Chapter 10

Chapter 10Completing the Accounting Cycle for a Sole

Propiertorship

Explain why it is necessary to update accounts through closing entries

Explain the purpose of the Income Summary account

Explain the relationship between the IS account and the capital account

Analyze and journalize the closing entries Post the closing entries to the GL Prepare a post-closing trial balance

Chapter 10 Objectives

When you refer to the close of a period, what do you mean? End of period

Why is it important to transfer the temporary account balances to the permanent owner’s capital account? To bring the Capital account balances up to

date

What do you think?

What do you think closing entries will do? Prepare the accounting records when one

period is ending and to get ready for the next period

Why are revenue, expense and owner’s w/d temporary accounts? They need to have a ZERO balance at end of

period

Discussion

The last two steps of the accounting cycle The purpose of closing entries The purpose of the Income Summary

account How to journalize the closing entries

Section 10.1 Objectives

8th step in the accounting cycle Journal entries made to close, or reduce to zero,

the balances of the temporary accounts Transfer the net income or net loss to the

owner’s capital account After the closing entries have been journalized

and posted, a Post-Closing Trial Balance is prepared to ensure that DR=CR

Closing Entries

All temporary accounts (expenses, revenue, etc…) need to start each new accounting period with a ZERO balance

Closing Entries

Net income or net loss Calculated from the worksheet and transferred to

the Income Statement From the IS, it’s included in the Statement of

Changes of Owner’s Equity Then listed on the Balance Sheet as the new Capital

account Notice that the capital account from the

worksheet and prepared Balance Sheet do not match

We already know

Maria Sanchez, Capital from the worksheet = $25,400

Maria Sanchez, Capital from the BS = $26,050

These amounts are different because the temporary accounts need to go through the closing process to bring all the accounts up to date

We already know

Income Summary Account

Serves as a simple income statement in the general ledger

Used to accumulate revenue and expenses for the period

Equals the net income or loss for the periodIncome Summary

Account = general ledger

account used to summarize the revenue and

expenses for the period.

Income Summary Account is a temporary account that

Is used only at the end

of the accounting period to

summarize revenue and

expense balances

does not have a normal balance

side

has a zero balance

before and after closing

process

does not appear on

any financial

statement

Journalizing Closing Entries

Four journal entries are prepared to close the temporary accounts

Close Revenue to Income Summary Transfer balances of all revenue accounts to

the CR side of IS

#1: Revenue to Income Summary

Close expense accounts to Income Summary Transfer expense account balances to the DR

side of Income Summary

#2: Expenses to Income Summary

#2: Expenses to Income Summary

Close Income Summary to the Owner’s Capital account Transfer the balance of Income Summary to

the Owner’s Capital account

#3: Income Summary to Capital

Income Summary

Expenses $1,500 Revenue $2,650

Balance $1,150

#3: Income Summary to Capital

Close Owner’s Withdrawal to Owner’s Capital Transfer the balance of the withdrawals to the

DR side of the Owner’s Capital account

#4: Withdrawals to Capital

In what step in the accounting cycle are closing entries made?

What is the DR side of Income Summary used for?

What is the CR side of Income Summary used for?

What is an entry called that has two or more debits or two or more credits?

Exit Ticket

10-1: text p. 259; wbk p. 184 10-2: text p. 259; wbk p. 185 9-1 & 9-2 Work Together

To-Do