Hult International Business School - London

International Accounting

Handout 5 Closing Entries

Module A - 2015 / 2016

-1-

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.
-2-

Temporary Accounts
These are sub-accounts of the shareholders equity
account (which is permanent).
Sole Proprietorship

Corporation

Capital (the permanent Account).

Retained Earnings (the permanent

Account).

Revenue (the temporary account);

Expense (the temporary account);
Drawing (the temporary account);

Revenue (the temporary account);

Expense (the temporary account);
Dividend (the temporary account);

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.

-3-

Income Statement
Classification of line items on an Income Statement will be dealt with later
in the course, however, all information necessary to prepare a basic
Income Statement is available on the Trial Balance.
WinstonWolfeServicesInc.
IncomeStatement($s)
FortheyearendedDecember31,20X5
Revenue(s)

2,900

Expense(s)

3,875

NetIncome

975

-4-

Adjusted TB Again
WinstonWolfeServicesInc.
CorporationAdjustedTrialBalanceII($s)
December31,20X5
Debit
Credit

WinstonWolfeServicesInc.
SoleProprietorshipAdjustedTrialBalanceII($s)
December31,20X5
Debit
Credit
Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
PrepaidInsurance
A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
Capital
Drawing
Revenue(s)
Expense(s)
DepreciationExpense
WagesExpense
UtilitiesExpense
InsuranceExpense
SuppliesExpense
Total

Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
PrepaidInsurance
A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
CommonStock
RetainedEarnings
Dividends
Revenue(s)
Expense(s)
DepreciationExpense
WagesExpense
UtilitiesExpense
InsuranceExpense
SuppliesExpense
Total

19,450
1,600
1,500
4,000
800
500
2,000
1,200
125
3,000
900
23,000
3,000
2,900
750
800
1,200
125
500
500
33,925

33,925

-5-

19,450
1,600
1,500
4,000
0
500

800
2,000
1,200
125
3,000
900
23,000
0

3,000
2,900
750
800
1,200
125
500
500
33,925

33,925

Closing Entries Direct Method (I)

Closing entries transfer the closing balances from the temporary accounts
into (Retained Earnings within) the permanent Equity account.
WagesExpense
Debit
+
1,200

Credit

1,200

UtilitiesExpense
Debit
+
125
125
125

Credit

Expense(s)
Debit
+
200
250
300
750
750

Revenue(s)

Credit

Debit

Depreciation
Expense
Debit
Credit
+

800
800

Credit
+
500
700
300
1,400
2,900
2,900

Dividends

Tr.3
Tr.4

Debit
+
3,000
3,000

Tr.5

SuppliesExpense
Debit
+
500

InsuranceExpense
Debit
+
500

CommonStock
Debit

Credit

500
RetainedEarnings

500

Credit
+
21000
2,000
23,000
23,000

Debit

Credit
+

-6-

Credit

Credit

Closing Entries Direct Method (II)

Instead of grabbing the balance from the temporary account
and 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);

-7-

Income Summary Account (I)

Typically, revenue and expense temporary accounts are first closed into the
Income 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);
Revenue
IncomeSumary
Credi t

Debi t

$XYZ
$XYZ

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);
IncomeSumary
Expense
Credi t

Debi t

$XYZ
$XYZ

This will close out the Expense account and transfer the balance into Income
Summary;
-8-

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;
Debi t
Credi t

IncomeSumary
R.Earnings

$XYZ
$XYZ

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

2. Crediting the Dividends account and debiting the Retained Earnings

account;
Debi t
Credi t

R.Earnings
Dividends

$XYZ
$XYZ

This will close out the Dividends account and transfer the balance into the
Retained Earnings account;

-9-

Income Summary Account Example

Income Summary account is used to verify that process of closing entries. When Revenues and
Expenses 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

-10-

Post Closing TB
WinstonWolfeServicesInc.
CorporationPostClosingTrialBalance($s)
December31,20X5
Debit
Credit

WinstonWolfeServicesInc.
SoleProprietorshipPostClosingTrialBalance($s)
December31,20X5
Debit
Credit
Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
PrepaidInsurance
A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
Capital
Drawing
Revenue(s)
Expense(s)
DepreciationExpense
WagesExpense
UtilitiesExpense
InsuranceExpense
SuppliesExpense
Total

Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
PrepaidInsurance
A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
CommonStock
RetainedEarnings
Dividends
Revenue(s)
Expense(s)
DepreciationExpense
WagesExpense
UtilitiesExpense
InsuranceExpense
SuppliesExpense
Total

19,450
1,600
1,500
4,000
800
500
2,000
1,200
125
3,000
900
19,025
0
0
0
0
0
0
0
0
27,050

27,050

-11-

19,450
1,600
1,500
4,000
0
500

800
2,000
1,200
125
3,000
900
23,000
3,975

0
0
0
0
0
0
0
0
27,050

27,050

Statement of Retained Earnings

The closing entries move balances from the temporary
accounts into the Retained Earnings permanent account;

REE account balance = REB + Revenues Expenses Dividends

Shareholder investments are recorded in the Common Stock

account.
WinstonWolfeServicesInc.
StatementofRetainedEarnings($s)
RetainedEarnings Dec31,20X4
NetIncome/(NetLoss)
Dividends
RetainedEarnings Dec31,20X5

0
975
3,000
3,975

WinstonWolfeServicesInc.
StatementofShareholders'Equity($s)
December31,20X5
CommonStock
RetainedEarnings
TotalShareholders'Equity
-12-

23,000
3,975
19,025

From Post Closing TB to Balance Sheet

WinstonWolfeServicesInc.
CorporationPostClosingTrialBalance($s)
December31,20X5
Debit
Credit
Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
PrepaidInsurance
A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
CommonStock
RetainedEarnings
Dividends
Revenue(s)
Expense(s)
DepreciationExpense
WagesExpense
UtilitiesExpense
InsuranceExpense
SuppliesExpense
Total

19,450
1,600
1,500
4,000
0
500

WinstonWolfeServicesInc.
CorporationBalanceSheet($s)
December31,20X5
Cash
A/R
OfficeSupplies
ComputerWorkstation
AccumulatedDepreciation
NetPP&E
PrepaidInsurance
TotalAssets

800
2,000
1,200
125
3,000
900
23,000
3,975

A/P
WagesPayables
UtilitiesPayables
Debt
UnearnedRevenue
TotalLiabilities

0
0
0
0
0
0
0
0
27,050

27,050

-13-

19,450
1,600
1,500
4,000
800
3,200
500
26,250
2,000
1,200
125
3,000
900
7,225

CommonStock
RetainedEarnings
TotalShareholders'Equity

23,000
3,975
19,025

TotalLiab.&Sh.Equity

26,250