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2. 河南财政税务高等专科学校 CLOSING ENTRIES CHAPTER 8

3. 河南财政税务高等专科学校 Contents Definition and purpose of closing Four Steps in closing procedure An illustration: Smith Company

4. 河南财政税务高等专科学校 Major Steps in Accounting Cycle Analyze transactions from source documents Record in journalsPost to general ledger accounts Adjust the general ledger accounts Prepare financial statements Close temporary accounts

5. 河南财政税务高等专科学校 Closing procedure The final bookkeeping entries made at the end of an accounting period to transfer income and expense items to the balance sheet accounts. Definition Purpose purpose of closing the ledger is twofold: 1.To calculate net profit or loss in the general ledger 2.To clear the balances of revenues and expenses accounts for the commencement of the next accounting period

6. 河南财政税务高等专科学校 Steps in Closing The closing entries consist of the four steps: Step 1, the revenue accounts （ credit balances ） are closed by transferring their balances to the income summary account. Dr: revenues ××× Cr: Income summary ××× Step 2, the expense accounts （ debit balances ） are closed by transferring their balances to the income summary account.. Dr: Income summary ××× Cr: Expenses ×××

7. 河南财政税务高等专科学校 Steps in Closing The closing entries consist of the four steps: Step 3, the income summary is closed by transferring the net balance to capital account (or to retained earnings for corporations) For a single proprietorship or a partnership Dr: Income summary ××× Cr: Capital ××× (To close the net income) or Dr: Capital ××× Cr: Income summary ××× (To close the net loss ）

8. 河南财政税务高等专科学校 Steps in Closing The closing entries consist of the four steps: Step 3, the income summary is closed by transferring the net balance to capital account(or to retained earnings for corporations) For a corporation: Dr: Income summary ××× Cr: Retained earning ××× (To close the net income) or Dr: Retained earning ××× Cr: Income summary ××× (To close the net loss)

9. 河南财政税务高等专科学校 Steps in Closing  Step 4, the withdrawals accounts (debit balance) are closed by transferring the balance to capital (or dividends to retained earnings for corporations). For a single proprietorship or a partnership  Dr: Capital ×××  Cr: Drawings ××× For a corporation: Dr: Retained earning ×××  Cr: Dividends ×××

10. 河南财政税务高等专科学校 An example: Closing Entries Step 1. To close the revenue accounts to the income summary. Assume that the only revenue account is sales for Smith Company.It has a credit balance of $9 800 on Oct.31,2014 Sales 9 800 Income Summary 9 800

11. 河南财政税务高等专科学校 An example: Closing Entries The posting is shown as following: Sales Account No. 411 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct10 19 31 Adjusting Closing $9,800 $5,900 3,400 500 $5,900 9,400 9,800 ___

12. 河南财政税务高等专科学校 An example: Closing Entries Income Summary Account No. 313 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct.31Closing $9,800 $9,800

13. 河南财政税务高等专科学校 An example: Closing Entries Step 2. To close the expense balances to the income summary. Assume that there were 8 expense accounts in the ledger of JB Service company on Oct.31, they are as follows: Office Salaries Expense 1,100 Utility Expense 230 Telephone Expense 120 Rent Expense 400 Insurance Expense 50 Supplies Expense 500 Office Supplies Expense 300 Depreciation Expense 121

14. 河南财政税务高等专科学校 Closing Entries Step 2. To close the expense balances to the income summary. Oct.31 Income Summary $2,821 Office Salaries Expense 1,100 Utility Expense 230 Telephone Expense 120 Rent Expense 400 Insurance Expense 50 Supplies Expense 500 Office Supplies Expense 300 Depreciation Expense 121

15. 河南财政税务高等专科学校 Closing Entries The posting is shown as following: Office Salaries Expense Account No. 511 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 25 31Closing $1,100 $1,100 _____ Utility Expense Account No. 512 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 29 31Closing $230 $230 _____

16. 河南财政税务高等专科学校 Closing Entries Telephone Expense Account No. 513 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Closing $120 $120 ____ Supplies Expense Account No. 516 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $400 $400 ____

17. 河南财政税务高等专科学校 Closing Entries Office Supplies Expense Account No. 517 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $300 $300 ____ Rent Expense Account No. 514 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $500 $500 ____

18. 河南财政税务高等专科学校 Closing Entries Insurance Expense Account No. 515 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $50 $50 _____ Depreciation Expense Account No.542 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $121 $121 ____

19. 河南财政税务高等专科学校 Closing Entries Income Summary Account No. 313 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct. 31 Adjusting Closing $2,821 $9,900 7,079

20. 河南财政税务高等专科学校 Closing Entries Step 3. To close the income summary account to the capital account. Jan. 31 Income Summary $7,079 Smith, Capital $7,079

21. 河南财政税务高等专科学校 Closing Entries Income Summary Account No. 313 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct.31 Closing $2,821 7,079 $9,900 $9,900 7,079 _____ Smith, Capital Account No. 311 DateItemPost. Ref. DebitCreditBalance Debit Credit 2014 Oct. 3 31Closing $20,000 7,079 $20,000 27,079

22. 河南财政税务高等专科学校 Closing Entries Step 4. To close the Withdrawals Account to the Capital Account. The Withdrawals account shows the amount that the owner takes from the business for personal living expenditures.

23. 河南财政税务高等专科学校 Closing Entries Jan. 31 Smith, Capital $980 Smith,Drawings $980 Smith, Drawings Account No. 312 DateItemPost. Ref. DebitCreditBalance Debit Credit 2014 Oct. 24 31Closing $980 $980 _____

24. 河南财政税务高等专科学校 Closing Entries Smith, Capital Account No. 311 DateItemPost. Ref. DebitCreditBalance DebitCredit 2014 Oct.3 31 Closing $980 $20,000 7,079 $20,000 27,079 26,099

25. 河南财政税务高等专科学校 Closing Entries Once posted to the ledger Revenue Expense Withdrawals ZERO The next accounting period

26. 河南财政税务高等专科学校 The Post-closing Trial Balance The trial balance The trial balance is a worksheet on which you list all your general ledger accounts and their debit or credit balance. Only has assets,liabilities and owners’ equity accounts.

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