1. Accounting December 2, 2014 Chapter 8-2 notes 8-2 WT & OYO Chapter 8-3 notes 8-3 WT & OYO

2. Need for Permanent and Temporary Accounts  Permanent accounts – accounts used to accumulate information from one fiscal period to the next (aka Real Accounts)  Include asset, liability and owner’s capital accounts  The ending account balances of permanent accounts for one fiscal period are the beginning account balances for the next.

3. Need for Permanent and Temporary Accounts  Temporary accounts – accounts used to accumulate information until it is transferred to the owner’s capital account (aka nominal accounts)  Include revenue, expense, owner’s drawing, and income summary accounts  Show changes in the owner’s capital for a single fiscal period  End of fiscal period, temporary balances are summarized & transferred to owner’s capital  Temporary accounts begin a new fiscal period with zero balances

4. Need for Closing Temporary Accounts  Closing entries – journal entries used to prepare temporary accounts for a new fiscal period  The net income for the next fiscal period would be difficult to calculate because amounts from several fiscal periods remain in the accounts  Therefore, the temporary accounts must start each period with zero balances

5. Closing an Account  To close a temporary account, an amount equal to its balance is recorded in the account on the side opposite to its balance.  Example: if an account has a credit of $4,411, a debit of $4,411 is recorded to close the account  Since all entries must have a debit and a credit, the second half of the entry to close a temporary account is recorded in the “Income Summary Account ”

6. Need for the Income Summary Account  A temporary account titled Income Summary is used to summarize the closing entries for the revenue and expense accounts  Unique: Does NOT have a normal balance side  Balance is determined by the amounts posted at the end of fiscal period  Net income=credit balance  Net loss=debit balance

7. NEED FOR THE INCOME SUMMARY ACCOUNT LESSON 8-2 7

8. Closing Entries Four closing entries:  Close income statement accounts with credit balances (sales)  Close income statement accounts with debit balances (expenses)  Record net income or loss and close Income Summary (owner’s capital)  Close the owner’s drawing account (owner’s capital)

9. Closing Entries  Information needed for closing entries is found on the Income Statement and Balance Sheet columns of the worksheet

10. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 10 LESSON 8-2 (Debit to close) CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE page 208 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.

11. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 11 LESSON 8-2 (Credit to close) CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES page 209 1 24 4.Debit amount 3.Credit 2.Income Summary 1.Date 3

12. Income Summary Account  Income summary is also a temporary account and must be closed after the net income or loss is recorded

13. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 8-2 (Income Summary: debit to close) (Capital: credit to record net income) CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT page 210 3.Credit 2.Debit 1.Date 1 2 3

14. Owner’s Drawing Account  The owner’s drawing account is neither a revenue or expense account.  Therefore, it is not closed through the income summary account.  The drawing account is closed directly to the owner’s capital account.

15. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 15 LESSON 8-2 (Credit to close) CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT page 211 3.Credit 2.Debit 1.Date 1 2 3

16. Assignment  8-2 Work Together / On Your Own

17. General Ledger Accounts After Adjusting/Closing Entries are Posted  The adjusting/closing entries are posted from the journal to the ledger  If the ledger has a zero balance (temporary accounts) then lines are drawn in both the Balance Debit and Balance Credit columns  Assures a reader that a balance has not been omitted

18. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 18 LESSON 8-3 GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED page 213

19. Post-Closing Trial Balance  Post-closing trial balance – trial balance prepared after the closing entries are posted  Only general ledger accounts with balances are included on a post-closing trial balance  Permanent accounts: assets, liabilities, and owner’s capital  Temporary accounts are closed and have zero balances so they do NOT appear on PCTB

20. Post-Closing Trial Balance  Debits must equal credits in a general ledger  Shows the company is ready for a new fiscal period

21. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 21 LESSON 8-3 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 page 216 2 3 7 5 8 4

22. Accounting Cycle Accounting Cycle – series of accounting activities included in recording financial information for a fiscal period 1.Analyze Transactions 2.Journalize 3.Post to the Ledger 4.Prepare Worksheet 5.Financial Statements 6.Journalize Adjusting/Closing Entries 7.Post Adjusting/Closing Entries 8.Post-Closing Trial Balance

23. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 23 LESSON 8-3 ACCOUNTING CYCLE FOR A SERVICE BUSINESS page 217 2 3 4 5 6 1 7 8 8.Prepare post-closing trial balance 7.Post adjusting and closing entries 6.Journalize adjusting and closing entries 5.Prepare financial statements 4.Prepare work sheet 3.Post 2.Journalize 1.Analyzes transactions

24. Assignment  8-3 Work Together / On Your Own  8-1 Application  8-2 Application  8-3 Application