Accounting 5 - Closing Entries
-
Upload
oanh-nguyen -
Category
Documents
-
view
231 -
download
0
Transcript of Accounting 5 - Closing Entries
-
7/23/2019 Accounting 5 - Closing Entries
1/13
-1-
Hult International Business School - London
International Accounting
Handout 5 Closing Entries
Module A - 2015 / 2016
-
7/23/2019 Accounting 5 - Closing Entries
2/13
-2-
What Have We Done So Far (?)1. Journalized transactions. Recorded transactions in the general journal;
2. Posted transactions into general journal accounts.3. Balanced accounts and prepared a trial balance.
And determined what adjustments are necessary.
4. Journalized and posted the adjusting entries.
5. Balanced accounts again and prepared the adjusted
trial balance.
6. Prepared financial statements (Income Statement).
7. Closed temporary accounts ... and prepare the final
Balance Sheet.
-
7/23/2019 Accounting 5 - Closing Entries
3/13
-3-
Temporary AccountsThese are sub-accounts of the shareholders equityaccount (which is permanent).
Temporary accounts are not critical for the purpose of producing the
end of accounting period Balance Sheet, but ... they are critical in
order to produce an Income Statement for the accounting period.
They must be emptied before the next accounting period begins. Balances need to be transferred into the permanent shareholders equity accounts.
Sole Proprietorship CorporationCapital (the permanent Account).
.
Revenue (the temporary account);
Expense (the temporary account);
Drawing (the temporary account);
Retained Earnings (the permanentAccount).
Revenue (the temporary account);
Expense (the temporary account);
Dividend (the temporary account);
-
7/23/2019 Accounting 5 - Closing Entries
4/13
-4-
Income StatementClassification of line items on an Income Statement will be dealt with laterin the course, however, all information necessary to prepare a basic
Income Statement is available on the Trial Balance.
Revenue(s) 2,900
Expense(s) 3,875
NetIncome 975
WinstonWolfeServicesInc.
IncomeStatement($s)
FortheyearendedDecember31,20X5
-
7/23/2019 Accounting 5 - Closing Entries
5/13
-5-
Adjusted TB Again WinstonWolfeServicesInc.Debit Credi t
Cash 19,450
A/R 1,600OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 0 800
PrepaidInsurance 500
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
CommonStock 23,000
RetainedEarnings 0
Dividends 3,000
Revenue(s) 2,900
Expense(s) 750DepreciationExpense 800
WagesExpense 1,200
UtilitiesExpense 125
InsuranceExpense 500
SuppliesExpense 500
Total 33,925 33,925
CorporationAdjustedTrialBalanceII($s)
December31,20X5
WinstonWolfeServicesInc.
Debi t C redi t
Cash 19,450A/R 1,600
OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 800
PrepaidInsurance 500
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
Capital 23,000
Drawing 3,000
Revenue(s) 2,900
Expense(s) 750DepreciationExpense 800
WagesExpense 1,200
UtilitiesExpense 125
InsuranceExpense 500
SuppliesExpense 500
Total 33,925 33,925
SoleProprietorshipAdjustedTrialBalanceII($s)
December31,20X5
-
7/23/2019 Accounting 5 - Closing Entries
6/13
-6-
Closing Entries Direct Method (I)Closing entries transfer the closing balances from the temporary accountsinto (Retained Earnings within) the permanent Equity account.
Deb it Credit
+
1,200
1,200
Deb it Credit
+
125
125
WagesExpense
UtilitiesExpense
Deb it Cred it
+
800
800
Depreciation
Expense
Deb it Cred it
+
21000
2,000
23,000
23,000
CommonStock
Deb it Cred it
+
0
RetainedEarnings
Debit Credit Debit Credit Debit Credit
+ + +
200 500 Tr.3 Tr.5 3,000
250 700 Tr.4 3,000
300 300
750 1,400
750 2,900
2,900Deb it Cred it
+
500
Debit Credit
+ 500
500
500
Expense(s) Revenue(s) Dividends
InsuranceExpense
SuppliesExpense
-
7/23/2019 Accounting 5 - Closing Entries
7/13
-7-
Closing Entries Direct Method (II)Instead of grabbing the balance from the temporary accountand moving it to the Retained Earnings account, closing of
accounts is done by:
1. Debiting the Revenue account and crediting the Retained Earnings
account (Revenue account having a normal Credit balance);
2. Crediting the Expense account and debiting the Retained Earnings
account (Expense account having a normal Debit balance);
3. Crediting the Dividends account and debiting the Retained Earnings
account (Dividends account having a normal Debit balance);
-
7/23/2019 Accounting 5 - Closing Entries
8/13
-8-
Income Summary Account (I)Typically, revenue and expense temporary accounts are first closed into theIncome Summary (IS) account, before the IS account is closed into the
Retained Earnings account.
This is accomplished by:
1. Debiting the Revenue account and crediting the Income Summary
account (Revenue account having a normal Credit balance);
This will close out the Revenue account and transfer the balance into Income
Summary;
2. Crediting the Expense account and debiting the Income Summary
account (Expense account having a normal Debit balance);
This will close out the Expense account and transfer the balance into Income
Summary;
Debit Revenue $XYZ
Credit Income
Sumary $
XYZ
Debit Income
Sumary $
XYZ
Credit Expense $XYZ
-
7/23/2019 Accounting 5 - Closing Entries
9/13
-9-
Income Summary Account (II)Income Summary account is closed into the Retained Earnings account.Dividends account is closed into the Retained Earnings account.
This is accomplished by:
1. Debiting the Income Summary account and crediting the Retained
Earnings account;
This will close out the Income Summary account and transfer the balance into theRetained Earnings account;
2. Crediting the Dividends account and debiting the Retained Earnings
account;
This will close out the Dividends account and transfer the balance into the
Retained Earnings account;
Debit IncomeSumary $XYZ
Credit R.Earnings $XYZ
Debit R.Earnings $XYZ
Credit Dividends $
XYZ
-
7/23/2019 Accounting 5 - Closing Entries
10/13
-10-
Income Summary Account ExampleIncome Summary account is used to verify that process of closing entries. When Revenues andExpenses are closed into Income Summary account correctly ... The balance in the IS
account will be equal to the Net Income for the accounting period. Example ...
Image source: http://www.loscostos.info/financial-accounting/financial-reporting.html
-
7/23/2019 Accounting 5 - Closing Entries
11/13
-11-
Post Closing TBWinstonWolfeServicesInc.
Debit Credi t
Cash 19,450
A/R 1,600OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 0 800
PrepaidInsurance 500
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
CommonStock 23,000
RetainedEarnings 3,975
Dividends 0
Revenue(s) 0
Expense(s) 0DepreciationExpense 0
WagesExpense 0
UtilitiesExpense 0
InsuranceExpense 0
SuppliesExpense 0
Total 27,050 27,050
CorporationPostClosingTrialBalance($s)
December31,20X5
WinstonWolfeServicesInc.
Debi t C redi t
Cash 19,450A/R 1,600
OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 800
PrepaidInsurance 500
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
Capital 19,025
Drawing 0
Revenue(s) 0
Expense(s) 0DepreciationExpense 0
WagesExpense 0
UtilitiesExpense 0
InsuranceExpense 0
SuppliesExpense 0
Total 27,050 27,050
December31,20X5
SoleProprietorshipPostClosingTrialBalance($s)
-
7/23/2019 Accounting 5 - Closing Entries
12/13
-12-
Statement of Retained EarningsThe closing entries move balances from the temporaryaccounts into the Retained Earnings permanent account; REE account balance = REB + Revenues Expenses Dividends
Shareholder investments are recorded in the Common Stockaccount. WinstonWolfeServicesInc.
RetainedEarnings Dec31,20X4 0
NetIncome
/(Net
Loss)
975
Dividends 3,000
RetainedEarnings Dec31,20X5 3,975
WinstonWolfeServicesInc.
CommonStock 23,000
RetainedEarnings 3,975
TotalShareholders'Equity 19,025
December31,20X5
StatementofRetainedEarnings($s)
Statementof
Shareholders'
Equity
($s)
-
7/23/2019 Accounting 5 - Closing Entries
13/13
-13-
From Post Closing TB to Balance SheetWinstonWolfeServicesInc.
Debit Credi t
Cash 19,450
A/R 1,600OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 0 800
PrepaidInsurance 500
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
CommonStock 23,000
RetainedEarnings 3,975
Dividends 0
Revenue(s) 0
Expense(s) 0DepreciationExpense 0
WagesExpense 0
UtilitiesExpense 0
InsuranceExpense 0
SuppliesExpense 0
Total 27,050 27,050
CorporationPostClosingTrialBalance($s)
December31,20X5
Cash 19,450
A/R 1,600OfficeSupplies 1,500
ComputerWorkstation 4,000
AccumulatedDepreciation 800
NetPP&E 3,200
PrepaidInsurance 500
TotalAssets 26,250
A/P 2,000
WagesPayables 1,200
UtilitiesPayables 125
Debt 3,000
UnearnedRevenue 900
TotalLiabilities 7,225
CommonStock 23,000
RetainedEarnings 3,975
TotalShareholders'Equity 19,025
TotalLiab.&Sh.Equity 26,250
WinstonWolfeServicesInc.
CorporationBalanceSheet($s)
December31,20X5