Completing the Accounting Cycle for a Sole Proprietorship Making Accounting Relevant In the...

Completing the Accounting Cycle for a Sole Proprietorship

Completing the Accounting Cycle for a Sole ProprietorshipMaking Accounting Relevant

In the workplace, it is important to be

able to manage your time efficiently.

Making Accounting Relevant

In the workplace, it is important to be

able to manage your time efficiently.

In your job or in your classroom experiences, what personal skills help you manage your time? How have you managed stress during especially busy times?

Section 1Preparing Closing Entries

Section 1Preparing Closing EntriesWhat You’ll 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.

What You’ll 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.

Why It’s Important

Closing entries are made to prepare

the financial records for the next fiscal

year.

Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)

Key Terms

closing entries

Income Summary account

compound entry

Key Terms

closing entries

Income Summary account

compound entry

Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries

Closing entries are 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.

Starting the Eighth Step in the Accounting Cycle: Journalizing the Closing Entries

Closing entries are 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.


The Income Summary Account

The Income Summary account is

used to accumulate and summarize the

revenue and expenses for the period.

The Income Summary Account

The Income Summary account is

used to accumulate and summarize the

revenue and expenses for the period.


Income Summary

Debit Credit

Expenses Revenue

If Revenue > Expenses Balance is net income

If Revenue < Expenses Balance is net loss

Preparing Closing Entries

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.

Preparing Closing Entries

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.


Preparing Closing Entries (cont'd.)

3. The balance of the Income

Summary account is transferred to

the capital account (net income to

the credit side; net loss to the debit

side).

4. The balance of the withdrawals

account is transferred to the debit

side of the capital account.

Preparing Closing Entries (cont'd.)

3. The balance of the Income

Summary account is transferred to

the capital account (net income to

the credit side; net loss to the debit

side).

4. The balance of the withdrawals

account is transferred to the debit

side of the capital account.


Closing Entry

ANALYSIS Identify 1.Roadrunner has only one revenue account, Delivery Revenue. The accounts affected are Delivery Revenue and Income Summary.

Classify 2. Delivery Revenue is a revenue account. Income Summary is a temporary capital account. + / – 3. The Delivery Revenue account balance is decreased by $2,650 to zero. That amount, $2,650, is transferred to the Income Summary account.

First Closing Entry—Close Revenue to Income Summary

First Closing EntryFirst Closing Entry


DEBIT-CREDIT RULE 4. Decreases in revenue accounts are recorded as debits. Debit Delivery Revenue for $2,650.

5. To transfer the revenue to the Income Summary account, credit Income Summary for $2,650.

First Closing Entry (cont'd.)First Closing Entry (cont'd.)


Closing Entry (cont'd.)


T ACCOUNTS 6. Delivery Income

Equipment Summary

Debit

–

Closing 2,650

Credit

Closing 2,650

Debit





Credit

+

Balance 2,650


JOURNAL ENTRY




Closing Entry

ANALYSIS Identify 1. The accounts affected by the second closing entry are Advertising Expense, Maintenance Expense, Rent Expense, Utilities Expense, and Income Summary. Classify 2. Advertising Expense, Maintenance Expense, Rent Expense, and Utilities Expense are expense accounts. Income Summary is a temporary capital account. + / – 3. The balances of the four expense accounts are decreased to zero; the total decrease is $1,500. The total amount, $1,500, is transferred to the Income Summary account.

Second Closing Entry—Close Expenses to Income Summary

Second Closing EntrySecond Closing Entry


DEBIT-CREDIT RULE 4. To transfer the expenses to the Income Summary account, debit Income Summary for $1,500.

5.Decreases in expense accounts are recorded as credits. Credit Advertising Expense, $75; Maintenance Expense, $600; Rent Expense, $700; Utilities Expense, $125.

Second Closing Entry (cont'd.)Second Closing Entry (cont'd.)




T ACCOUNTS 6.Income Summary Advertising Expense

Debit

–

Closing 1,500

Credit

–

Closing 75




Credit


Debit

+

Balance 75

Maintenance Expense Rent Expense

Debit

+

Balance 125

Credit

–

Closing 600

Debit

+

Balance 700

Credit

–

Closing 700

Utilities ExpenseCredit

–

Closing 125

Debit

+

Balance 600


JOURNAL ENTRY 7.




Closing Entry

ANALYSIS Identify 1. The accounts Income Summary and Maria Sanchez, Capital are affected. Classify 2. Income Summary is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account. + / – 3. The Income Summary account balance is reduced to zero by transferring $1,150, the net income amount, to the capital account. Maria Sanchez, Capital is increased by $1,150.

Third Closing EntryThird Closing Entry


Third Closing Entry—Close Income Summary to Capital

DEBIT-CREDIT RULE 4. To reduce the Income Summary balance to zero, debit Income Summary for $1,150.

5. Net income is recorded as a credit to the owner’s capital account. Credit Maria Sanchez, Capital for $1,150.

Third Closing Entry (cont'd.)Third Closing Entry (cont'd.)




T ACCOUNTS 6. Maria SanchezIncome Summary Capital

Debit

Closing 1,150

Debit

–




Credit

Balance 1,150

Credit

+

Balance 25,400

Closing 1,150



JOURNAL ENTRY 7.




Closing Entry

ANALYSIS Identify 1. The accounts affected by the fourth closing entry are Maria Sanchez, Withdrawals and Maria Sanchez, Capital.

Classify 2. Maria Sanchez, Withdrawals is a temporary capital account. Maria Sanchez, Capital is an owner’s capital account.

+ / – 3. Maria Sanchez, Withdrawals is decreased by $500. Maria Sanchez, Capital is decreased by $500.

Fourth Closing Entry—Close Withdrawals to Capital

Fourth Closing EntryFourth Closing Entry


DEBIT-CREDIT RULE 4. Decreases in owner’s capital accounts are recorded as debits. Debit Maria Sanchez, Capital for $500.

5.Decreases in owner’s withdrawal accounts are recorded as credits. Credit Maria Sanchez, Withdrawals for $500.

Fourth Closing Entry (cont'd.)Fourth Closing Entry (cont'd.)




T ACCOUNTS 6.Maria Sanchez Maria Sanchez

Capital Withdrawals

Debit

–

Closing 500

Credit

–

Closing 500




Credit

+

Balance 26,550

Debit

+

Balance 500



JOURNAL ENTRY 7.




Check Your UnderstandingCheck Your Understanding

What is the purpose of the

Income Summary account?

What is the purpose of the

Income Summary account?


Completing the Accounting Cycle for a Sole Proprietorship Making Accounting Relevant In the...

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