1. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. Lesson 8-1 Recording Closing Entries What: Recording Closing Entries and Preparing a Post- Closing Trial Balance for a Service Business

2. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. To understand how to complete the end-of- fiscal-period work to end the accounting cycle and make the records ready to begin a new fiscal (financial) period. STEP 7 of the Accounting Cycle Why:

3. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. How: LT1 Journalize and post closing entries for a service business organized as a proprietorship. Use your Aplia “Work Together” and “On Your Own” to verify concept accuracy.

5. © 2014 Cengage Learning. All Rights Reserved. Need for Permanent and Temporary Accounts ●Accounts used to accumulate information from one fiscal period to the next are called permanent accounts. ●Permanent accounts are also referred to as real accounts. ●Accounts used to accumulate information until it is transferred to the owner’s capital account are called temporary accounts. ●Temporary accounts are also referred to as nominal accounts. SLIDE 5 Lesson 8-1 LO1

6. © 2014 Cengage Learning. All Rights Reserved. Need for Closing Temporary Accounts ●Journal entries used to prepare temporary accounts for a new fiscal period are called closing entries. ●The temporary account balances must be reduced to zero at the end of each fiscal period. SLIDE 6 LO1 Lesson 8-1

7. © 2014 Cengage Learning. All Rights Reserved. Income Summary Debit Total expenses (greater than revenue) (Debit balance is the net loss.) Credit Revenue Income Summary Debit Total expenses Credit Revenue (greater than expenses) (Credit balance is the net income.) Need for the Income Summary Account ●When revenue is greater than total expenses, resulting in a net income, the Income Summary account has a credit balance, as shown in the T account. SLIDE 7 ●When total expenses are greater than revenue, resulting in a net loss, the Income Summary account has a debit balance, as shown in the T account. LO1 Lesson 8-1

8. © 2014 Cengage Learning. All Rights Reserved. Closing Entry for an Income Statement Account with a Credit Balance SLIDE 8 LO1 Lesson 8-1 Closing5,820.00 Closing (revenue)5,820.00 Bal. 5,820.00 (New Bal.0.00) Sales Income Summary Heading 1 1 Date 2 2 4 4 Credit 3 3 Debit (Debit to close)

9. © 2014 Cengage Learning. All Rights Reserved. Closing Entry for Income Statement Accounts with Debit Balances SLIDE 9 LO1 Lesson 8-1 (Credit to close) Debit Amount Income Summary Date Credit

10. © 2014 Cengage Learning. All Rights Reserved. Closing Entry to Record Net Income or Loss and Close the Income Summary Account SLIDE 10 LO1 Lesson 8-1 Date 1 1 3 3 Credit (Capital: credit to record net income) 2 2 Debit (Income Summary: debit to close)

11. © 2014 Cengage Learning. All Rights Reserved. Closing Entry for the Owner’s Drawing Account SLIDE 11 LO1 Lesson 8-1 Date 1 1 3 3 Credit (Credit to close) 2 2 Debit

12. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-1 Audit Your Understanding 1.What do the ending balances of permanent accounts for one fiscal period represent at the beginning of the next fiscal period? SLIDE 12 ANSWER Beginning balances Lesson 8-1

13. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-1 Audit Your Understanding 2.What do the balances of temporary accounts show? SLIDE 13 ANSWER Changes in the owner’s capital account for a single fiscal period Lesson 8-1

14. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-1 Audit Your Understanding 3.List the four closing entries. SLIDE 14 ANSWER 1.An entry to close income statement accounts with credit balances. 2.An entry to close income statement accounts with debit balances. 3.An entry to record net income or net loss and close the Income Summary account. 4.An entry to close the owner’s drawing account. Lesson 8-1

15. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. Lesson 8-2 Preparing a Post-Closing Trial Balance What: Recording Closing Entries and Preparing a Post- Closing Trial Balance for a Service Business

16. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. To understand how to complete the end-of- fiscal-period work to end the accounting cycle and make the records ready to begin a new fiscal (financial) period. STEP 8 of the Accounting Cycle Why:

17. © 2014 Cengage Learning. All Rights Reserved. Learning Targets © 2014 Cengage Learning. All Rights Reserved. How: LT2 Prepare a post-closing trial balance. Use your Aplia “Work Together” and “On Your Own” to verify concept accuracy.

19. © 2014 Cengage Learning. All Rights Reserved. General Ledger Accounts after Closing Entries Are Posted SLIDE 19 LO2 Lesson 8-2

20. © 2014 Cengage Learning. All Rights Reserved. General Ledger Accounts after Closing Entries Are Posted SLIDE 20 LO2 Lesson 8-2

21. © 2014 Cengage Learning. All Rights Reserved. Post-Closing Trial Balance ●A trial balance prepared after the closing entries are posted is called a post-closing trial balance. SLIDE 21 LO2 Lesson 8-2

22. © 2014 Cengage Learning. All Rights Reserved. Post-Closing Trial Balance SLIDE 22 LO2 Lesson 8-2 Single Rule 4 4 7 7 Record Totals Heading 1 1 6 6 Totals 8 8 Double Rule Account Titles 2 2 5 5 Compare Totals Account Balances 3 3

23. © 2014 Cengage Learning. All Rights Reserved. Accounting Cycle for a Service Business ●The series of accounting activities included in recording financial information for a fiscal period is called an accounting cycle. SLIDE 23 LO2 Lesson 8-2

24. © 2014 Cengage Learning. All Rights Reserved. Accounting Cycle for a Service Business SLIDE 24 LO2 Lesson 8-2 2 2 3 3 4 4 5 5 6 6 1 1 7 7 8 8 8. 8.Prepare post-closing trial balance 7. 7.Journalize and post closing entries 6. 6.Prepare financial statements 5. 5.Journalize and post adjusting entries 4. 4.Prepare work sheet 3. 3.Post 2. 2.Journalize 1. 1.Analyze transactions

25. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-2 Audit Your Understanding 1.Why are lines drawn in both the Balance Debit and Balance Credit columns when an account has a zero balance? SLIDE 25 ANSWER To assure a reader that a balance has not been omitted Lesson 8-2

26. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-2 Audit Your Understanding 2.Which accounts go on the post-closing trial balance? SLIDE 26 ANSWER Only those with balances (permanent accounts) Lesson 8-2

27. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-2 Audit Your Understanding 3.Why are temporary accounts omitted from a post-closing trial balance? SLIDE 27 ANSWER Because they are closed and have zero balances Lesson 8-2

28. © 2014 Cengage Learning. All Rights Reserved. Lesson 8-2 Audit Your Understanding 4. What are the steps in the accounting cycle? SLIDE 28 ANSWER 1.Analyze transactions. 2.Journalize. 3.Post. 4.Prepare work sheet. 5.Journalize and post adjusting entries. 6.Prepare financial statements. 7.Journalize and post closing entries. 8.Prepare post-closing trial balance. Lesson 8-2