Blue Print

  1. Introduction to the Closing Process

The final step of the accounting cycle is the closing process. The main goal of this stage of the cycle is to ensure that the balance of each temporary account is returned to zero and that net income is transferred to the owner’s capital account. The first step in successfully undertaking the closing process is to understand the difference between a temporary account and a permanent account.

Is an Account Temporary or Permanent?If a temporary account has an ending balance of $59,000, what is its beginning balance for the following accounting period? If the answer is zero, enter “0”.
$If a permanent account has an ending balance of $59,000, what is its beginning balance for the following accounting period? If the answer is zero, enter “0”.

Income Summary and Owner’s Drawing

Revenues and expenses are reported on the and are considered accounts. When the balance of any of these accounts is reduced to zero, the balances are closed to a temporary account called Income Summary. This is where expenses are deducted from revenues to arrive at so that it can be closed into owner’s capital. Because Income Summary is a temporary account, it also begins each accounting period with a balance.Revenue accounts have a normal balance and are closed (reduced to zero) with a entry.

Expense accounts have a normal balance and are closed with a entry. Drawing is the one account that is not closed to Income Summary. This is because Drawing represents the withdrawal of cash and other assets from the company, thereby directly reducing the account.

+ Revenue and Expense Accounts
Revenue
+
Normal
balance
Expense
+
Normal
balance
  1. APPLY THE CONCEPTS: Closing entries with T accountsThe closing process is illustrated in the following diagram with the use of T accounts. As you can see, Drawing is not closed to Income Summary but closed directly into Capital. This is because Drawing is not an expense and does not reduce net income.Using the adjusted trial balance provided below, complete the closing entries in the following T accounts.
Owner’s Capital
20,000
Bal.
Income Summary
Bal.
 
Owner’s Drawing
5,000
Selling Expense
164,000
Fees Earned
176,000
Depreciation Expense
48,000
Rent Revenue
138,000
  1. APPLY THE CONCEPTS: Journalizing closing entries for the year ending December 31, 20–Using the Adjusted Trial Balance, prepare the journal entry to close the revenue accounts. For grading purposes, close the revenue accounts in the order listed on the Adjusted Trial Balance.If an amount box does not require an entry, leave it blank or enter “0”.
+ Adjusted Trial Balance
Adjusted Trial Balance
For December 31, 20–
Cash 70,000
Accounts Receivable 29,000
Prepaid Insurance 16,000
Equipment 60,000
Accumulated Depreciation 40,000
Accounts Payable 10,000
Salaries Payable 8,000
Owner’s Capital 20,000
Owner’s Drawing 5,000
Fees Earned 176,000
Rent Revenue 138,000
Selling Expense 164,000
Depreciation Expense 48,000
392,000 392,000
Page: 1
DATE DESCRIPTION POST.
REF.
DEBIT CREDIT
1 Dec. 31 1
2 2
3 3
  1. Close the expense accounts. For grading purposes, close the expense accounts in the order listed in the Adjusted Trial Balance.If an amount box does not require an entry, leave it blank or enter “0”.
Page: 2
DATE DESCRIPTION POST.
REF.
DEBIT CREDIT
1 Dec. 31 1
2 2
3 3
  1. Close the (a) Income Summary and (b) Drawing accounts.If an amount box does not require an entry, leave it blank or enter “0”.
Page: 3
ITEM DESCRIPTION POST.
REF.
DEBIT CREDIT
1 a. 1
2 2
3 3
4 b. 4
5 5
  1. After posting the closing entries, a post-closing trial balance. should be prepared to prove the equality of the debit and credit balances in the general ledger accounts. The ending balance of each general ledger account that remains open at the end of the year is listed. Remember: Only the permanent accounts remain open after the closing process is completed.

    Complete the post-closing trial balance below.If an amount box does not require an entry, leave it blank or enter “0”. Be sure to list the items in order of their liquidity.

+ Adjusted Trial Balance
Adjusted Trial Balance
For the Year Ending December 31, 20–
Cash 70,000
Accounts Receivable 29,000
Prepaid Insurance 16,000
Equipment 60,000
Accumulated Depreciation 40,000
Accounts Payable 10,000
Salaries Payable 8,000
Owner’s Capital 20,000
Owner’s Drawing 5,000
Fees Earned 176000
Rent Revenue 138000
Selling Expense 164000
Depreciation Expense 48000
392000 392000
Post-Closing Trial Balance
December 31, 20–
Debit Balance Credit Balance

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Last Updated on February 11, 2019 by Essay Assistance