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Closing Accounts
Completing the
Accounting Cycle
Learning Objective 1
1. Describe the flow of accounting
information from the unadjusted
trial balance into the adjusted trial
balance and financial statements.
Flow of Accounting
Information
LO 1
LO 1
Unadjusted
TB
Dr
Cr
Adjustmen
ts
Dr
Cr
Adjusted
TB
Dr
Cr
(continued)
LO 1
Unadjusted
TB
Dr
Cr
Adjustmen
ts
Dr
Cr
Adjusted
TB
Dr
Cr
(continued)
LO 1
Unadjusted
TB
Dr
Cr
Adjustmen
ts
Dr
Cr
Adjusted
TB
Dr
Cr
(continued)
LO 1
Adjusted
TB
Dr
Cr
Income
State.
Dr
Cr
Balance
Sheet
Dr
Cr
(continued)
LO 1
Adjusted
TB
Dr
Cr
Income
State.
Dr
Cr
Balance
Sheet
Dr
Cr
(concluded)
LO 2
LO 2
LO 2
LO 2
LO 2
Current Assets
Cash and other
assets that are
expected to be
converted into
cash, sold, or used
up usually within a
year or less,
through the normal
operations of the
business, are called
current assets.
Cash
Accounts
Receivable
Notes
Receivable
Supplies
LO 2
Notes Receivable
Notes receivable are written
promises by the customer to pay the
amount of the note and possibly
interest at an agreed rate.
LO 2
Fixed Assets
Property, plant,
and equipment
(also called fixed
assets or plant
assets) include
assets that
depreciate over a
period of time.
Land is an
exception, as it
is not subject to
depreciation.
Equipment
Machinery
Buildings
Land
LO 2
Current Liabilities
Liabilities that
will be due within
a short time
(usually one year
or less) and that
are to be paid
out of current
assets are called
current liabilities.
Accounts
payable
Wages payable
Interest payable
Unearned fees
LO 2
Long-Term Liabilities
Liabilities not
due for a long
time (usually
more than one
year) are called
long-term
liabilities.
Short-term notes
payable
Mortgages
payable
Bonds payable
LO 2
Owners Equity
Owners equity is the owners right
to the assets of the business.
Owners equity is added to the total
liabilities, and this total must be
equal to the total assets.
LO 2
LO 3
Closing Entries
Accounts that are relatively
permanent from year to year are
called permanent accounts or real
accounts. These accounts are carried
forward from year to year.
LO 3
Closing Entries
Accounts that report amounts for
only one period are called temporary
accounts or nominal accounts.
Temporary accounts are not carried
forward because they relate to only
one period.
LO 3
Closing Entries
To report amounts for only one
period, temporary accounts should
have zero balances at the beginning
of the next period.
To achieve this, the revenue and
expense account balances are
transferred to Income Summary at
the end of the period.
LO 3
Closing Entries
The balance of Income Summary (net
income or net loss) is then
transferred to the owners capital
account.
The balance of the owners drawing
account is also transferred to the
owners capital account.
The entries that transfer these
balances are called closing entries.
LO 3
Closing Entries
Income Summary is a temporary
account that is only used during the
closing process.
At the end of the closing process, the
Income Summary account will have a
zero balance.
Income Summary is sometimes called
a clearing account.
25
26
LO 3
27
LO 3
28
LO 3
LO 3
Closing Entries
Step 1
Step 2
Step 3
29
Step 4
LO 3
LO 3
LO 4
Accounting Cycle
The accounting process that begins
with analyzing and journalizing
transactions and ends with preparing
the accounting records for the next
periods transactions is called the
accounting cycle.
There are 10 steps in the accounting
cycle.
LO 4
Accounting Cycle
1. Transactions are analyzed and
recorded in the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is
prepared.
4. Adjustment data are assembled and
analyzed.
5. An optional end-of-period spreadsheet
(work sheet) is prepared.
(continued)
LO 4
Accounting Cycle
6. Adjusting entries are journalized and
posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and
posted to the ledger.
LO 5
Accounting Cycle
(continued)
LO 5
Accounting Cycle
(continued)
LO 5
Accounting Cycle
37
LO 5
Accounting Cycle
LO 5
LO 5
Adjusting Entries
40
LO 5
41
LO 6
Accounting Period
The annual accounting period
adopted by a business is known as
its fiscal year.
When a business adopts a fiscal year
that ends when business activities
have reached the lowest point in its
annual operation, such a fiscal year
is also called the natural business
year.
Exercise
Music Depot
The adjusted trial balance for Music
Depot, as at 31 July 2010 is as
follows:
Accounts
Adjusted Trial
balance
Debit
Cash
Accounts receivable
Supplies
Credit
12,780
4,750
175
Prepaid insurance
2,475
Office equipment
5,000
60
Accounts payable
5,680
Wages payable
120
Unearned revenue
3,600
10,500
1,700
Accounts
Adjusted Trial
balance
Debit
Fees earned
20,500
Wages expense
2,520
2,750
1,100
Utilities expense
860
Music expense
2,810
Advertising expense
1,600
Supplies expense
855
Insurance expense
225
Depreciation expense
Miscellaneous expense
Credit
60
800
40,460
40,460
Music Depot
Prepare an end-of-period worksheet.
Accounts
Income
Statement
Adjd TB
Debit
Credit
Debit
Credit
Balance Sheet
Debit
Cash
12,78
0
12,78
0
Accounts receivable
4,750
4,750
175
175
Prepaid insurance
2,475
2,475
Office equipment
5,000
5,000
Supplies
Accumulated
depreciation
office equipment
Credit
60
60
5,680
5,680
120
120
Unearned revenue
3,600
3,600
10,50
0
10,50
0
Accounts payable
Wages payable
1,700
1,700
Accounts
Adjd TB
Debit
Fees earned
Credit
Income
Statement
Debit
20,500
2,520
2,520
2,750
2,750
1,100
1,100
860
860
Music expense
2,810
2,810
Advertising expense
1,600
1,600
Supplies expense
855
855
Insurance expense
225
225
60
60
800
800
Depreciation expense
Miscellaneous expense
Debit
Credit
26,88
0
26,880
20,50
0
Wages expense
Utilities expense
Credit
Balance Sheet
20,50
0
Music Depot
Prepare an:
income statement
statement of owners equity
balance sheet
Note: Lee Chang made investments
in Music Depot on 1 June & 1 July
2010.
Balance Sheet
31 July 2010
Assets
Liabilities
Current assets:
Current liabilities:
Cash
Accounts receivable
Supplies
Prepaid insurance
Total current assets
120
3,600
9,400
20,180
5,680
Owners equity
5,000 Lee Chang, capital
15,720
(60)
4,940
Total assets
25,120
Music Depot
Journalise the closing entries.
Closing entries
Debit
1.
20,50
0
20,50
0
Income summary
2.
Credi
t
13,58
0
Wages expense
2,520
2,750
Equipment rent
expense
1,100
Utilities expense
860
Music expense
2,810
Advertising expense
1,600
Supplies expense
855
Insurance expense
225
Closing entries
Debi Credi
t
t
3.
6,92
0
6,920
1,70
0
1,700
Music Depot
Post the closing entries to the
relevant ledger accounts.
Debit
Balance
10,500
Closing (Ref 3)
Closing (Ref 4)
Credit
6,920
1,700
Balance c/f
15,720
Balance
Closing (Ref 4)
Balance c/f
1,700
1,700
0
Debit
Closing (Ref 1)
Closing (Ref 2)
Closing (Ref 3)
Balance c/f
Credit
20,500
13,580
6,920
0
Debit
Adjusted balance
Closing (Ref 1)
Credit
20,500
20,500
Balance c/f
Wages expense
31 Jul
Adjusted balance
2,520
Closing (Ref 2)
2,520
Balance c/f
Adjusted balance
Closing (Ref 2)
Balance c/f
2,750
2,750
0
Adjusted balance
1,100
Closing (Ref 2)
1,100
Balance c/f
Utilities expense
31 Jul
Adjusted balance
860
Closing (Ref 2)
860
Balance c/f
Music expense
31 Jul
Adjusted balance
Closing (Ref 2)
Balance c/f
2,810
2,810
0
Adjusted balance
1,600
Closing (Ref 2)
1,600
Balance c/f
Supplies expense
31 Jul
Adjusted balance
855
Closing (Ref 2)
855
Balance c/f
Insurance expense
31 Jul
Adjusted balance
Closing (Ref 2)
Balance c/f
225
225
0
Adjusted balance
60
Closing (Ref 2)
60
Balance c/f
Miscellaneous expense
31 Jul
Adjusted balance
Closing (Ref 2)
Balance c/f
800
800
0
Music Depot
Prepare a post-closing trial balance.
Accounts
Post closing
TB
Debit
Cash
12,7
80
Accounts receivable
4,75
0
Supplies
175
Prepaid insurance
2,47
5
Office equipment
5,00
0
Accumulated depreciation
office equipment
Accounts payable
Credit
60
5,68
0