6-1 Skyline College Chapter 6. 6-2 Closing entries are journal entries that transfer the results of...
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Transcript of 6-1 Skyline College Chapter 6. 6-2 Closing entries are journal entries that transfer the results of...
6-1
Skyline College
Chapter
6
6-2
Closing entries are journal entries that transfer the results of operations (net income or net loss) to owner’s equity and reduce the revenue, expense, and drawing account balances to zero.
Only balance sheet accounts carry forward a balance.
The Closing Process
6-3
The Income Summary account is a special owner’s equity account that is used only in the closing process to summarize the results of operations.
The Income Summary Account
Classified as a temporary owner’s equity account
Only time it has a balance is during the closing process
Has a zero balance after the closing process and remains with a zero balance until after the closing procedure for the next period
6-4
2. Transfer the expense account balances to the Income Summary account.
There are four steps in the closing process:There are four steps in the closing process:
4. Transfer the balance of the drawing account to the owner’s capital account.
3. Transfer the balance of the Income Summary account to the owner’s capital account.
1. Transfer the balance of the revenue account to the Income Summary account.
6-5
On December 31 the worksheet for JT ‘s Consulting Services shows one revenue account, Fees Income of $35,000.
Step 1: Transfer Revenue AccountBalances
The Fees Income account is closed to the IncomeSummary account.
6-6
Net Income
CREDIT
BALANCE SHEETINCOME STMT.
DEBIT CREDIT DEBIT
83,500
5,0002,000
22,0003,500
3677,000
90,0004,000
35,000 7,000 500
1,000
3673,500
35,000 97,36712,367 120,000
367
120,583
TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS
DEBIT CREDIT CREDIT DEBIT CREDIT
ACCOUNT NAME
CashAccounts ReceivableSuppliesPrepaid RentEquipment
Accum. Depr.—Equip.
Jason Taylor, Cap.Accounts Payable
Jason Taylor, Draw.Fees IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp.—Equip.Totals
DEBIT
83,500
7,00090,000
4,00035,000
7,000 500
22,0007,000
5,0003,000
83,500
5,000
22,000
4,000
7,000 500
2,000
7,00090,000
35,000
1,000
3673,500
132,000
132,000 4,083 4,083
(c) 367
(a) 1,000(b) 3,500(c) 367
(a) 1,000(b) 3,500 3,500
120,58322,633 22,633
35,000 35,000 120,000 120,000
JT’s Consulting ServicesWorksheet
Month Ended December 31, 2007
It has a credit balance of $35,000.
6-7
Fees Income
-Closing 35,000
+Bal 35,000
Income Summary
Closing 35,000
Step 1: Close Revenue
The revenue account, Fees Income, is decreased by $35,000 to zero.
The $35,000 is transferred to the temporary owner’s equity account, Income Summary.
6-8
The words “Closing Entries” are written in the Description column of the general journal.
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDIT REF.
2007 Closing Entries
Dec. 31 Fees Income 35,000
Income Summary 35,000
Step 1: Close Revenue
6-9
The Income Statement section of the worksheet for JT’s Consulting Services lists five expense accounts.
Salaries Expense $7,000Utilities Expense 500Supplies Expense 1,000Rent Expense 3,500Depreciation Expense 367
Since expense accounts have debit balances, enter a credit in each account to reduce its balance to zero.
This closing entry transfers total expenses to the Income Summary account.
Step 2: Transfer Expense AccountBalances
6-10
The five expense account balances are reduced to zero.
Step 2: Close Expenses
The total, $12,367 of expenses are transferred to the temporary owner’s equity account, Income Summary.
6-11
35,000 120,000 120,000
JT’s Consulting ServicesWorksheet
Month Ended December 31, 2007
It has a credit balance of $35,000.
0
CREDIT
BALANCE SHEETINCOME STMT.
DEBIT CREDIT DEBIT
83,500
5,0002,000
22,0003,500
3677,000
90,0004,000
35,000 7,000 500
1,000
3673,500
35,000 97,36712,367 120,000
367
120,583
TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS
DEBIT CREDIT CREDIT DEBIT CREDIT
ACCOUNT NAME
CashAccounts ReceivableSuppliesPrepaid RentEquipment
Accum. Depr.—Equip.
Jason Taylor, Cap.Accounts Payable
Jason Taylor, Draw.Fees IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp.—Equip.Totals
DEBIT
83,500
7,00090,000
4,00035,000
7,000 500
22,0007,000
5,0003,000
83,500
5,000
22,000
4,000
7,000 500
2,000
7,00090,000
35,000
1,000
3673,500
132,000
132,000 4,083 4,083
(c) 367
(a) 1,000(b) 3,500(c) 367
(a) 1,000(b) 3,500 3,500
120,583
JT’s Consulting ServicesWorksheet
Month Ended December 31, 2007
CREDIT
BALANCE SHEETINCOME STMT.
DEBIT CREDIT DEBIT
83,500
5,0002,000
22,0003,500
367 7,00090,000
4,00035,000
7,000 500
1,000
3673,500
35,000 97,36712,367 120,000
367
120,583
TRIAL BALANCE ADJ. TRIAL BAL.ADJUSTMENTS
DEBIT CREDIT CREDIT DEBIT CREDIT
ACCOUNT NAME
CashAccounts ReceivableSuppliesPrepaid RentEquipment
Accum. Depr.—Equip.
Jason Taylor, Cap.Accounts Payable
Jason Taylor, Draw.Fees IncomeSalaries ExpenseUtilities ExpenseSupplies ExpenseRent ExpenseDepr. Exp.—Equip.Totals
DEBIT
83,500
7,00090,000
4,00035,000
7,000 500
22,0007,000
5,0003,000
83,500
5,000
22,000
4,000
7,000 500
2,000
7,00090,000
35,000
1,000
3673,500
132,000
132,000 4,083 4,083
(c) 367
(a) 1,000(b) 3,500(c) 367
(a) 1,000(b) 3,500 3,500
120,583
JT’s Consulting ServicesWorksheet
Month Ended December 31, 2007
35,000 120,000 120,000
JT’s Consulting ServicesWorksheet
Month Ended December 31, 2007
22,633 22,633It has a debit balance of $12,367.
35,000
6-12
Income Summary
Step 2: Close Expenses
Salaries Expense
Closing 12,367 Bal 35,000 -Closing 7,000
+Bal 7,000
Utilities Expense Supplies Expense
+Bal 500
+Bal 1000
-Closing 1,000
-Closing 500
Depr. Expense – Equip.Rent Expense
-Closing 3,500
+Bal 3,500
+Bal 367
-Closing 367
Bal 22,633
6-13
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDIT REF.
2007 Closing EntriesDec. 31 Income Summary 12,367 Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depreciation Exp.-Equip. 367
Step 2: Close Expenses
6-14
The Income Summary account reflects all entries in the Income Statement section of the worksheet.
Income Summary
Dr.
Closing 12,367
Cr.
Balance 22,633
Closing 35,000
Net Income
6-15
The journal entry to transfer net income to owner’s equity is a debit to Income Summary, and a credit to Jason Taylor, Capital because Income Summary has a credit balance of $22,633.
The balance of Income Summary is reduced to zero; the owner’s capital account is increased by the amount of net income.
Step 3: Close Net Income to Owner’s Capital
6-16
The Income Summary account is reduced to zero.
The net income amount, $22,633, is transferred to the owner’s capital account. Jason Taylor, Capital is increased by $22,633.
Step 3: Close Net Income to Capital
Wooohoooo! I made some money
this month!
6-17
Income Summary Jason Taylor, Capital
Closing 22,633Bal 22,633
+Bal 90,000
Step 3: Close Net Income to Capital
Closing 22,633
6-18
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Income Summary 22,633
Jason Taylor, Capital 22,633
Step 3: Close Net Income to Capital
6-19
The drawing account balance is reduced to zero.
The balance of the drawing account, $4,000, is transferred to the owner’s capital account.
Remember that withdrawals appear in the statement of owner’s equity as a
deduction from capital.
Step 4: Close Drawing to Capital
6-20
Jason Taylor, Capital Jason Taylor, Drawing
-Closing 4,000
+Bal 112,633
-Closing 4,000
+Bal 4,000
Step 4: Close Drawing to Capital
Bal 108,633
The new balance of the Jason Taylor, Capital account agrees with the amount listed on the balance sheet.
6-21
GENERAL JOURNAL PAGE 4
DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing EntriesDec. 31 Jason Taylor, Capital 4,000
Jason Taylor, Drawing 4,000
Step 4: Close Drawing to Capital
6-22
Summary of Closing Entries
GENERAL JOURNAL PAGE 4
POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries
Dec. 31 Fees Income 401 35,000 Income Summary 309 35,000
31 Income Summary 309 12,367 Salaries Expense 511 7,000 Utilities Expense 514 500 Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip. 523 367
31 Income Summary 309 22,633 Jason Taylor, Capital 301 22,633
31 Jason Taylor, Capital 301 4,000 Jason Taylor , Draw. 302 4,000
STEPS
1. CLOSEREVENUE
2. CLOSEEXPENSEACCOUNTS
3. CLOSEINCOMESUMMARY
4. CLOSEDRAWINGACCOUNT
6-23
“Closing” is entered in the Description column of the ledger accounts.
The ending balances of the drawing, revenue, and expense accounts are zero.
Posting the Closing Entries
All journal entries are posted to the general ledger accounts.
6-24
GENERAL JOURNAL PAGE 4
POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries
Dec. 31 Fees Income 401 35,000 Income Summary 309 35,000
31 Income Summary 309 12,367 Salaries Expense 511 7,000 Utilities Expense 514 500 Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip. 523 367
31 Income Summary 309 22,633 Jason Taylor, Capital 301 22,633
31 Jason Taylor, Capital 301 4,000 Jason Taylor, Draw. 302 4,000
STEPS
1. CLOSEREVENUE
2. CLOSEEXPENSEACCOUNTS
3. CLOSEINCOMESUMMARY
4. CLOSEDRAWINGACCOUNT
ACCOUNT Fees Income ACCOUNT NO. 401
POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT
2007 Dec. 31 J2 26,000 26,000Dec. 31 J2 9,000 35,000Dec. 31 Closing J4 35,000 – 0 –
6-25
GENERAL JOURNAL PAGE 4
POST. DATE DESCRIPTION REF. DEBIT CREDIT 2007 Closing Entries
Dec. 31 Fees Income 401 35,000 Income Summary 309 35,000
31 Income Summary 309 12,367 Salaries Expense 511 7,000 Utilities Expense 514 500 Supplies Expense 517 1,000 Rent Expense 520 3,500 Depr. Expense-Equip. 523 367
31 Income Summary 309 22,633.00 Jason Taylor, Capital 301 22,633.00
31 Jason Taylor, Cap 301 4,000 Jason Taylor, Draw. 302 4,000
STEPS
1. CLOSEREVENUE
2. CLOSEEXPENSEACCOUNTS
3. CLOSEINCOMESUMMARY
4. CLOSEDRAWINGACCOUNT
ACCOUNT Income Summary ACCOUNT NO. 309
POST. BALANCE DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT
2007 Dec. 31 Closing J4 35,000 35,000
6-26
A postclosing trial balance is a statement that is prepared to prove the equality of general ledger:
Preparing the Postclosing Trial Balance
Proves that total debits equal total credits
Verifies that revenue, expense, and drawing
accounts have zero balances
Only permanent accounts appear on the postclosing trial balance (assets, liabilities and owner’s capital).
6-27
JT’s Consulting Services Postclosing Trial Balance December 31, 2007
ACCOUNT NAME DEBIT CREDIT Cash 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment 22,000Accumulated Depreciation–Equipment 367 Accounts Payable 7,000Jason Taylor, Capital _______ 108,633Totals 116,000 116,000
Postclosing Trial Balance
6-28
To interpret means to understand and explain the meaning and importance of something.
Interpret financial statements.
6-29
Consider the financial statements for JT’s Consulting Services at the end of the accounting period.
What is the cash balance?
How much do customers owe the business?
How much does the business owe suppliers?
What is the profit or loss?
6-30
JT’s Consulting ServicesBalance Sheet
December 31, 2007Assets
Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation <367> 21,633Total Assets $ 115,633
Liabilities and Owner’s EquityLiabilities Accounts Payable $ 7,000Owner’s Equity Jason Taylor, Capital 108,633Total Liabilities and Owner’s Equity $115,633
What is the
cash balance?
6-31
JT’s Consulting ServicesBalance Sheet
December 31, 2007Assets
Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation < 367> 21,633Total Assets $ 115,633
Liabilities and Owner’s EquityLiabilities Accounts Payable $ 7,000Owner’s Equity Jason Taylor, Capital 108,633Total Liabilities and Owner’s Equity $115,633
How much do the customers owe the business?
6-32
JT’s Consulting ServicesBalance Sheet
December 31, 2007Assets
Cash $ 83,500 Accounts Receivable 5,000Supplies 2,000Prepaid Rent 3,500 Equipment $ 22,000Less Accumulated Depreciation < 367> 21,633Total Assets $ 115,633
Liabilities and Owner’s EquityLiabilities Accounts Payable $ 7,000Owner’s Equity Jason Taylor, Capital 108,633Total Liabilities and Owner’s Equity $115,633
How much does the business owe its suppliers?
6-33
JT’s Consulting Services Income Statement
Month Ended December 31, 2007
Revenue Fees Income 35,000 Expenses Salaries Expense 7,000 Utilities Expense 500 Supplies Expense 1,000 Rent Expense 3,500 Depr. Expense--Equipment 367 Total Expenses < 12,367>Net Income for the Month 22,633
What is the profit?
6-34
The Accounting Cycle
Step 1 Analyze
transactionsAnalyze the source documents.
Sales slips Purchase invoices Credit memorandums Check stubs
Step 1 Analyze
transactions
6-35
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Record the effects of the transactions in a journal.
Step 2 Journalize the
data about transactions
6-36
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Transfer data from the journal to the general ledger accounts.
Step 3 Post the
data about transactions
6-37
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Prepare a worksheet with five sections.
Trial Balance
Adjustments
Adjusted Trial Balance
Income Statement
Balance Sheet
Step 4 Prepare
a worksheet
Step 4 Prepare
a worksheet
6-38
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Step 4 Prepare
a worksheet
Prepare financial statements.
Income Statement
Statement of Owner’s Equity
Balance Sheet
Step 5Prepare financial
statements
Step 5Prepare financial
statements
6-39
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Step 4 Prepare
a worksheet
Step 5Prepare financial
statements
The adjusting entries are a permanent record of the changes in account balances shown on the worksheet.
Step 6 Journalize and post adjusting
entries
Step 6 Journalize and post adjusting
entries
6-40
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Step 4 Prepare
a worksheet
Step 5Prepare financial
statements
Step 6 Journalize and post adjusting
entries
Transfer net income or net loss to owner’s equity. Reduce the balances of the
temporary accounts to zero.
Step 7 Journalize and
post closing entries
Step 7 Journalize and
post closing entries
6-41
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Step 4 Prepare
a worksheet
Step 5Prepare financial
statements
Step 6 Journalize and post adjusting
entriesStep 7
Journalize and post closing
entries
Confirm that the general ledger is in balance.
Confirm that the revenue, expense, and drawing accounts have zero balances.
Step 8 Prepare a
postclosing trial balance
Step 8 Prepare a
postclosing trial balance
6-42
The Accounting Cycle
Step 1 Analyze
transactions
Step 2 Journalize the
data about transactions
Step 3 Post the
data about transactions
Step 4 Prepare
a worksheet
Step 5Prepare financial
statements
Step 6 Journalize and post adjusting
entriesStep 7
Journalize and post closing
entries
Step 8 Prepare a
postclosing trial balance
Use financial statements to understand and communicate the financial information and to make decisions.
Step 9 Interpret
the financial information
Step 9 Interpret
the financial information
6-43
Flow of Data Through a Simple Accounting System
Source documents
Source documents are analyzed.
General journal
General ledger
Worksheet Financialstatements
Source Documents
6-44
Transactions are recorded in the general journal.
Flow of Data Through a Simple Accounting System
Source documents
General journal
General ledger
Worksheet Financialstatements
General journal
6-45
Transactions are posted from the general journal to the general ledger.
Flow of Data Through a Simple Accounting System
Source documents
General journal
General ledger
Worksheet Financialstatements
General ledger
6-46
Financial information is proved, adjusted, and summarized on the worksheet.
Flow of Data Through a Simple Accounting System
Source documents
General journal
General ledger
Worksheet Financialstatements
Worksheet
6-47
Financial information is reported on financial statements.
Flow of Data Through a Simple Accounting System
Source documents
General journal
General ledger
Worksheet FinancialstatementsFinancial
statements