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Slide

5-1

5 Completing the Accounting


Cycle

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-2

Closing Process
 Resets revenue,
expense and Identify accounts for
withdrawal account closing.
balances to zero at
the end of the period.
Record and post closing
 Helps summarize a entries.
period’s revenues
and expenses in the
Income Summary
account. Prepare post-closing trial
balance.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-3

Temporary and Permanent


Accounts
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
Theclosing
closingprocess
process
applies
appliesonly
only to
to
temporary
temporaryaccounts.
accounts.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-4

Recording and Posting Closing


Entries
 Close Revenue Let’s see how the
accounts to Income closing process
Summary. works!
 Close Expense
accounts to Income
Summary.
 Close Income Summary
account to Owner’s
Capital.
 Close Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-5

Closing Process for a


Proprietorship
Expense Accounts Revenue Accounts
10,000 25,000

10,000 25,000
Income Summary

Owner's Capital Withdrawals Account


30,000 5,000

30,000 Balances before closing. 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-6

Closing Process for a


Proprietorship
Expense Accounts Revenue Accounts
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000

Owner's Capital 25,000 Withdrawals Account


30,000 5,000

30,000 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-7

Closing Process for a


Proprietorship
Expense Accounts Revenue Accounts
10,000 10,000 Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000

Owner's Capital 15,000 Withdrawals Account


30,000 5,000

The
Thebalance
balancein
inIncome
Income
30,000 Summary
Summaryequals
equalsnet
net 5,000
income.
income.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-8

Closing Process for a


Proprietorship
Expense Accounts Revenue Accounts
10,000 10,000 Close Income 25,000 25,000
Summary to
Owner’s Capital.
- -
Income Summary
10,000 25,000
15,000

- Withdrawals Account
Owner's Capital
5,000 30,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
40,000
Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.
5-9 5.3

Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.
5-10 5.3

Close Revenue
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.

 Close Revenue Accounts to


5-11 5.3

Income Summary

GENERAL JOURNAL Page 34


Date Description PR Debit Credit

Prepare
Preparethe
theentry
entryto
toclose
closeRevenues
Revenuesbyby
debiting
debitingthe
therevenue
revenueaccounts
accountsand
andcrediting
crediting
Income
IncomeSummary.
Summary.

Now, let’s look at the ledger accounts after


posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.

 Close Revenue Accounts to


5-12 5.3

Income Summary

GENERAL JOURNAL Page 34


Date Description PR Debit Credit
Dec. 31 Consulting Revenue 7,850
Rental Revenue 300
Income Summary 8,150

Now, let’s look at the ledger accounts after


posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide

 Close Revenue Accounts to


5-13

Income Summary
Consulting Revenue
7,850 7,850

-
Income Summary
7,850
300
Rental Revenue
300 300

-
8,150

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.
5-14 5.3

Close Expense
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.

 Close Expense Accounts to


5-15 5.3

Income Summary
GENERAL JOURNAL Page 34
Date Description PR Debit Credit

Prepare
Preparethetheentry
entryto
toclose
closeExpenses
Expensesby
by
crediting
creditingthe
theexpense
expenseaccounts
accountsand
anddebiting
debiting
Income
IncomeSummary.
Summary.

Now, let’s look at the ledger accounts after


posting this closing entry.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide Exh.

 Close Expense Accounts to


5-16 5.3

Income Summary
GENERAL JOURNAL Page 34
Date Description PR Debit Credit
Dec. 31 Income Summary 4,365
Depreciation Expense-Equipment 375
Salaries Expense 1,610
Insurance Expense 100
Rent Expense 1,000
Supplies Expense 1,050
Utilities Expense 230

Now, let’s look at the ledger accounts after


posting this closing entry.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide

 Close Expense Accounts to


5-17

Income Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-
Income Summary
375 7,850
1,610 300
Salaries Expense Supplies Expense
100
1,610 1,610 1,050 1,050 1,000
- - 1,050
230

3,785
Insurance Expense Utilities Expense
100 100 230 230
- - Net Income
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide Exh.
5-18 5.3

Close Income
Summary to
Owner’s Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.

 Close Income Summary to


5-19 5.3

Owner’s Capital

GENERAL JOURNAL Page 34


Date Description PR Debit Credit
Dec. 31 Income Summary 3,785
Chuck Taylor, Capital 3,785

Now, let’s look at the ledger accounts after


posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide

 Close Income Summary to


5-20

Owner’s Capital

Income Summary
375 7,850
1,610 300
100
Chuck Taylor, 1,000
Capital 1,050
30,000 230
3,785 3,785
-
33,785

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.
5-21 5.3

Close
Withdrawals to
Owner’s Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.

 Close Withdrawals to Owner’s


5-22 5.3

Capital

GENERAL JOURNAL Page 34


Date Description PR Debit Credit
Dec. 31 Chuck Taylor, Capital 600
Chuck Taylor, Withdrawals 600

Now, let’s look at the ledger accounts after


posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide

 Close Withdrawals to Owner’s


5-23

Capital

Chuck Taylor, Chuck Taylor,


Withdrawals Capital
600 600 600 30,000
1,785

- 31,185

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-24

Post-Closing Trial Balance

 List
List of
of permanent
permanent
accounts Let’s look at
accounts and
and their
their
FastForward’s
balances
balances after
after post-closing trial
posting
posting closing
closing balance.
entries.
entries.

 Total
Total debits
debits and
and
credits
credits must
must be
be
equal.
equal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide Exh.
5-25 5.4

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002


Slide
5-26

Closing Entries for a Corporation


The
The first
firsttwo
two
entries
entriesare arethe
the Close Revenue accounts
same,
same, but butthe
the to Income Summary.
last
last two
twoareareaa
little
littledifferent!
different! Close Expense accounts
to Income Summary.

Close Income Summary


account to Retained
Earnings.

Close Dividends
Declared to Retained
Earnings.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
5-27

End of Chapter 5

Let’s close this


chapter!

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

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