1. Completing the accounting cycle
Closing Entries
Completing the accounting cycle

2. Accounting Cycle Summarized
Analyze business transactions 1
Prepare post adjusting trial balance 9
Journalize the transactions 2
Journalize & post closing entries 8
Post to ledger accounts 3
Prepare financial statements 7
Prepare a trial balance 4
Prepare adjusted trial balance 6
Journalize & post adjusting entries 5

3. Closing Entries
Final stage of accounting cycle to prepare the accounts for the next fiscal period (remember the TIME PERIOD CONCEPT GAAP?)
Some accounts have balances that continue from one period to the next and some do not

4. Real Accounts Have balances that continue into the next fiscal period
Also referred to as permanent accounts
All asset, liability and owner’s capital accounts
i.e. Bank, Truck, Accounts Payable

5. Nominal Accounts Balances do not continue into the next fiscal period
Also referred to as temporary accounts
Revenue, Expense, and drawings accounts
Nominal accounts (with the exception of drawings) are related to the income statement which deals only with a single fiscal period

6. Income Summary Account
Summarizes the revenues and expenses of the period
Used only during closing entry process
Temporary balance in this account presents either the amount of net income or net loss

7. End of Period Procedure
Bring accounts up to date by journalizing and posting adjusting entries
Close nominal accounts to prepare them for next fiscal period
Take off a post-closing trial balance

8. Closing Temporary (Nominal) Accounts
To determine current Owner’s Equity
Put all accounts back together

9. Closing Entries
All revenues and expenses must be reduced to zero to allow new entries next period
Use the REID formula:
R: close revenues to Income Summary
E: close expenses to Income Summary
I: close Income Summary to Capital
D: close Drawings to Capital

10. The Closing Process
(Individual)
Expenses
Dr.
(normal
balance)
Cr.
to close
Owner’s Capital is a permanent account. All other accounts shown here are temporary accounts.
(Individual)
Revenues
Cr.
(normal
balance)
Dr.
to close
Income
Summary
Dr.
Expenses
Cr.
Revenue
Cr. balance
= Net Income
to close 2 1
Close expenses to income summary 2
Close revenues to income summary 1 3
Owner’s
Drawings
Dr.
(normal
balance)
Cr.
to close
Owner’s
Capital
Drawings
Net
Income
Cr.
(normal
balance)
Close income summary to Owner’s Capital 3 4
Close Owner’s Drawings to Owner’s Capital 4

11. Close Revenues Close Expenses Cr Income Summary 50000
Dr Fees Income
Dr Management Revenue 20000
Cr Income Summary
Close Expenses
Dr Income Summary
Cr Advertising Expense Wages General Expense

12. Close Income Summary Close Drawings
Dr Income Summary
Cr J. Schmoo, Capital
Close Drawings
Dr J. Schmoo, Capital 5000
Cr J. Schmoo, Drawings 5000

13. Post-Closing Trial Balance
WHY? - To ensure we have closed out the accounts correctly
Last stage in the accounting cycle