closing 75 Section 1Preparing Closing Entries (con’t.) Second Closing Entry (con’t.) Closing Entry (con’t.) Credit Second Closing Entry—Close Expenses to Income Summary Debit + Balance 75 Maintenance ExpenseRent Expense Debit + Balance 125 Credit – Closing 600 Debit + Balance 700 Credit – Closing 700 Utilities Expense Credit – Closing 125 Debit + Balance 600

Closing Entry (con’t.) JOURNAL ENTRY 7. Section 1Preparing Closing Entries (con’t.) Second Closing Entry (con’t.) Second Closing Entry—Close Expenses to Income Summary

Closing Entry ANALYSIS Identify1.The accounts Income Summary and Maria Sanchez, Capital are affected. Classify2.Income Summary is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account. + / –3.The Income Summary account balance is reduced to zero by transferring $1,150, the net income amount, to the capital account. Maria Sanchez, Capital is increased by $1,150. Third Closing Entry Section 1Preparing Closing Entries (con’t.) Third Closing Entry—Close Income Summary to Capital

DEBIT-CREDIT RULE 4.To reduce the Income Summary balance to zero, debit Income Summary for $1, Net income is recorded as a credit to the owner’s capital account. Credit Maria Sanchez, Capital for $1,150. Third Closing Entry (con’t.) Section 1Preparing Closing Entries (con’t.) Closing Entry (con’t.) Third Closing Entry—Close Income Summary to Capital

T ACCOUNTS 6. Maria Sanchez Income SummaryCapital Debit Closing 1,150 Debit – Section 1Preparing Closing Entries (con’t.) Third Closing Entry (con’t.) Closing Entry (con’t.) Credit Balance 1,150 Credit + Balance 25,400 Closing 1,150 Third Closing Entry—Close Income Summary to Capital

Closing Entry (con’t.) JOURNAL ENTRY 7. Section 1Preparing Closing Entries (con’t.) Third Closing Entry (con’t.) Third Closing Entry—Close Income Summary to Capital

Closing Entry ANALYSIS Identify1.The accounts affected by the fourth closing entry are Maria Sanchez, Withdrawals and Maria Sanchez, Capital. Classify2.Maria Sanchez, Withdrawals is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account. + / –3.The Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez, Capital is decreased by $500. Fourth Closing Entry—Close Withdrawals to Capital Fourth Closing Entry Section 1Preparing Closing Entries (con’t.)

DEBIT-CREDIT RULE 4.Decreases in owner’s capital accounts are recorded as debits. Debit Maria Sanchez, Capital for $ Decreases in owner’s withdrawal accounts are recorded as credits. Credit Maria Sanchez, Withdrawals for $500. Fourth Closing Entry (con’t.) Section 1Preparing Closing Entries (con’t.) Closing Entry (con’t.) Fourth Closing Entry—Close Withdrawals to Capital

T ACCOUNTS 6. Maria Sanchez CapitalWithdrawals Debit – Closing 500 Credit – Closing 500 Section 1Preparing Closing Entries (con’t.) Fourth Closing Entry (con’t.) Closing Entry (con’t.) Credit + Balance 26,550 Debit + Balance 500 Fourth Closing Entry—Close Withdrawals to Capital

Closing Entry (con’t.) JOURNAL ENTRY 7. Section 1Preparing Closing Entries (con’t.) Fourth Closing Entry (con’t.) Fourth Closing Entry—Close Withdrawals to Capital

Check Your Understanding Xxx Section 1Preparing Closing Entries (con’t.)