Completing the Accounting Cycle for a Sole Proprietorship

Chapter 10

The Last Two Steps of the Accounting Cycle

• Journalize and Post Closing Entries– Journal entries made to close, or reduce to zero,

the balances in the temporary accounts and to transfer the net income or net loss for the period to the capital account

• Prepare a Post-Closing Trial Balance– Trial Balance prepared after temporary accounts

are brought to zero and capital has been adjusted accordingly

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The Process of Closing Entries1. Prior to the closing process, you know that the net income or

net loss is calculated on the work sheet2. The net income or net loss amount then appears on the

income statement3. On the statement of changes in owner’s equity, the ending

balance of the capital account includes net income or net loss4. The ending balance of the capital account then appears on the

balance sheet5. At this point, however, the balance of the capital account in

the general ledger does not equal the amount on the balance sheet because the closing entries need to be journalized and posted

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The Income Summary Account

• The Income Summary Account is used to accumulate and summarize the revenue and expenses for the period.– Expenses, which have debit balances, are

transferred as debits to Income Summary– Revenues, which have credit balances, are

transferred as credits to Income Summary– The balance in the account equals the net income

or net loss for the fiscal period

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Income Summary T Account

Income Summary

Debit

Expenses

Credit

Revenue

If Revenue >Expenses

If Revenue < Expenses

Balance is net income

Balance in net loss

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General Journal Closing Transactions

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Closing Income Summary to Capital

• Once all transactions for Revenue and Expenses have been journalized, Income Summary has a balance. If there was a net income the Income Summary Account should have a credit balance. If there was a net loss, Income Summary should have a debit balance

• The balance is then offset with the Capital account opposite to what the current Income Summary balance is. The idea is to bring the account to a zero balance.

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Closing Income Summary to Capital

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Closing Withdrawals to Capital

• Withdrawal accounts usually have a debit balance so to close them you off set with a credit and debit to Capital

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General Journal of Closing Entries

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Posting the Closing Entries to the

General Ledger

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Post-Closing Trial Balance

• 9th & Final Step in the Accounting Cycle – Prepared to make sure total debits equal total credits after the closing entries are posted.

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