PREPARING CLOSING ENTRIES

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PREPARING CLOSING ENTRIES

• Chapter 10 Lecture Notes

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CONGRATULATIONS!

• Guess what?
• You have done an amazing thing
• You have made it to the end of an accounting
  cycle!
• WHOOO HOOOOOOO!
• Now what?

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ITS CLOSING TIME!

• Time to get the books ready for the new year.
• Did the business make money or lose money?
• Who gets that money?
• How do we prepare the business for the next
  accounting period?
• Thats what Chapter 10 is all about! With a bit
  of hard work and my expert tutelage, youll be
  fine! ?

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What are Closing Entries?

• Well first, lets review
• Permanent accounts are used to accumulate
  information from one fiscal period to the next!
  (Also known as real accounts.)
• Permanent accounts are your assets, liabilities,
  and owners equity accounts.
• Temporary accounts are used to accumulate
  information until it is transferred to the
  owners capital account.
• Temporary accounts are also known as nominal
  accounts.
• Temporary accounts are your revenue, expenses,
  drawing, and income summary accounts.
• Temporary accounts must be reduced to ZERO at the
  end of each fiscal period!

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So what are closing entries then?

• Well, closing entries are the special journal
  entries used to prepare the temporary accounts
  for the new fiscal period.
• To close a temporary account, an amount equal to
  its balance is recorded on the opposite side of
  its balance.
• For example, if Sales Revenue has a Credit
  Balance of 4,000, we would give Sales Revenue a
  Debit for 4,000 to close it!

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But can you do that?

• You cant make a journal entry with just a debit
  or a credit. You need both!
• Whenever a temporary account is closed, the
  closing entry must have equal debits and credits!
• INCOME SUMMARY is the temporary account that is
  used to summarize the closing entries for the
  revenue and expense accounts.

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INCOME SUMMARY!

• The Income Summary account is awesome. It sits
  there all alone, all year waiting for its one
  chance at glory.
• Closing day is it!
• The Income Summary account is unique because it
  does not have a normal balance.
• CREDIT BALANCE NET INCOME!
• DEBIT BALANCE NET LOSS!

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THERE ARE FOUR CLOSING ENTRIES!

• Entry to Close Revenue
• Entry to Close Expenses
• Entry to Close Net Income or Net Loss into
  Capital. This will also close down Income
  Summary! (Its job is done! ?)
• Lastly, the entry to close the Drawing Account
  into Capital.
• After recording these entries, you post them back
  to the ledger and watch the magic happen!
• Whoever invented this is a genius, man!