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Acct 1 Chapter 10

Patchogue-Medford High School

Accounting I – Chapter 10 Notes

Mr. Butzke

 

 

Chapter 10 – Completing the Accounting Cycle for a Sole Proprietorship- Closing Entries, posting them, and a Post-Close Trial Balance                                                                                                                                 Page 250

 

Objective: Students will be able to demonstrate their knowledge of year-end closing entries with the use of the Temporary Equity account; Income Summary. They will post, close and prepare a final post-close trial balance to end the accounting period.

 

Previous topics covered from the last chapters in the accounting cycle:

      Step 1 – Collect and verify source documents

      Step 2 – Analyze each transaction

      Step 3 – Journalize each transaction

      Step 4 – Posting to the General Ledger

      Step 5 – Preparing a Trial Balance

      Step 6 – Preparing a six-column work sheet

      Step 7 – Preparing the financial statements; I/S, SCOE, & B/S

 

The processes covered in this chapter are the last two steps, 8 & 9 in the accounting cycle:

               Step 8 – Preparing Closing entries and posting them to the G/L

               Step 9 – Preparing the Post-Close-Trial-Balance from the remaining permanent account balances in the G/L.

 

 

The Closing Process

 

  • This uses journal entries to zero out (or close) all temporary accounts in the G/L.
  • In order to do this you will use the temporary holding account in the equity section called Income Summary. This is an account that begins with the number 3 and is only used to transfer a balance, usually the net income, to the capital account. The Inc. Sum account will not have a balance at the end of the period.
  • There are four entries that are used to accomplish this: (pages 257-260)
  1. Close all individual Revenue accounts to the temporary equity account called; Income Summary.

Dr. Service Revenue

Dr. Fee Revenue

         Cr. Income Summary

  1. Close all individual Expense Accounts to the Income Summary account:

Dr. Income Summary

         Cr. Wage Expense

         Cr. Rent Expense

         Cr. Advertising Expense

At this point the balance in the Income Summary account would be the same amount as the Net Income that is on the W/S and Income Statement.

  1. Close the Income Summary Account to the Owners Capital Account:

Dr. Income Summary

         Cr. Owners Capital

(This is the entry for net income. It would be reversed if were for a net loss)

  1. Close the temporary equity account, Owner’s Withdrawal directly to the Owner’s Capital Account:

Dr. Owners Capital

         Cr. Owner’s Withdrawal

 

When recording the closing entries into the G/L you would put the explanation of “Closing Entry” into the description column of the G/L.

The complete entry is shown on page 261.

 

         Do problem 10-1, Preparing Closing entries, page 262, WB page 184.

 

The closing process is usually done automatically by the accounting software used by most companies. The key in having this work is in the proper setup of the accounts in the chart of accounts.

 

Post Close Trial Balance

 

Once the closing J/E have been posted, the G/L has now been “Flipped” to a new year. The only accounts that should have a balance are the permanent accounts; assets, liabilities, & owners capital.

In order to prove the ledger and start the next year or accounting period you would prepare a Post-Close Trial Balance. (page 265)

-List the remaining permanent accounts, with their balances (Dr. or Cr.), in numeric order. NO TEMPORARY ACCOUNTS SHOULD APEAR OR HAVE A BALANCE.

- Add down the Dr. and Cr. columns, the totals should agree.

 - When they agree you may start the accounting new year.

 

          Do problem 10-3, Determine accounts affected by Closing J/E’s, pg 266, WB 186.

 

 

 

 

 

 

 

     

                       

 

 

Terms Page 268

Questions Page 269

 

                                   

 

 

 

Problems

 

 

Prob.  10-4      Preparing closing J/E               TB pg 271   WB pg 187  PC 205

Prob.  10-5      Post-close Trial Balance           TB pg 271    WB pg 187 PC 206        Q209        

Prob.  10-6      Journalize & post close J/E       TB pg 273    WB pg 188 PC 207       

Prob.  10-7      Posting & Post Close T/B         TB pg 274    WB pg 189 PC 207        (optional)    

Prob.  10-8      Complete end of period activity TB pg 274   WB pg 193                   Q209                                          

 

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