PPTChap 006

Copyright 2015 McGraw-Hill Education. All rights reserved.
. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 1: Closing Entries
Section Objectives
6-1 Journalize and post closing
entries.
The Accounting Cycle

Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
The seventh step in the accounting cycle is to journalize

and post closing entries
6-3
QUESTION:
What is the Income Summary account?

ANSWER:
The Income Summary account is a

special owners equity account that
is used only in the closing process
to summarize the results of
operations.
6-4
Income Summary Account

Classified
Does
as a temporary owners equity account.
not have a normal balance.
Has
a zero balance after the closing process and remains with

a zero balance until the closing procedure for the next period.
6-5
Objective 6-1
Journalize and post closing entries.
There are four steps in the closing process:

1. Transfer the revenue account balances to the
Income Summary account.
2. Transfer the expense account balances to the
3. Transfer the the Income Summary account
balance to the owners capital account.
4. Transfer the drawing account balance to the
owners capital account.
6-6
Wells Consulting Services

Worksheet
Month Ended December 31, 2016
ACCOUNT NAME
TRIAL BALANCE
ADJUSTMENTS
ADJ. TRIAL BAL.
INCOME STMT.
BALANCE SHEET
DEBIT
DEBIT
DEBIT
DEBIT
DEBIT CREDIT
CREDIT
111,350
Cash
5,000
Accounts Receivable
1,500
Supplies
Prepaid Rent
8,000
Equipment
11,000
Accum. Depr.Equip.
3,500
Accounts Payable
Carolyn Wells, Cap.
100,000
5,000
Carolyn Wells, Draw.
Fees Income
47,000
Salaries Expense
8,000
Utilities Expense
650
(a) 500
Supplies Expense
Rent Expense
(b) 4,000
Depr. Exp.Equip.
(c)
183
Totals
150,500 150,500
4,683
Net Income
CREDIT
111,350
5,000
(a) 500
1,000
4,000
(b) 4,000
11,000
(c) 183
CREDIT
CREDIT
111,350
5,000
1,000
4,000
11,000
183
3,500
100,000
183
3,500
100,000
5,000
5,000
47,000
8,000
8,000
650
650
500
500
4,000
4,000
183
183
4,683 150,683 150,683 13,333
33,667
47,000
Fees Income has a credit

balance of $47,000
47,000
47,000 137,350 103,683

33,667
47,000 137,350 137,350
6-7
Step 1: Close Revenue

Fees Income
Balance 47,000
Income Summary
Closing 47,000
Closing 47,000
6-8
Step 1: Close Revenue

GENERAL JOURNAL
4
DATE
2016
DESCRIPTION
POST.
REF.
PAGE
DEBIT
CREDIT
Closing Entries
Dec. 31 Fees Income
47,000.00
Income Summary
47,000.00
The words Closing Entries are written in the

Description column of the general journal
6-9
Step 2: Close Expenses
The Income Statement section of the worksheet for

Wells Consulting Services lists five expense accounts.
Since expense accounts have debit balances, enter a

credit in each account to reduce its balance to zero.
This closing entry transfers total expenses to the

6-10
The five expense account balances are reduced to

zero.
The total, $13,333 of
expenses are transferred to

the temporary owners equity
account, Income Summary.
6-11
Income Summary
Bal 47,000
Closing
Salaries Expense
Balance 8,000
Closing 8,000
13,333
Utilities Expense
Balance
650
Supplies Expense
Balance
500
Closing 650
Rent Expense
Closing 500
Depr. Expense Equip.

Balance
Balance 4,000
Closing 4,000
183
Closing 183
6-12
DATE
2016
Dec. 31
GENERAL JOURNAL
PAGE
POST.
REF.
CREDIT
DESCRIPTION
Closing Entries
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depreciation Exp.-Equip.
DEBIT
13,333.00
8,000.00
650.00
500.00
4,000.00
183.00
6-13
The Income Summary account reflects all

entries in the Income Statement section of
the worksheet.
Income Summary
Dr.
Cr.
Closing 13,333
Closing 47,000
Balance 33,667
Net Income
6-14
Step 3: Close Net Income to Capital
The journal entry to transfer net income to

owners equity is a debit to Income Summary,
and a credit to Carolyn Wells, Capital.
The Income Summary account is reduced to zero.
The net income amount, $33,667, is transferred to

the
owners capital account. Carolyn Wells, Capital is
increased by $33,667.
6-15

Income Summary
Balance 33,667
Closing 33,667
Carolyn Wells, Capital

Balance 100,000
Closing 33,667
6-16

GENERAL JOURNAL
DATE
DESCRIPTION
Closing Entries
Dec. 31 Income Summary
POST.
REF.
PAGE
DEBIT
CREDIT
33,667.00
33,667.00
6-17
Step 4: Close Drawing to Capital

Withdrawals appear in the statement of owners
equity as a deduction from capital.
The drawing account is closed directly to the capital
account.
The drawing account balance is reduced to zero.
The balance of the drawing account, $5,000, is
transferred to the owners capital account.
6-18

Balance 133,667
Closing 5,000
Carolyn Wells, Drawing

Balance 5,000
Closing 5,000
6-19

GENERAL JOURNAL
DATE
DESCRIPTION
Closing Entries
Dec. 31 Carolyn Wells, Capital
POST.
REF.
PAGE
DEBIT
CREDIT
5,000.00
5,000.00
6-20
The new balance of the Carolyn Wells,

Capital account agrees with the
amount listed on the balance sheet.
Dr.
Cr.
Balance
5,000
Balance

Dr.
Closing 5,000
Cr.
Balance 100,000
Drawing 5,000
Net Inc.
33,667
Balance 128,667

6-21
Summary of Closing Entries

GENERAL JOURNAL
STEPS
1. Close
Revenue
Account
2. Close
Expense
Accounts
DATE
2016
DESCRIPTION
Dec. 31
31
3. Close
Income
Summary
31
4. Close
Drawing
Account
31
PAGE
POST.
REF.
DEBIT
Fees Income
Income Summary
401
309
47,000.00
Income Summary
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense-Equip.
309
511
514
517
520
523
13,333.00
Income Summary
309
Carolyn Wells, Capital 301
33,667.00

Carolyn Wells, Draw.
301
302
CREDIT
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
33,667.00
5,000.00
5,000.00
6-22
Posting the Closing Entries

All journal entries are posted to the general
ledger accounts.
Closing is entered in the Description column
of
the ledger accounts.
The ending balances of the drawing, revenue,

and expense accounts are zero.
6-23
GENERAL JOURNAL
STEPS
DATE
1. CLOSE
REVENUE
2016
ACCOUNT
DATE
2016
Dec. 31
Dec. 31
Dec. 31
Dec. 31
DESCRIPTION
Closing
DEBIT
CREDIT
Closing Entries
Fees Income
Income Summary
Fees Income
DESCRIPTION
POST.
REF.
PAGE
401
309
ACCOUNT NO.
POST.
REF.
J2
J2
J4
DEBIT
CREDIT
36,000.00
11,000.00
47,000.00
47,000.00
47,000.00
401
BALANCE
DEBIT
CREDIT
36,000.00
47,000.00
0
6-24
GENERAL JOURNAL
DATE
2016
STEPS
DESCRIPTION
Closing Entries
1. CLOSE
REVENUE
Dec. 31
ACCOUNT
Income Summary
DATE
2016
Dec. 31
DESCRIPTION
Closing
Fees Income
Income Summary
POST.
REF.
401
309
ACCOUNT NO.
POST.
REF.
J4
DEBIT
CREDIT
47,000.00
PAGE
DEBIT
CREDIT
47,000.00
47,000.00
309
BALANCE
DEBIT
CREDIT
47,000.00
6-25
Chapter
6
Closing Entries
and the Postclosing
Trial Balance
Section 2: Using Accounting
Information
6-2. Prepare a postclosing trial
balance.
6-3. Interpret financial statements.
6-4. Review the steps in the
accounting cycle.
6-26

Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
6-27
Objective 6-2
Prepare a postclosing Trial Balance.
QUESTION:
What is the postclosing trial balance?

ANSWER:
A postclosing trial balance is a report that

is prepared to prove the equality of total
debits and credits after the closing
process is completed. It verifies that
revenue, expense, and drawing accounts
have zero balances.
6-28

Postclosing Trial Balance
December 31, 2016
ACCOUNT NAME
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Accumulated DepreciationEquipment
Accounts Payable
Totals
DEBIT
CREDIT
111,350.00
5,000.00
1,000.00
4,000.00
11,000.00
183.00
132,350.00
3,500.00
128,667.00
132,350.00
6-29
Finding and Correcting Errors

If the postclosing trial balance does not
balance, the accounting records contain
errors.
Use the audit trail to trace data through
the accounting records.
6-30
Objective 6-3
Interpret financial
statements.
6-31

Partial Balance Sheet
December 31, 2016
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$ 111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
What is the
cash balance?
How much do the customers
owe the business?
6-32

Balance Sheet
December 31, 2016
Assets
Cash
Accounts Receivable
Supplies
Prepaid Rent
Equipment
Less Accumulated Depreciation
Total Assets
$ 111,350.00
5,000.00
1,000.00
4,000.00
$ 11,000.00
183.00
10,817.00
$ 132,167.00
Liabilities and Owners Equity

Liabilities
Accounts Payable
Owners Equity
Total Liabilities and Owners Equity
$ 3,500.00
128,667.00
$132,167.00
How much does the business owe its suppliers?

6-33

Income Statement
Month Ended December 31, 2016
Revenue
Fees Income
Expenses
Salaries Expense
Utilities Expense
Supplies Expense
Rent Expense
Depr. Expense--Equipment
Total Expenses
Net Income
47,000.00
8,000.00
650.00
500.00
4,000.00
183.00
13,333.00
33,667.00
What is the profit?

6-34
Objective 6-4 Review the steps in the accounting cycle

Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Prepare financial statements
Income Statement
Statement of Owners Equity
Balance Sheet
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
6-35

Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Transfer net income or net loss

to owners equity.
Reduce the balances of the
temporary accounts to zero.
Step 7
Journalize and
post closing
entries
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 6
Journalize and
post adjusting
entries
6-36

Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
Step 6
Journalize and
post adjusting
entries
6-37
Flow of Data Through a Simple

Accounting System
Source
Documents
General
journal
General
ledger
Worksheet
Financial
statements
6-38
Thank You
for using
College Accounting, 14th Edition
Price Haddock Farina
6-39

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PPTChap 006

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Copyright 2015 McGraw-Hill Education. All rights reserved.

. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The Accounting Cycle

The seventh step in the accounting cycle is to journalize

What is the Income Summary account?

The Income Summary account is a

Income Summary Account

as a temporary owners equity account.

not have a normal balance.

a zero balance after the closing process and remains with

Journalize and post closing entries.

There are four steps in the closing process:

Wells Consulting Services

ADJ. TRIAL BAL.

Fees Income has a credit

47,000 137,350 103,683

Step 1: Close Revenue

Step 1: Close Revenue

Dec. 31 Fees Income

The words Closing Entries are written in the

Step 2: Close Expenses

The Income Statement section of the worksheet for

Since expense accounts have debit balances, enter a

This closing entry transfers total expenses to the

Step 2: Close Expenses

The five expense account balances are reduced to

expenses are transferred to

Depr. Expense Equip.

Step 2: Close Expenses

The Income Summary account reflects all

Step 3: Close Net Income to Capital

The journal entry to transfer net income to

The net income amount, $33,667, is transferred to

Step 3: Close Net Income to Capital

Carolyn Wells, Capital

Step 3: Close Net Income to Capital

Step 4: Close Drawing to Capital

Step 4: Close Drawing to Capital

Carolyn Wells, Drawing

Step 4: Close Drawing to Capital

The new balance of the Carolyn Wells,

Carolyn Wells, Capital

Carolyn Wells, Capital

Summary of Closing Entries

Carolyn Wells, Capital

Posting the Closing Entries

Closing is entered in the Description column

The ending balances of the drawing, revenue,

The Accounting Cycle

Prepare a postclosing Trial Balance.

What is the postclosing trial balance?

A postclosing trial balance is a report that

Wells Consulting Services

Finding and Correcting Errors

Wells Consulting Services

Wells Consulting Services

Liabilities and Owners Equity

How much does the business owe its suppliers?

Wells Consulting Services

What is the profit?

Objective 6-4 Review the steps in the accounting cycle

The Accounting Cycle

Prepare financial statements