1. Closing Entries

2. Closing Entries
We need to prepare accounts for the next fiscal period (according the time period concept)
Some accounts have balances which continue into the next fiscal period and some do not…
Can you guess which ones do not?

3. Real vs. Nominal Accounts
Real Accounts (Permanent)
Have balances that continue into the next period
Nominal (Temporary)
Have balances that do not continue into the next period
Each nominal account begins a fiscal period with a zero balance
These accounts are closed.

4. Examples Real Accounts (Permanent) Assets Liabilities Capital
Nominal Accounts (Temporary)
Revenue
Expenses
Drawings

5. Closing Out the Nominal Accounts
All nominal accounts (revenue, expenses, drawings) balances are moved to capital.
This updates the capital figure to show the final equity figure (recall the expanded owner’s equity section on the balance sheet)
A new account called “income summary” is used for this process

6. Eg. Dave’s Molly Maid Service
Dave, Drawings $1,500
Dave, Capital $ 50,000
Maid Service Revenue $22,300
Cleaning Supplies Expense $1,000
Vacuum Repairs Expense $1,100
Uniform Cleaning Expense $220

7. Eg. Dave’s Molly Maid Service
Dave, Drawings $1,500
Dave, Capital $ 50,000
Maid Service Revenue $22,300
Cleaning Supplies Expense $1,000
Vacuum Repairs Expense $1,100
Uniform Cleaning Expense $220

8. Eg. Dave’s Molly Maid Service
Closing Entry #1 – Revenues To close out the revenue account for the current period, such that it is zero for the beginning of the following period
Dec. 31
Maid Service Revenue
22,300
Income Summary
To close the balance of revenue

9. Eg. Dave’s Molly Maid Service
Dave, Drawings $1,500
Dave, Capital $ 50,000
Maid Service Revenue $22,300
Cleaning Supplies Expense $1,000
Vacuum Repairs Expense $1,100
Uniform Cleaning Expense $220

10. Eg. Dave’s Molly Maid Service
Closing Entry #2 – Expenses To zero out all expense accounts, to ensure they are empty for the beginning of the new period
Dec. 31
Income Summary
2,320
Cleaning Supplies Expense
1,000
Vacuum Repairs Expense
1,100
Uniform cleaning expense
220
To close the expense accounts

11. Eg. Dave’s Molly Maid Service
Closing Entry #3 – Income (or Loss) To close out the existing balance in income summary
Dec. 31
Income Summary
19,980
Dave, Capital
To close the income summary account and transfer the net income to capital

12. Eg. Dave’s Molly Maid Service
Dave, Drawings $1,500
Dave, Capital $ 50,000
Maid Service Revenue $22,300
Cleaning Supplies Expense $1,000
Vacuum Repairs Expense $1,100
Uniform Cleaning Expense $220

13. Eg. Dave’s Molly Maid Service
Closing Entry #4 – Drawings
By reducing capital by the amount of drawings we are ensuring that the Capital balance is fully representative of the current claims of the owners
Dec. 31
Dave, Capital
1,500
Dave, Drawings
To close the drawings account and transfer its balance to capital.

14. What is happening in the ledger?
Notice Capital account again reveals what you learned earlier with expanded owner’s equity section
Beginning Capital + Net Income – Drawings = Ending Capital f
Capital
50, Jan 1/13
19, Dec 31/13
Dec 31/ ,500
64,480

15. Post Closing Trial Balance
Last step in the accounting cycle
Make sure the debits still match the credits so that you know you have properly closed out all of the nominal accounts into the capital account.

16. Accounting Cycle Revisited
1. Transaction Occurs
2. Transactions Recorded in Journal
3. Journal Posted to Ledger Accounts
4. Trial Balance & Interim Financial Statements Prepared
Accounting Cycle Revisited
6. Formal Financial Statements Prepared
7. Ledger Accounts Adjusted and closed
8. Post Closing Trial Balance
5. Worksheet Prepared

17. homework