FABM 2 Closing-Entries 1

Living Angels Christian Academy
SY 2021-2022
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
COMPLETING THE ACCOUNTING CYCLE
Closing Entries
Accumulation of information on the details of operations entails maintaining separate revenue

and expense accounts. At the end of the period, this information is reported in the income
statement. The revenue and expense accounts are then closed to the owner’s equity. This
process also shows the results of operation. The closing entries update the owner’s capital
account at the end of the period. They also eliminate the balances of the nominal accounts to
ready them for the next accounting period.
To close a temporary account, an entry is made to make its balance become zero. Closing
transfers the balances of the temporary accounts to the capital account. The Income Summary,
considered to be a summary account, is used to close the income and expense accounts.
For illustrations purposes, assume that the following are the ledger balances of Anime World
Gallery after adjustment. Prepare the closing entries.
Anime World Gallery

Trial Balance
May 31, 2016
Cash Php 373,660

Accounts Receivable 70,000
Allowance for Bad Debts Php 1,500
Art Supplies 5,400
Prepaid Rent 6,000
Prepaid Insurance 8,100
Office Equipment 180,000
Accumulated Depreciation- Office Equipment 5,000
Furniture and Fixture 40,000
Accumulated Depreciation – Furniture and Fixture 1,000
Accounts Payable 32,200
Notes Payable 100,000
Utilities Payable 4,500
Unearned Painting Revenue 80,000
Ong, Capital 300,000
Ong, Drawing 18,000
Painting Revenue 210,000
Salaries Expense 4,000
Utilities Expense 5,040
Insurance Expense 2,700
Rent Expense 12,000
Art Supplies Expense 1,800
Depreciation Expense 6,000
Bad Debts Expense 1,500
Php 734,200 Php 734,200
Steps in Closing the Accounts
1. Close the income accounts

Since income accounts have normal credit balances, each revenue account will have to
be debited in the amount of its balance to bring their balances to zero. The credit is made to the
income summary account.
2016
May 31 Painting Revenue 210,000
Income Summary 210,000
To close income accounts.
2. Close the expense accounts

Expense accounts have normal debit balances, each of these will have to be credited to
close the account. Thus, a compound entry is needed considering the number of expense
accounts. The total of all expense accounts is then debited to income summary. The entry to
close the expense accounts of Anime World Gallery:
May 31 Income Summary 33,040

Salaries Expense 4,000
Utilities Expense 5,040
Insurance Expense 2,700
Rent Expense 12,000
Art Supplies Expense 1,800
Depreciation Expense 6,000
Bad Debts Expense 1,500
To close expense accounts
3. Close the income summary to capital

Notice that after posting the entries involving the income and expense accounts, the
balance of the income summary account is exactly the net income or net loss for the period. A
credit balance indicates net income and a debit balance indicates a net loss. Regardless of
whether the business yields a net income or a net loss, the income summary account must be
closed to the capital account. For Anime World Gallery, the entry is:
May 31 Income Summary 176,960

Ong, Capital 176,960
To close the income summary to capital
Note: The balancing figure of the income summary account is to be closed to capital is the net
income or net loss of the business. In the case of Anime World Gallery, Php 176,960 is the amount
of net income.
4. Close the drawing account

The drawing account represents the amount withdrawn by the owner either in cash or
non-cash assets for personal use. It is for this reason that the debit balance of the drawing
account should be closed to capital. The following entry is an illustration using Anime World
Gallery:
May 31 Ong, Capital 18,000

Ong, Drawing 18,000
To close drawing account to capital
Ong, Flocer Lao (2016). Fundamentals of Accountancy, Business, and Management. Quezon City: C&E Publishing, Inc.

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Living Angels Christian Academy

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2

COMPLETING THE ACCOUNTING CYCLE

Accumulation of information on the details of operations entails maintaining separate revenue

Anime World Gallery

Cash Php 373,660

1. Close the income accounts

2. Close the expense accounts

May 31 Income Summary 33,040

3. Close the income summary to capital

May 31 Income Summary 176,960

4. Close the drawing account

May 31 Ong, Capital 18,000

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