Closing Entries Module 4 Illustration Closing Entries Correlated to “The Accounting Course Manual,” Craig M. Pence, 2004

Closing the Temporary Accounts After the adjusting entries have been posted and the financial statements have been prepared, it will be time to close the temporary accounts. Recall, from our Module 2 discussions, that the temporary accounts are the revenue, expense and Drawing accounts. We described them earlier as simply separate “Capital” accounts that are used to organize all the debit and credit entries that are made to owner’s equity during the accounting period.

Why Do Closings? The revenues, expenses and withdrawals are recorded separately in order to facilitate the preparation of the financial statements. Once the statements have been prepared, it is no longer necessary to keep these accounts separate from Capital. In fact, if we do not remove the balances from these accounts before we begin the next accounting period, we will have two periods’ revenues, expenses and withdrawals accumulated in the accounts by the end of that period.

What Do Closings Do? The temporary accounts are highlighted in yellow. In closing these accounts, their balances are transferred into the real Capital account. After closing, there will be no balances left in the temporary accounts, and the balance in Capital will be equal to the period’s ending owner’s equity.

The Statement of Owner’s Equity The closing entries will result in a new balance in Capital that is equal to the ending owner’s equity. As this Statement of Owner’s Equity tells us, the ending owner’s equity is $6,000.

$5,000 $2,000 $5,000 Balance before close $6,000 Balance after close Capital Drawing Supplies ExpenseRevenue $8,000

The Income Summary Account Income Summary is a special closing account that is used to verify the accuracy of the closing entries. When it is used, the revenue and expense accounts are closed into Income Summary, and if the closings are done correctly, this will produce a balance in Income Summary that is equal to net income for the period. Revenues – Expenses = Net Income ExpensesRevenues

Completion of the Closings Next, the Income Summary balance is closed into Capital. This transfers the net income amount from Income Summary into the Capital account. Lastly, the Drawing account is also closed into Capital. Withdrawals Net Income Ending Owner’s Equity

The Post-Closing Trial Balance If we prepare a second trial balance after the closing entries have been posted, there will be no balances left in the temporary accounts. Only the real, or “balance sheet,” accounts will have balances now.

“Back to the Balance Sheet” Note the similarity between the post- closing trial balance and the balance sheet. After closing the temporary accounts, we are “back to the balance sheet” as far as the account balances are concerned.

End of the Presentation This ends the closing entry presentation. We hope it has been helpful to you in learning about closing entries. Remember, though, that practice is necessary in order to master accounting. Refer to your course manual, the textbook, and other online resources for the practice exercises that will help you become a master of the closing process!