Principles of Accounting (1)

College of Management and Techology in Alexandria

1
Lecture Week 13
The Closing Process

2
 Learning Objectives
1. Prepare closing entries and a post-closing trial balance.

3
Closing the Books

Companies journalize and post closing entries only at the

Trial Adjusting
Analyze Journalize Post
Balance Entries

Adjusted Post-Closing
Trial
Financial Closing
Trial
Balance Statements Entries
Balance

4
Closing the Books
The closing process is an important step at the end of an accounting period after
the formal financial statements have been completed to get ready for the next
accounting period.
Income is earned over a period of time; therefore, the purpose of the closing
process is to reset all revenue, expense and withdrawal accounts to a zero balance
at the end of the period. By doing so, we can start the next accounting period
anew.
A temporary account called income summary is used to facilitate the closing
process. The account will never appear on any financial statement and will have a
zero balance when the closing process is complete.

5
 Temporary and Permanent Accounts
Revenues
Assets

Withdrawals
Expenses

Liabilities

Owner’s
Capital
Temporary
Permanent
Accounts
Accounts
These
The closing accounts
process Income should all
applies Summary have a zero These accounts are permanent in
only to balance at nature because they are carried
temporary the end of forward from one accounting
accounts. the period. period to the next.
6
Recording Closing Entries
Close Credit Balances in Revenue Accounts to
Income Summary. This process will cause all
revenue accounts to have a zero balance Let’s see how
Close Debit Balances in Expense accounts to the closing
Income Summary. This will zero out all our process works!
expense accounts.
Close Income Summary account to Owner’s
Capital. This process zeroes out the income
summary.
Close Withdrawals to Owner’s Capital. This will
cause the withdrawal account to have a zero
balance.
7
Journalizing Closing Entries
GENERAL JOURNAL Page J3
Date Account Titles and Explanations Ref. Debit Credit
2020
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600
(To close revenue account)
31 Income Summary 350 7,740
Supplies Expense 631 1,500
Depreciation Expense 711 40
Insurance Expense 722 50
Salaries and Wages Expense 726 5,200
Rent Expense 729 900
Interest Expense 729 50
(To close expense accounts)

8
Journalizing Closing Entries
GENERAL JOURNAL Page J3
Date Account Titles and Explanations Ref. Debit Credit
2020
Oct. 31 Income Summary 350 2,860
Owner’s Capital 301 2,860
(To close net income to capital)
31 Owner’s Capital 301 500
Owner’s Drawings 306 500
(To close drawings to capital)

9
Posting Closing Entries

(Individual) Income (Individual)

2 1

3
Key:
1. Close Revenues to Income Owner’s Owner’s
Summary. Drawings Capital
2. Close Expenses to Income
Summary.
4
3. Close Income Summary to Owner’s
Capital.
4. Close Owner’s Drawings to
Owner’s Capital.

10
Post-Closing Trial Balance
After all four of our closing entries have
been made, we prepare a post-closing trial
balance. Let’s look at the
All the revenues, expenses, and post-closing trial
balance.
withdrawals have been reduced to zero
balances.
This trial balance should show only
permanent accounts, that is assets,
liabilities, and the capital account.
The owner’s capital account appears with
an updated balance including net income
and owner’s withdrawals.
Total debits and credits must be equal.
11
 Yazici Advertising
Post-Closing Trial Balance
October 31, 2020
Debit Credit Notice that
Cash ₺15,200
Accounts Receivable 200 the owner’s
Supplies 1,000 capital
Prepaid Insurance 550 account has
Equipment 5,000 been
Accumulated Depreciation ₺ 40
Notes Payable 5,000 updated to
Accounts Payable 2,500 include net
Unearned Service Revenue 800 income and
Salaries and Wages Payable 1,200
Interest Payable 50 owner’s
Owner’s Capital 12,360 withdrawals.
₺21,950 ₺21,950 (10,000 +
2860 – 500)

12
Quick Test; Closing Entries
Hancock Heating has the following balances in selected accounts of its adjusted
trial balance.
Accounts Payable €27,000 Owner’s Drawings €15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Supplies Expense 7,000
Expense 51,000
Prepare the closing entries at December 31.
Service Revenue 98,000
Income Summary 98,000

13
Quick Test; Closing Entries
Accounts Payable €27,000 Owner’s Drawings €15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Supplies Expense 7,000
Expense 51,000
Prepare the closing entries at December 31.
Income Summary 80,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000

14
Quick Test; Closing Entries
Accounts Payable €27,000 Owner’s Drawings €15,000
Service Revenue 98,000 Owner’s Capital 42,000
Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Supplies Expense 7,000
Expense 51,000
Prepare the closing entries at December 31.
Income Summary 18,000
Owner’s Capital 18,000
Owner’s Capital 15,000
Owner’s Drawings 15,000

15
 EN
D
O
F
LE
CT
UR
E
W
EE
ou
kY K
13
an
Th

16
References
• Wild, J., Shaw, K., Chiappetta, B. and Samaha, K., 2017. Fundamental
Accounting Principles. 2nd ed. McGraw-Hill Education.
• Weygandt, J., Kimmel, P. and Kieso, D., 2019. Accounting Principles
IFRS Version. Global Edition. Wiley.

17