Patchogue-Medford High School
Accounting I – Chapter 10 Notes
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)
- Close all individual Revenue accounts to the temporary equity account called; Income Summary.
Dr. Service Revenue
Dr. Fee Revenue
Cr. Income Summary
- 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.
- 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)
- 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
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