1. Chapter 8 Recording Adjusting and Closing Entries TEST = 150 Points

2. Accounting Concepts Accounting Period Cycle – is applied when changes in the financial information are reported over a specific time in the form of financial statements.

3. Adjusting Entries Adjusting Entries - journal entries recorded to update general ledger accounts at the end of a fiscal period (Supplies & Prepaid Insurance). Adjusting entries are recorded on the next page following the last daily transaction. You don’t have to decide debit and credit parts because that was done on the worksheet. All that needs to be done is to record the entry in the journal. All entries need to be posted before the account balance changes. Once posted accounts will reflect amount on hand. No source document is needed because you have titled the section “Adjusting Entries.”

4. Steps for Adjusting Entries Enter heading Adjusting Entries in the middle of the account title column. Enter in the date. There is no source document as you have labeled the column Adjusting Entries. Adjusting Entry #1 –Debit – Supplies Expense –Credit – Supplies Supplies Expense now has the value of supplies used during the fiscal period. Adjusting Entry #2 –Debit – Insurance Expense –Credit – Prepaid Insurance

5. ADJUSTING ENTRY FOR SUPPLIES 1 2 3 4 4.Write the title of the account credited. Record the credit amount. 3.Write the title of the account debited. Record the debit amount. 2.Write the date. 1.Write the heading.

6. ADJUSTING ENTRY FOR PREPAID INSURANCE 1 2 3 3.Write the title of the account credited. Record the credit amount. 2.Write the title of the account debited. Record the debit amount. 1.Write the date.

7. Section 8.2 Recording Closing Entries Permanent Accounts - accounts used to accumulate information from one fiscal period to the next. –Ending balances are used from one fiscal period to the next. Temporary Accounts - accounts used to accumulate information until it is transferred to the owners capital account. –Accounts begin with a zero balance at the start of each fiscal period.

8. Recording Closing Entries Closing entries - journal entries used to prepare temporary accounts for a new fiscal period. To close a temporary account, an amount of its equal balance is recorded to the opposite side of its normal balance.

9. Income Summary Income Summary - a temporary account used to summarize the closing entries for revenue and expenses. –Income Summary DOES NOT have a normal balance side. –This account must be reduced to zero as well. Closing entries are taken from the Income statement and balance sheet columns of the worksheet. There are four closing entries –Sales – Temporary Account –Expenses - Temporary Account –Income Summary or net income/loss - Temporary Account –Drawing - Temporary Account

10. NEED FOR THE INCOME SUMMARY ACCOUNT TEST QUESTION

11. Closing Entries First closing entry = Sales –Sales has a normal balance of credit –To close sales = debit it and credit Income Summary Second closing entry = Expenses –Expenses have a normal balance of debit –To close expenses, list all expenses, credit them and debit income summary (total of all expenses)

12. CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE 1 2 3 4 1.Write the heading. 2.Write the date. 3.Write the title of the account debited. Record the debit amount. 4.Write the title of the account credited. Record the credit amount.

13. CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES 1 24 4.Debit amount 3.Credit 2.Income Summary 1.Date 3

14. Closing Entries 3rd Closing Entry = Income Summary or Net Income/Loss –What is left in income summary should be equal to your net income or loss. –If it is a net income, Debit Income Summary, Credit - Owners Capital account. 4th Closing Entry = Drawing account –The owners drawing account has a normal debit balance. –To close drawing, Credit the owners drawing account and Debit the Owners Capital account.

15. CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT 3.Credit 2.Debit 1.Date 1 2 3

16. CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT 3.Credit 2.Debit 1.Date 1 2 3

17. Section 8.3 - Preparing a Post Closing Trial Balance After posting your adjusting and closing entries, you need to prepare a post closing trial balance. –The only accounts with a balance should be permanent accounts. –NO TEMPORARY ACCOUNTS LISTED –This will verify that your debits = credit in the general ledger. These ending balances are now used as beginning balances for the next fiscal period. Post closing trial balance is the last step of the accounting cycle. The NEW capital balance after closing entries is verified by checking it with the amount on the balance sheet.

18. GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED

19. 8.Double rule 7.Record totals 6.Totals 5.Compare totals 4.Single rule 3.Account balances 2.Account titles 1.Heading POST-CLOSING TRIAL BALANCE 1 6 2 3 7 5 8 4