1. Journalize and Post Adjusting and Closing Entries

2. The Accounting Cycle
The Accounting cycle for a service business includes 8 steps.
We will learn to create the journal entries for worksheet adjustments and post closing entries.
This covers steps 5 and 7 in the accounting cycle of a fiscal period.

3. Steps 5 and 7 are covered in this lesson.

4. Step 5: Journalize and Post Adjustments

5. Worksheet Adjustment-calculations
When completing the Work Sheet, adjustments are made to supplies and prepaid insurance for the amount used during the fiscal period (month, quarter, or year). Adjustment = Beginning balance – Amount on hand For example: Black's Chop Shop performed a count of supplies at the end of the accounting period (June 30, 20XX) and determined that value of supplies "on hand" (not used) was $1, In the worksheet on the prior slide, the beginning supplies balance is $3, Supplies Adjustment = $3, $1, = $1, The value of prepaid insurance coverage "on hand" (not used) on June 30 was $ On the worksheet, the beginning prepaid insurance is $1, Insurance Adjustment = $1, $ = $750.00

6. Completing the worksheet adjustments, prove and rule, and extend balances.
A. Record the Worksheet Adjustments
Enter the debit amount in the worksheet’s adjustments Debit column on the line with the appropriate account expense title.
Enter the credit amount in the worksheet’s Adjustment Credit column on the line with the appropriate account asset title.
B. Prove and rule the Adjustments columns to ensure the debits equal the credits.
A single line is ruled across the bottom of the Adjustments Debit and Credit columns.
The Adjustments Debit and Credit columns are summed and totaled. The column totals should equal signifying the Adjustment columns balance.
A double line is ruled below the column totals verifying the totals are correct and in balance.
C. Extend the account balances on the Income Statement and Balance Sheet then calculate the Net Income or Loss.
D. Calculate all column totals, ensure the debits = credits. A double line is ruled below the column totals verifying the totals are correct and in balance.

7. Adjusting Entries from the Worksheet
Notice how the adjustments to supplies and pre-paid insurance accounts impact the balance sheet balances.
Notice how the adjustments to supplies expense and insurance expense accounts impact the Income Statement figures.
These adjustments must be journalized and posted to the General Ledger.

8. Accounting Cycle Step 5: Journalize the Adjustments in the General Journal for the fiscal period, end of month June.
1. Enter the heading Adjusting Entries at the top of the account title column.
2. Enter the date in the date column.
3. Enter the account title and record the corresponding debit amount on the same row.
4. Enter the account title and record the corresponding credit amount on the same row.
5. Complete steps 2 though 4 for each adjustment.

9. Post the Adjustments to the Account Ledger-Steps
1. Enter the date in the date column of the ledger pages.
2. Enter the journal page number in the Post Ref column of the ledger pages.
3. Write the adjustment amounts in the appropriate debit or credit column.
4. Calculate the appropriate debit or credit balance column.
5. Write the ledger account number in the Post Ref column of the journal.
Repeat the steps for each adjustment.

10. Post the Adjustments to the Account Ledger
Supplies Adjustments are then posted to the individual account ledgers on June 30:

11. Post the Adjustments to the Account Ledger continued…
Insurance Adjustments are then posted to the individual account ledgers for June 30:

12. Accounting Cycle step 7: Journalize and Post closing Entries.
When the accounting fiscal period ends, we must create closing journal entries for all Temporary accounts and post them to the General Ledger accounts.

13. Permanent Accounts (real accounts)
Are accounts that accumulate information that carries into each fiscal period. They include asset, liability, and owner’s equity accounts. The ending balance of a fiscal period for these accounts becomes the beginning balance of the next fiscal period.
For example, at the end of June, the Assets a business owns at the end of the month (cash, buildings, office equipment, cars, accounts receivable, etc) will stay on the records and become the beginning assets for the start of July.

14. Temporary accounts (nominal accounts)
Are accounts that accumulate information until it is transferred to the owner’s capital account.
For example: these accounts include revenue, expense, and owner’s drawing accounts plus the income summary account.
The income summary account is used to summarize closing entries to the revenue and expense accounts. This account does not have a normal balance.

15. Closing Temporary Accounts.
The income statement accounts have temporary balances because the net income or loss must be transferred to the owner’s capital account at the end of a fiscal period. 
Temporary accounts begin a new fiscal period with a zero balance.
For example, Sales and expenses made in June do not carry into July. July starts with a $0 balance of sales and expenses.
To close a temporary account, an amount equal to the balance is recorded in the account to the opposite side of its balance. For example, rent expenses with a debit balance of $4,000 will have a credit of $4,000 recorded to close the account.

16. Why Record Closing Entries?
In order to reduce temporary account balances to $0, we must create closing entries. This procedure prepares the income statement temporary accounts for the next fiscal period.
For example, Sales of $10,000 in a fiscal period of June does not carry into the fiscal period of July. July starts with a $0 balance.
If the balances on temporary accounts were not reduced to zero, the amounts for the next fiscal period would accumulate and net income/loss would be difficult to calculate.
We use the temporary account called “Income Summary” to achieve this.

17. Closing the Income Statement Accounts

18. Steps to Record Closing Entries
Create the closing entries for Income Statement accounts with a credit balance (sales) using the Income Summary.
Create the closing entry for the Income Statement accounts with a debit balance (expenses) using the Income Summary.
Record the Net Income or Loss to Owners Equity and close the Income Summary.
Close the Owners Drawing account.

19. Create the Closing entry for Income Statement accounts with a credit balance: Using the worksheet on slide 17, Sales has a Credit so we will close the Sales account by debiting Sales and Crediting Income Summary.

20. Create the Closing entry for Income Statement accounts with a debit balance: Using the worksheet on slide 17, Expenses have a debit balance, so we will credit all the individual expense accounts and debit the Income Summary account.

21. Closing Entry for the Net Income/Loss and the Owners Drawing Accounts

22. Create the Closing Entries for the Net Income/Loss and Owner’s Drawing Acct

23. Income Summary T Chart
The Income Summary is a temporary account, used to close the revenues, expenses, and profit/loss of a company.
Below is the Income summary T-chart for journal entries written from slide 22 to close the revenue and expense accounts with net income (profit) to the owner’s capital account. The normal balance with net income (profit) is a credit balance.
When total expenses are greater than income (sales), there is a loss (not profit), and the normal balance is a debit.
The beginning balance and ending balance of the income summary account is “0”, noted as a dash “-”.

24. Congratulations You have now learned how to:
Enter the Worksheet adjustments, carry balances forward into the Income Statement and Balance Sheet, calculate the net income/loss.
Journalize and Post the General Journal adjustment entries.
Understand temporary and permanent accounts.
Journalize and Post the closing entries for the Income Statement, Income Summary, and Owners Drawing Accounts.