How to transition from being a sole proprietor and eliminate your self-employment taxes
Chapter 10: Completing the Accounting Cycle for a Sole Proprietor
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Transcript of Chapter 10: Completing the Accounting Cycle for a Sole Proprietor
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Chapter 10: Completing the Accounting Cycle for a Sole Proprietor
Accounting IMs. Alltucker
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Chapter Objectives
Explain why it is necessary to update accounts through closing entries.
Explain the purpose of the Income Summary account. Explain the relationship between the Income Summary
account and the capital account. Analyze and journalize closing entries. Post the closing entries to the general ledger. Prepare a post-closing trial balance. Define the accounting terms introduced in this chapter.
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Section 1: Preparing Closing Entries
What you will learn: Why temporary capital accounts are closed at the end of the
fiscal year. The purpose of the Income Summary account. The relationship between the Income Summary account and
the capital account. How to analyze and journalize closing entries.
Why it’s important: Closing entries are made to prepare the financial records for
the next fiscal year.
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Completing the Accounting Cycle
At the end of an accounting period, an accountant transfers the balances of the temporary accounts to the owner’s capital account to bring it up to date and to prepare the accounting records for the next period.
Temporary accounts: Revenue Expenses Withdrawals
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8th Step: Journalizing the Closing Entries Closing Entries: journal entries made to close, or reduce
to zero, the balances in the temporary capital accounts and to transfer the net income or net loss for the period to the capital account
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Purpose of Closing Process
In your worksheet you found net income or net loss Net income or net loss is seen on the Income Statement Changes in Owner’s Equity reflects the net income or net
loss. General ledger capital account balance does
not equal the amount on the balance sheet. Look on page 234 for a visual aid
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Income Summary account
Look on page 73 at the chart of accounts. What type of account is Income Summary?
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The Income Summary Account Which general ledger account have you seen that has
not been used yet? Income summary: used to accumulate and summarize
the revenue and expenses for the period. Serves as a simple income statement in the ledger Expenses: debit balances are transferred as debits to the
income summary account as a debit Revenue: credit balances are transferred as credits to
Income Summary Balance of Income Summary equals the net income or the net
loss for the fiscal period. The balance of Income Summary is transferred to the capital
account at the end of the closing process.
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Income Summary Used only at the end of the fiscal year to summarize the
balances from the revenue and expense accounts Balance before and after the closing process is zero Does not appear on any financial statement Does not have a normal balance
Does not have an increase or a decrease side
Income Summary
Debit Credit
Expenses Revenue
If Revenue > Expenses Balance is net income
If Revenue < Expenses Balance is net loss
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Preparing Closing Entries Four journal entries are prepared to close the temporary
capital accounts 1. the balance of the revenue account is transferred to
the credit side of the income summary account 2. The expense account balances are transferred to the
debit side of the Income Summary account. 3. The balance of the Income Summary account is
transferred to the capital account Net income to credit side Net loss to debit side
4. The balance of the withdrawals account is transferred to the debit side of the capital account.
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Closing the Balance of the Revenue Account to Income Summary
Balance of the revenue account is found in the Income Statement of the work sheet
1. Enter “Closing Entries” in the center of the description column.
2. Enter the date (last day of the fiscal period) 3. Enter the names of the accounts to be debited and the
amounts to be debited. 4. Enter the name of the account, Income Summary, to
be credit and the amount credited
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Closing the Revenue account to Income Summary
JOURNAL ENTRY
First Closing Entry—Close Revenue to Income Summary
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Closing the Expense accounts to Income Summary Balances of the expense accounts are found in the
income statement section of the worksheet
JOURNAL ENTRY
Second Closing Entry—Close Expenses to Income Summary
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Closing the Income Summary Account to Capital
Income Summary2650
1500
1150 New Balance
Closing entry for revenue
Closing entry for expenses
If Income Summary has a credit balance net profit
If Income Summary has a debit balance net loss
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Closing the Income Summary Account to Capital
JOURNAL ENTRY 7.
Fourth Closing Entry—Close Withdrawals to Capital
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Closing Withdrawals to Capital Withdrawals decrease owner’s equity Balance of the withdrawals account is found in the
Balance Sheet section of the work sheet
JOURNAL ENTRY 7.
Fourth Closing Entry—Close Withdrawals to Capital
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Thinking Critically
Why are closing entries for revenue and expense accounts recorded?
What is the order in which you journalize closing entries?
What is the purpose of the Income Summary account?
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Section 2:Posting Closing Entries and Preparing a Post-Closing Trial Balance
What you will learn: How to record closing entries in the general ledger. The purpose of a post-closing trial balance. How to prepare a post-closing trial balance.
Why it’s important: A post-closing trial balance verifies that the closing entries
are properly recorded in the general ledger and that you are ready to start the next accounting period.
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Completing the Accounting Cycle
Post the closing entries to the general ledger accounts Procedure is exactly the same as other general ledger
postings, with ONE exception. “Closing Entries” are written in the Description column of
the general ledger account
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Review: Posting to General Ledger Steps 1. Enter the date of the journal entry in the Date column 2. Description is usually left blank in general posting
When doing closing entries write “Closing Entries” 3. Identify where the journal entry is recorded in post
reference column—Example: G1 4. Enter the debit amount in the debit column 5. Compute and record the new account balance in the
appropriate balance column 6. Return to journal and enter the ledger account number
of the account you just posted 7. Repeat the same steps for the credit entry
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Review: Posting to General Ledger Steps
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Posting Closing Entries
Maria Sanchez, Capital 301
20Oct 1 25000 25000
2G1G1G3G3
3131
Closing EntryClosing Entry
400 25400265501150
500 26050
Income Summary Balance (credit): $1150Withdrawal balance: $500
You have to do this for every line in the general journal.
DO NOT FORGET TO PUT THE POST REFERENCE IN THE JOURNAL AFTERYOU HAVE POSTED.
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The Ninth Step in the Accounting Cycle Preparing a Post-Closing Trial Balance
Prepared to make sure total debits equal total credits after the closing entries are posted.
Only accounts with balances are listed on the post-closing trial balance
Only permanent accounts have balances Temporary accounts have zero balances—no need to list
them
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Post-Closing Trial Balance
After the journal entries are posted to the accounts in the general ledger, the total of all the debit balances should equal the total of all the credit balances Proving the ledger Debits = Credits Prepared on a two-column accounting stationery
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Post Closing Trial Balance
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Thinking Critically
After the closing process, what types of accounts have balances other than zero, and what types of accounts have zero balances?
What is the purpose of the eighth and ninth steps in the accounting cycle?
What happens when your debits don’t equal credits in the post closing trial balance?