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.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.)
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
T ACCOUNTS 6. Delivery Income
Equipment Summary
Debit
–
Closing 2,650
Credit
Closing 2,650
Debit
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry (cont'd.)First Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
Closing Entry (cont'd.)
Credit
+
Balance 2,650
Closing Entry (cont'd.)
JOURNAL ENTRY
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry (cont'd.)First Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
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
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.)
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Closing Entry (cont'd.)
Second Closing Entry—Close Expenses to Income Summary
T ACCOUNTS 6.Income Summary Advertising Expense
Debit
–
Closing 1,500
Credit
–
Closing 75
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry (cont'd.)Second Closing Entry (cont'd.)
Closing Entry (cont'd.)
Credit
Second Closing Entry—Close Expenses to Income Summary
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
Closing Entry (cont'd.)
JOURNAL ENTRY 7.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry (cont'd.)Second Closing Entry (cont'd.)
Second Closing Entry—Close Expenses to Income Summary
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
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.)
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Closing Entry (cont'd.)
Third Closing Entry—Close Income Summary to Capital
T ACCOUNTS 6. Maria SanchezIncome Summary Capital
Debit
Closing 1,150
Debit
–
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry (cont'd.)Third Closing Entry (cont'd.)
Closing Entry (cont'd.)
Credit
Balance 1,150
Credit
+
Balance 25,400
Closing 1,150
Third Closing Entry—Close Income Summary to Capital
Closing Entry (cont'd.)
JOURNAL ENTRY 7.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry (cont'd.)Third Closing Entry (cont'd.)
Third Closing Entry—Close Income Summary to Capital
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
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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.)
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Closing Entry (cont'd.)
Fourth Closing Entry—Close Withdrawals to Capital
T ACCOUNTS 6.Maria Sanchez Maria Sanchez
Capital Withdrawals
Debit
–
Closing 500
Credit
–
Closing 500
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry (cont'd.)Fourth Closing Entry (cont'd.)
Closing Entry (cont'd.)
Credit
+
Balance 26,550
Debit
+
Balance 500
Fourth Closing Entry—Close Withdrawals to Capital
Closing Entry (cont'd.)
JOURNAL ENTRY 7.
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry (cont'd.)Fourth Closing Entry (cont'd.)
Fourth Closing Entry—Close Withdrawals to Capital
Check Your UnderstandingCheck Your Understanding
What is the purpose of the
Income Summary account?
What is the purpose of the
Income Summary account?
Section 1 Preparing Closing Entries (cont'd.)Section 1 Preparing Closing Entries (cont'd.)
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