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Week 5:

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

Flow of Accounting Information


End-of-Period Spreadsheet (Work
Sheet)
Accounts

Unadjusted
TB

Dr

Cr

Adjustmen
ts

Dr

Account balances are listed in the


Trial Balance column using the
ending balances found in the general
ledger.

Cr

Adjusted
TB

Dr

Cr

(continued)

LO 1

Flow of Accounting Information


End-of-Period Spreadsheet (Work
Sheet)
Accounts

Unadjusted
TB

Dr

Cr

Adjustmen
ts

Dr

Cr

Adjustments are entered here. 2


possibilities:
Deferrals Existing balances are changed
Accruals New information is entered

Adjusted
TB

Dr

Cr

(continued)

LO 1

Flow of Accounting Information


End-of-Period Spreadsheet (Work
Sheet)
Accounts

Unadjusted
TB

Dr

Cr

Adjustmen
ts

Dr

Cr

Adjusted
TB

Dr

Cr

Adjustments are combined with the


trial balance amounts. Account
balances are now adjusted.

(continued)

LO 1

Flow of Accounting Information


End-of-Period Spreadsheet (Work
Sheet)
Accounts

Adjusted
TB

Dr

Cr

Income
State.

Dr

Revenue and expense balances in


the Adjusted Trial Balance column
are extended to the Income
Statement column.

Cr

Balance
Sheet

Dr

Cr

(continued)

LO 1

Flow of Accounting Information


End-of-Period Spreadsheet (Work
Sheet)
Accounts

Adjusted
TB

Dr

Cr

Income
State.

Dr

Asset, liability, owners equity,


and drawing balances in the
Adjusted Trial Balance column are
extended to the Balance Sheet
column.

Cr

Balance
Sheet

Dr

Cr

(concluded)

LO 2

Preparing financial statements:


Income Statement
The income statement is prepared
directly from the Income Statement
or Adjusted Trial Balance columns of
the end-of-period spreadsheet (work
sheet) beginning with fees earned of
$16,840.

LO 2

Preparing financial statements:


Statement of Owners Equity
The 1st item presented on the
statement of owners equity is the
balance of the owners capital
account at the beginning of the
period.

LO 2

Preparing financial statements:


Balance Sheet
The balance sheet is prepared
directly from the Balance Sheet or
Adjusted Trial Balance columns of the
end-of-period spreadsheet (or work
sheet), beginning with Cash of
$2,065.

LO 2

Classified Balance Sheet


A classified balance sheet is a
balance sheet that was expanded by
adding subsections for current
assets; property, plant, and
equipment; current liabilities; and
long-term liabilities.

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

Preparing financial statements:


Cash Flow Statement
Will show the cash inflows and
outflows for the accounting period.
Focuses on where the cash comes
from & how it is used.
Divides cash movements into 3
activities:
Operating activities
Investing activities
Financing activities

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.

Journalizing and Posting Closing LO 3


Entries

25

Journalizing and Posting Closing


Entries

26

LO 3

Journalizing and Posting Closing


Entries

27

LO 3

Journalizing and Posting Closing


Entries

28

LO 3

LO 3

Closing Entries

Step 1

Step 2

Step 3

29

Step 4

LO 3

Temporary Account Balances


After the closing entries are posted,
all of the temporary accounts have
zero balances.

LO 3

Post-Closing Trial Balance


A post-closing trial balance is
prepared after the closing entries
have been posted. The purpose of
the post-closing (after closing) trial
balance is to verify that the ledger is
in balance at the beginning of the
next period.

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.

10. A post-closing trial balance is


prepared.

LO 5

Accounting Cycle

(continued)

LO 5

Accounting Cycle

(continued)

LO 5

Accounting Cycle

37

LO 5

Accounting Cycle

LO 5

Unadjusted Trial Balance

LO 5

Adjusting Entries

40

LO 5

Adjusted Trial Balance

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

Accumulated depreciation office


equipment

60

Accounts payable

5,680

Wages payable

120

Unearned revenue

3,600

Lee Chang, capital

10,500

Lee Chang, drawing

1,700

Accounts

Adjusted Trial
balance
Debit

Fees earned

20,500

Wages expense

2,520

Office rent expense

2,750

Equipment rent expense

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

Lee Chang, capital

10,50
0

10,50
0

Accounts payable
Wages payable

Lee Chang, drawing

1,700

1,700

Accounts

Adjd TB
Debit

Fees earned

Credit

Income
Statement
Debit

20,500
2,520

2,520

Office rent expense

2,750

2,750

Equipment rent expense

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

40,460 40,460 20,500

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.

Income Statement for the


2 months ended 31 July 2010
Fees
earned .................................................................................
$20,500
Expenses:
Music expense ............................................................
$2,810
Office rent expense ..................................................... 2,750
Wages expense ........................................................... 2,520
Advertising expense .................................................... 1,600
Equipment rent expense ............................................. 1,100
Utilities
expense ...............................................................860
Supplies expense ........................................................... 855
Insurance expense ...................................................... ..225
Depreciation expense ................................................. 60
Miscellaneous expense .............................................. ..800
Total
expenses .............................................................................

Statement of Owners Equity


2 months ended 31 July 2010
Lee Chang, capital, June 1,
2010 ...................................... $ 0
Additional investments during the
period ....................... 10,500
Total ...........................................................................
........ $10,500
Net income for the period ...................................
$6,920
Less withdrawals ...................................................
(1,700)
Increase in owners
equity ................................................ 5,220
Lee Chang, capital, July 31,
2010 .................................. $15,720

Balance Sheet
31 July 2010
Assets

Liabilities

Current assets:

Current liabilities:

Cash
Accounts receivable
Supplies
Prepaid insurance
Total current assets

12,780 Accounts payable


4,750 Wages payable
175 Unearned revenue
2,475 Total liabilities

Less: Acc. Depreciation

120
3,600
9,400

20,180

Property, plant &


equipment:
Office equipment

5,680

Owners equity
5,000 Lee Chang, capital

15,720

(60)
4,940

Total assets

25,120 Total liabilities &


owners equity

25,120

Music Depot
Journalise the closing entries.

Closing entries
Debit
1.

31 Jul Fees earned

20,50
0
20,50
0

Income summary
2.

31 Jul Income summary

Credi
t

13,58
0

Wages expense

2,520

Office rent expense

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.

31 Jul Income summary

6,92
0

Lee Chang, capital


4.

31 Jul Lee Chang, capital


Lee Chang, drawing

6,920
1,70
0
1,700

Music Depot
Post the closing entries to the
relevant ledger accounts.

Posting closing entries to ledger


accounts
Lee Chang, capital
31 Jul

Debit

Balance

10,500

Closing (Ref 3)
Closing (Ref 4)

Credit
6,920

1,700

Balance c/f

15,720

Lee Chang, drawing


31 Jul

Balance
Closing (Ref 4)
Balance c/f

1,700
1,700
0

Posting closing entries to ledger


accounts
Income Summary
31 Jul

Debit

Closing (Ref 1)
Closing (Ref 2)

Closing (Ref 3)
Balance c/f

Credit
20,500

13,580

6,920
0

Posting closing entries to ledger


accounts
Fees earned
31 Jul

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

Office rent expense


31 Jul

Adjusted balance
Closing (Ref 2)
Balance c/f

2,750
2,750
0

Posting closing entries to ledger


accounts
Debit
Credit
Equipment rent expense
31 Jul

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

Posting closing entries to ledger


accounts
Debit
Credit
Advertising expense
31 Jul

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

Posting closing entries to ledger


accounts
Debit
Credit
Depreciation expense
31 Jul

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