Accounting 5 - Closing Entries

7/23/2019 Accounting 5 - Closing Entries

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Hult International Business School - London

International Accounting

Handout 5 Closing Entries

Module A - 2015 / 2016


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What Have We Done So Far (?)1. Journalized transactions. Recorded transactions in the general journal;

2. Posted transactions into general journal accounts.3. Balanced accounts and prepared a trial balance.

And determined what adjustments are necessary.

4. Journalized and posted the adjusting entries.

5. Balanced accounts again and prepared the adjusted

trial balance.

6. Prepared financial statements (Income Statement).

7. Closed temporary accounts ... and prepare the final

Balance Sheet.


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Temporary AccountsThese are sub-accounts of the shareholders equityaccount (which is permanent).

Temporary accounts are not critical for the purpose of producing the

end of accounting period Balance Sheet, but ... they are critical in

order to produce an Income Statement for the accounting period.

They must be emptied before the next accounting period begins. Balances need to be transferred into the permanent shareholders equity accounts.

Sole Proprietorship CorporationCapital (the permanent Account).

.

Revenue (the temporary account);

Expense (the temporary account);

Drawing (the temporary account);

Retained Earnings (the permanentAccount).

Revenue (the temporary account);

Expense (the temporary account);

Dividend (the temporary account);


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Income StatementClassification of line items on an Income Statement will be dealt with laterin the course, however, all information necessary to prepare a basic

Income Statement is available on the Trial Balance.

Revenue(s) 2,900

Expense(s) 3,875

NetIncome 975

WinstonWolfeServicesInc.

IncomeStatement($s)

FortheyearendedDecember31,20X5


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Adjusted TB Again WinstonWolfeServicesInc.Debit Credi t

Cash 19,450

A/R 1,600OfficeSupplies 1,500

ComputerWorkstation 4,000

AccumulatedDepreciation 0 800

PrepaidInsurance 500

A/P 2,000

WagesPayables 1,200

UtilitiesPayables 125

Debt 3,000

UnearnedRevenue 900

CommonStock 23,000

RetainedEarnings 0

Dividends 3,000

Revenue(s) 2,900

Expense(s) 750DepreciationExpense 800

WagesExpense 1,200

UtilitiesExpense 125

InsuranceExpense 500

SuppliesExpense 500

Total 33,925 33,925

CorporationAdjustedTrialBalanceII($s)

December31,20X5


Debi t C redi t

Cash 19,450A/R 1,600

OfficeSupplies 1,500


AccumulatedDepreciation 800


A/P 2,000

WagesPayables 1,200


Debt 3,000

UnearnedRevenue 900

Capital 23,000

Drawing 3,000

Revenue(s) 2,900


WagesExpense 1,200

UtilitiesExpense 125

InsuranceExpense 500

SuppliesExpense 500

Total 33,925 33,925

SoleProprietorshipAdjustedTrialBalanceII($s)

December31,20X5


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Closing Entries Direct Method (I)Closing entries transfer the closing balances from the temporary accountsinto (Retained Earnings within) the permanent Equity account.

Deb it Credit

+

1,200

1,200

Deb it Credit

+

125

125

WagesExpense

UtilitiesExpense

Deb it Cred it

+

800

800

Depreciation

Expense

Deb it Cred it

+

21000

2,000

23,000

23,000

CommonStock

Deb it Cred it

+

0

RetainedEarnings

Debit Credit Debit Credit Debit Credit

+ + +

200 500 Tr.3 Tr.5 3,000

250 700 Tr.4 3,000

300 300

750 1,400

750 2,900

2,900Deb it Cred it

+

500

Debit Credit

+ 500

500

500

Expense(s) Revenue(s) Dividends

InsuranceExpense

SuppliesExpense


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Closing Entries Direct Method (II)Instead of grabbing the balance from the temporary accountand moving it to the Retained Earnings account, closing of

accounts is done by:

1. Debiting the Revenue account and crediting the Retained Earnings

account (Revenue account having a normal Credit balance);

2. Crediting the Expense account and debiting the Retained Earnings

account (Expense account having a normal Debit balance);

3. Crediting the Dividends account and debiting the Retained Earnings

account (Dividends account having a normal Debit balance);


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Income Summary Account (I)Typically, revenue and expense temporary accounts are first closed into theIncome Summary (IS) account, before the IS account is closed into the

Retained Earnings account.

This is accomplished by:

1. Debiting the Revenue account and crediting the Income Summary

account (Revenue account having a normal Credit balance);

This will close out the Revenue account and transfer the balance into Income

Summary;

2. Crediting the Expense account and debiting the Income Summary

account (Expense account having a normal Debit balance);

This will close out the Expense account and transfer the balance into Income

Summary;

Debit Revenue $XYZ

Credit Income

Sumary $

XYZ

Debit Income

Sumary $

XYZ

Credit Expense $XYZ


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Income Summary Account (II)Income Summary account is closed into the Retained Earnings account.Dividends account is closed into the Retained Earnings account.

This is accomplished by:

1. Debiting the Income Summary account and crediting the Retained

Earnings account;

This will close out the Income Summary account and transfer the balance into theRetained Earnings account;

2. Crediting the Dividends account and debiting the Retained Earnings

account;

This will close out the Dividends account and transfer the balance into the

Retained Earnings account;

Debit IncomeSumary $XYZ

Credit R.Earnings $XYZ

Debit R.Earnings $XYZ

Credit Dividends $

XYZ


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Income Summary Account ExampleIncome Summary account is used to verify that process of closing entries. When Revenues andExpenses are closed into Income Summary account correctly ... The balance in the IS

account will be equal to the Net Income for the accounting period. Example ...

Image source: http://www.loscostos.info/financial-accounting/financial-reporting.html


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Post Closing TBWinstonWolfeServicesInc.

Debit Credi t

Cash 19,450





A/P 2,000

WagesPayables 1,200


Debt 3,000

UnearnedRevenue 900

CommonStock 23,000

RetainedEarnings 3,975

Dividends 0

Revenue(s) 0


WagesExpense 0

UtilitiesExpense 0

InsuranceExpense 0

SuppliesExpense 0

Total 27,050 27,050

CorporationPostClosingTrialBalance($s)

December31,20X5


Debi t C redi t

Cash 19,450A/R 1,600

OfficeSupplies 1,500




A/P 2,000

WagesPayables 1,200


Debt 3,000

UnearnedRevenue 900

Capital 19,025

Drawing 0

Revenue(s) 0


WagesExpense 0

UtilitiesExpense 0

InsuranceExpense 0

SuppliesExpense 0

Total 27,050 27,050

December31,20X5

SoleProprietorshipPostClosingTrialBalance($s)


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Statement of Retained EarningsThe closing entries move balances from the temporaryaccounts into the Retained Earnings permanent account; REE account balance = REB + Revenues Expenses Dividends

Shareholder investments are recorded in the Common Stockaccount. WinstonWolfeServicesInc.

RetainedEarnings Dec31,20X4 0

NetIncome

/(Net

Loss)

975

Dividends 3,000

RetainedEarnings Dec31,20X5 3,975


CommonStock 23,000


TotalShareholders'Equity 19,025

December31,20X5

StatementofRetainedEarnings($s)

Statementof

Shareholders'

Equity

($s)


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From Post Closing TB to Balance SheetWinstonWolfeServicesInc.

Debit Credi t

Cash 19,450





A/P 2,000

WagesPayables 1,200


Debt 3,000

UnearnedRevenue 900

CommonStock 23,000


Dividends 0

Revenue(s) 0


WagesExpense 0

UtilitiesExpense 0

InsuranceExpense 0

SuppliesExpense 0

Total 27,050 27,050

CorporationPostClosingTrialBalance($s)

December31,20X5

Cash 19,450




NetPP&E 3,200


TotalAssets 26,250

A/P 2,000

WagesPayables 1,200


Debt 3,000

UnearnedRevenue 900

TotalLiabilities 7,225

CommonStock 23,000


TotalShareholders'Equity 19,025

TotalLiab.&Sh.Equity 26,250


CorporationBalanceSheet($s)

December31,20X5

Documents

Accounting 5 - Closing Entries