1. The Accounting Cycle: Step 8 (part 1)
Professor Eric Carstensen
MiraCosta College

2. Types of Accounts Temporary Accounts
Accounts that accumulate information during an accounting period
Examples are Revenue, Expense and Dividends accounts, and Income Summary
Permanent Accounts
Accounts that accumulate information across accounting periods
Examples are Assets, Liabilities and Equity accounts

3. The Closing Process
Step 1: Close Credit balances in Revenue Accounts to Income Summary
Step 2: Close Debit balances in Expense Accounts to Income Summary
Step 3: Close Income Summary to Retained Earnings
Step 4: Close Distributions (Dividends) to Retained Earnings

4. The Closing Process - Continued
The Closing Process makes what we see reported in the Statement of Retained Earnings happen (i.e, Net Income moves from Income Statement to Retained Earnings
Begin. Retained Earnings Plus: Net Income Less: Distributions Equals: Ending Retained Earnings

5. Example: Closing with Profit

6. Closing with Profit - Continued
revenue
rent expense
beg.
10,000
2,000
c1.
c2. -
wages expense
income summary
6,000
8,000
c3.
retained earnings
dividends
5,000
1,000
c4.
Example with Profit:
revenue
10,000
rent expense
2,000
wages expense
6,000
total expenses
8,000
net income
begin retained earnings
5,000
plus: net income
less: dividends
1,000
equals: end retained earnings

7. Example: Closing with a Loss

8. Closing with a Loss - Continued
revenue
rent expense
beg.
10,000
4,000
c1.
c2. -
wages expense
income summary
8,000
12,000
c3.
2,000
retained earnings
dividends
5,000
1,000
c4.
Example with Loss:
revenue
10,000
rent expense
4,000
wages expense
8,000
total expenses
12,000
net income
(2,000)
begin retained earnings
5,000
plus: net income
less: dividends
1,000
equals: end retained earnings
2,000

9. Retained Earnings Statements
Example with Profit:
Example with Loss:
revenue
10,000
rent expense
2,000
4,000
wages expense
6,000
8,000
total expenses
12,000
net income
(2,000)
begin retained earnings
5,000
plus: net income
less: dividends
1,000
equals: end retained earnings

10. Step 8 (part 1) Conclusion
Next time, we will take what we learned here about the closing process and apply it to the financial statements we created in Step 7.
We will create the closing entries and post them to our t-accounts.