PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 4
COMPLETING THE ACCOUNTING CYCLE
4 - 2
BENEFITS OF A WORK SHEET
Aids the preparation of
financial statements.
Aids the preparation of
financial statements.
Reduces possibility of
errors.
Reduces possibility of
errors.
Links accounts and their
adjustments.
Links accounts and their
adjustments.
Assists in planning and organizing an
audit.
Assists in planning and organizing an
audit.
Helps in preparing
interim financial statements.
Helps in preparing
interim financial statements.
Shows the effects of proposed
transactions.
Shows the effects of proposed
transactions.
Not a required report.
Not a required report.
P 1
4 - 6
RECORDING CLOSING ENTRIES
1. Resets revenue, expense and withdrawal account balances to zero at the end of the period.
2. Helps summarize a period’s revenues and expenses in the Income Summary account.
Identify accountsfor closing.
Record and postclosing entries.
Prepare post-closingtrial balance.
C 1
4 - 7
Temporary Accounts
Revenues
Income Summary
Exp
ense
s
With
draw
als
Permanent Accounts
Assets
Lia
bili
ties
Ow
ner’s
Cap
italTEMPORARY AND
PERMANENT ACCOUNTS
The closing process The closing process applies only to applies only to
temporary accounts.temporary accounts.
The closing process The closing process applies only to applies only to
temporary accounts.temporary accounts.
C 1
4 - 8
Let’s see how the closing
process works!
RECORDING CLOSING ENTRIES
Close Credit Balances in Revenue Accounts to Income Summary.
Close Debit Balances in Expense accounts to Income Summary.
Close Income Summary account to Owner’s Capital.
Close Withdrawals to Owner’s Capital.
P 2
4 - 9
Close Credit Balances in
Revenue Accounts to
Income Summary.
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
P 2
4 - 10
CLOSE CREDIT BALANCES INREVENUE ACCOUNTS TO INCOME
SUMMARY
Now, let’s look at the ledger accounts after posting this closing entry.
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150
P 2
4 - 11
Consulting Revenue7,850 7,850
-
Rental Revenue300 300
-
Income Summary8,150
P 2 CLOSE CREDIT BALANCES INREVENUE ACCOUNTS TO INCOME
SUMMARY
4 - 12
Close Debit Balances in
Expense Accounts to Income Summary.
P 2
FastForwardAdjusted Trial Balance
December 31, 2011Debit Credit
Cash 4,350$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Accumulated depreciation-Equip. 375$ Accounts payable 6,200 Salaries payable 210 Unearned consulting revenue 2,750 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 200 Consulting revenue 7,850 Rental revenue 300 Depreciation expense-Equipment 375 Salaries expense 1,610 Insurance expense 100 Rent expense 1,000 Supplies expense 1,050 Utilities expense 230 Totals 47,685$ 47,685$
4 - 13
Now, let’s look at the ledger accountsafter posting this closing entry.
CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME
SUMMARY Dr. Cr.
Dec. 31 Income summary 4,365Depreciation expense-Equipment 375Salaries expense 1,610Insurance expense 100Rent expense 1,000Supplies expense 1,050Utilities expense 230
P 2
4 - 14
Income Summary4,365 8,150
3,785
Utilities Expense230 230
-
Rent Expense1,000 1,000
-
Net Income
CLOSE DEBIT BALANCES IN EXPENSE ACCOUNTS TO INCOME
SUMMARY
Supplies Expense1,050 1,050
-
Depreciation Expense- Eq.
375 375 -
Salaries Expense1,610 1,610
-
Insurance Expense100 100
-
P 2
4 - 15
SUMMARY OF THE CLOSING PROCESS
1. Close Credit Balances in Revenue Accounts to Income Summary.
2. Close Debit Balances in Expense Accounts to Income Summary.
3. Close Income Summary to Owner’s Capital.4. Close Withdrawals Account to Owner’s
Capital.
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