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Closing Entries and Corrective Entries
Chapter 4 Closing Entries and Corrective Entries
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Closing The Books At the end of an accounting period, accounts are made ready for the next period, this is called closing the books. Temporary Accounts relate to a single accounting period. They include all income statement accounts and the owner’s drawing accounts. All temporary accounts are closed.
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Closing The Books Permanent Accounts relate to future accounting periods. They include all Balance Sheet accounts and the owner’s capital accounts. Permanent Accounts are not closed.
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Closing Entries At the end of the end of the accounting period, all temporary account balances are transferred to the Owner’s Capital Account. Closing Entries formally show the transfer of net income (or loss) to the owner’s capital account. These entries produce a zero balance in each of the temporary accounts. These accounts are now ready to accumulate data for the next accounting period.
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Closing Entries – 3 Steps
Accounts DR CR Revenue $1000 Capital $1000 - To close the revenue account Capital $350 Salaries Expense $150 Utilities $200 - To close the expense accounts Capital $115 Drawings $115 -To close the drawings accounts
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Corrective Entries As soon as an error has been discovered, a correcting entry is made immediately. The correcting entry will produce the correct value in all effected accounts. Example – On May 10th, a customer pays off their debt, but when the transaction is journalized, Service Revenue is credited instead of Accounts Receivable.
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Example Continued Accounts DR CR Cash $1000 Service Revenue $1000
Accounts Receivable $1000 - To correct the May 10th entry
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Example # 2 On May 18th, office equipment is purchased that costs $450. The transaction is journalized and posted as debit to delivery equipment $45 and as a credit to Accounts Payable $45.
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Example # 2 Continued Accounts DR CR Delivery Equipment $45
Accounts Payable $45 Office Equipment $450 Delivery Equipment $45 Accounts Payable $405 - To correct May 18 entry.
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