Accounting Practices 501 Chapter 8 Closing entries Cathy Saenger, Senior Lecturer, Eastern Institute...
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Accounting Practices 501 Chapter 8 Closing entries Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011
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Transcript of Accounting Practices 501 Chapter 8 Closing entries Cathy Saenger, Senior Lecturer, Eastern Institute...
Accounting Practices 501
Chapter 8
Closing entries
Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011
Ch8G - Adj Trial Balance 2
We know thatProfit = Income less Expenses
Once profit has been calculated, what happens to the income and expense
accounts?
They get closed off as they only belong to ONE accounting period
Mmm……..
Ch8G - Adj Trial Balance 3
Extract from trial balance at year end
After the financial statements have been prepared from the adjusted trial balance, we
then close off the income and expense accounts so that they start at zero in the
new financial year
The following is an extract from an adjusted trial balance (after balance day adjustments) and only
shows some accounts
Adjusted Trial Bal
Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 4
Extract from adjusted trial balance at year end
After the financial statements have been prepared from the adjusted trial balance, we need to close off the income and expense accounts so that they start at zero for the new period
Adjusted Trial Bal
Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 5
ALL the income and expense accounts are closed off to a Profit & Loss account
Lets close off the income accounts first. After closing off an account, the balance will be zero.
Adjusted Trial Bal
Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 6
General JournalDate Account
TitlesRef no Debit Credit
31/3 Interest 600
Profit & Loss 90,600
Being entry required to closeincome accounts
Sales 90,000
Adjusted Trial Bal Closing After closing
Dr Cr Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory
6000
Closing inventory
5000
Drawings 2000
Funds introduced
6000
Ch8G - Adj Trial Balance 7
General JournalDate Account
TitlesRef no Debit Credit
31/3 Interest 600
Profit & Loss 90,600
Being entry required to close income accounts
Sales 90,000
600 NIL
90000 NIL
Profit & Loss 90,600
Adjusted Trial Bal Closing After closing
Dr Cr Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory
6000
Closing inventory
5000
Drawings 2000
Funds introduced
6000
Ch8G - Adj Trial Balance 8
600 NIL
90000 NIL
Profit & Loss 90,600
After closing, the balances of the income accounts start at zero for the new accounting period (1 April)
Adjusted Trial Bal
Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 9
Lets close off the expense accounts. After closing off an account, the balance will be zero.
Adjusted Trial Bal
Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Date Account Titles
Ref no Debit Credit31/3
Purchases 40,000
71,000
Closing inventory 5,000
Other expenses 30,000
Opening inventory 6,000
Profit & Loss
Being entry required to close expense accounts to Profit & Loss
Adjusted Trial Bal Closing After closing
Dr Cr Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory
6000
Closing inventory
5000
Drawings 2000
Funds introduced
6000
600 NIL
90000 NIL
Profit & Loss 90,600
Date Account Titles
Ref no Debit Credit31/3
Purchases 40,000
71,000
Closing inventory 5,000
Other expenses 30,000
Opening inventory 6,000
Profit & Loss
Being entry required to close expense accounts to Profit & Loss
40000
NIL30000
NIL
6000 NIL5000 NIL
71,000 19,600
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 12
All the income and expense accounts have now been closed off and have zero balances.
Profit & Loss 19,600
NIL
NIL
NIL
NIL NIL
NIL
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 13
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
The last thing to do is to close off the Profit & Loss, Drawings and Funds Introduced accounts and transfer the amounts to the Capital account
19,600
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 14
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
Owner gets the profit
19,600
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 15
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
General JournalDate Account
TitlesRef no Debit Credit
31/3 Profit & Loss 19,600
Capital 19,600
Being entry required to close Profit & Loss to Capital
19,600 19,600
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 16
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
General JournalDate Account Titles Debit Credit31/3 Capital 2,000
Drawings 2,000Being entry required to close Drawings to Capital
NIL
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 17
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
General JournalDate Account Titles Debit Credit31/3 Funds introduced 6,000
Capital 6,000Being entry required to close Funds introduced to Capital
NIL
NIL
Adjusted Trial Bal After closing
Dr Cr Dr Cr
Purchases 40000
Other expenses 30000
Interest 600
Sales 90000
Opening inventory 6000
Closing inventory 5000
Drawings 2000
Funds introduced 6000
Ch8G - Adj Trial Balance 18
Profit & Loss
NIL
NIL
NIL
NIL NIL
NIL
General JournalDate Account Titles Debit Credit31/3 Funds introduced 6,000
Capital 6,000Being entry required to close Funds introduced to Capital
NIL
NIL NIL
Ch8G - Adj Trial Balance 19
That wasn’t too bad
.... was it?
