Chapter 6: Closing Entries and the Postclosing Trial Balance

What are the nine steps of the accounting cycle?

1. Analyze transactions 2. Journalize the transactions 3. Post the transactions 4. Prepare a worksheet 5. Prepare Financial Statements 6. Record Adjusting Entries 7. Record Closing Entries 8. Prepare a post-closing Trial Balance 9. Interpret the financial information

The postclosing Trial Balance verifies that:

1. Total debits equal total credits 2. Revenue, expense, and drawing accounts have zero balances.

What are the four steps in the closing process?

1. Transfer the balance of the revenue account to the Income Summary account. 2. Transfer the expense account balances to the Income Summary account. 3. Transfer the balance of the Income Summary account to the owner's capital account. 4. Transfer the balance of the drawing account to the owner's capital account.

On December 31st, the worksheet for Eli's Consulting Services shows one revenue account, Fees Income. It has a credit balance of $47,000. How would the closing entry look for the Fees Income account?

A credit of $47,000 would be applied to the Income Summary account, and a debit of $47,000 would be applied to the Fees Income account

After the revenue and expense accounts are closed, the Income Summary has a credit balance of $33,667, which is net income for the month. The journal entry to transfer net income to owner's equity is:

A debit to Income Summary and a credit to Owner's Capital for $33,667.

Income Summary Account

A special owner's equity account that is used only in the closing process to summarize the results of operations.

Postclosing Trial Balance

A statement that is prepared to prove the equality of total debits and credits after the closing process is completed.

A firm has $90,000 in revenue for the period. Give the entry to close the Fees Income account.

Acct. Debit Credit Fees Income $90,000 Income Summary $90,000

A firm has the following expenses: Rent Expense, #3,600; Salaries Expense, $7,000; and Supplies Expense, $1,500. Give the entry to close the expense accounts.

Acct. Debit Credit Income Summary $12,000 Rent Expense $3,600 Salaries Expense $7,000 Supplies Expense $1,500

On the postclosing Trial Balance, the only accounts with balances are the permanent accounts:

Assets, Liabilities, and Owner's Equity

Is the following statement true or false? Why? "All owner's equity accounts appear on the post-closing trial balance."

False. The temporary owner's equity accounts do not appear on the post-closing trial balance. The temporary owner's equity accounts are the drawing account and Income Summary.

What three financial statements are prepared during the accounting cycle?

Income statement, Statement of owner's equity, and balance sheet.

What is the last step in the accounting cycle?

Interpret the financial statements

Closing Entries

Journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce the revenue, expense, and drawing account balances to zero.

Interpret

To understand and explain the meaning and importance of something (such as financial statements)

Income Summary has a _____ balance after the closing process, and it remains with a ____ balance until after the closing procedure for the next period.

Zero

The entry to close the Income Summary account may include: a. A debit to Income Summary and a credit to the owner's capital account. b. A debit to Income Summary and a credit to Cash c. A debit to Cash and a credit to Income Summary d. A debit to Income Summary and a credit to the owner's drawing account

a. A debit to Income Summary and a credit to the owner's capital account

What accounts appear on the post-closing trial balance? a. Asset, liability, and the owner's capital accounts b. Asset, liability, and the owner's drawing account c. Asset, liability. and revenue and expense accounts d. Asset, liability, revenue and expense, and the owner's drawing account.

a. Asset, liability. and the owner's capital accounts.

After the closing entries are posted, which account normally has a balance other than zero? a. Capital b. Rent Expense c. Income Summary d. Fees Income

a. Capital

What is the journal entry to close the drawing account? a. Debit the Capital account and Credit the Drawing account b. Debit the Drawing account and Credit the Capital account c. Debit the Revenue account and Credit the Drawing account d. Debit Drawing Expense and Credit Drawing account.

a. Debit the Capital account and Credit the Drawing account

Which of the following statements about the interpretation of the financial statements is not correct? a. Interpreting the financial statements can only be performed by auditors b. Interpreting the financial statements is the final step in the accounting cycle. c. To interpret the financial statements means to understand and explain the meaning and importance of information in accounting reports. d. Interpreting the financial statements can assist in decision making for the owners of a firm.

a. Interpreting the financial statements can only be performed by auditors

Which of the following accounts typically appears within multiple closing entries? a. The owner's capital account b. The owner's drawing account c. Accumulated depreciation d. Fees Income

a. The owner's capital account

One purpose of closing entries is to: a. Transfer the results of operations to owner's equity b. Reduce the owner's capital account balance to zero so that the account is ready for the next period. c. Close all accounts so that the ledger is ready for the next accounting period d. Adjust the ledger account balances to provide complete and accurate figures for use on financial statements

a. Transfer the results of operations to owner's equity

Which financial statement would indicate how much customers owe to the business? a. Income Statement b. Balance Sheet c. Statement of Owner's equity d. Statement of cash flows

b. Balance sheet

Which financial statement would indicate whether there is enough cash to purchase new equipment and how much money is owed to suppliers? a. Income statement b. Balance sheet c. Statement of owner's equity d. Statement of cash flow

b. Balance sheet

Which of the following journal entries would be used to close a Fees income account with a $4200 balance at period-end? a. Debit Income Summary and credit Fees Income $4,200 b. Debit Fees Income and credit Income Summary $4,200 c. Debit owner's capital and credit Fees Income $4,200 d. Debit Fees Income and credit owner's capital $4,200

b. Debit Fees Income and credit Income Summary $4,200

The Supplies Expense account is closed by: a. Debiting the owner's capital account and crediting Supplies Expense b. Debiting Income Summary and crediting Supplies Expense c. Debiting Supplies Expense and crediting Income Summary d. Debiting Supplies Expense and crediting the owner's capital account

b. Debiting Income Summary and crediting Supplies Expense

Which of the following accounts will not appear on the post-closing trial balance? a. Capital b. Drawing c. Accounts Payable d. Cash

b. Drawing

After the revenue and expense accounts are closed, Income Summary has a credit balance of $80,000. What does this figure represent? a. Net loss of $80,000 b. Net profit of $80,000 c. Owner's withdrawal of $80,000 d. Net increase in owner's equity of $80,000

b. Net profit of $80,000

The fourth step in the closing process is to a. Interpret the financial information b. Prepare the worksheet c. Analyze Transactions d. Journalize the Transactions

b. Prepare a worksheet

Why is a post-closing trial balance prepared? a. To ensure the general journal is in balance after the adjusting and closing entries are journalized. b. To ensure the general ledger is in balance after the adjusting and closing entries are posted c. To ensure that all transactions have been journalized d. To ensure that all transactions have been posted.

b. To ensure the general ledger is in balance after the adjusting and closing entries are posted.

What are the last three steps (7th, 8th, and 9th) in the accounting cycle? a. Post the journal entries, journalize the transactions, and analyze the transactions. b. Prepare financial statements, prepare a worksheet, and prepare a post-closing trial balance. c. Journalize and post-closing entries, prepare a post-closing trial balance and interpret the financial statements. d. Interpret the financial information, analyze transactions, and journalize transactions.

c. Journalize and post-closing entries, prepare a post-closing trial balance, and interpret the financial statements

The business owner removes supplies that are worth $1,200 from the company stockroom. She intends to take them home for personal use. What effect will this have on the company's net income? a. Net income will decrease by $1,200 b. Net income will increase by $1,200 c. No effect on net income d. Net income will decrease by $2,400

c. No effect on net income

Which of the following lists the final three steps of the accounting cycle in the correct order? a. Prepare a postclosing trial balance; record closing entries; interpret the financial information b. Record closing entries; interpret the financial information; prepare a postclosing trial balance c. Record closing entries, prepare a postclosing trial balance; interpret the financial information d. Interpret the financial information; record closing entries; prepare a postclosing trial balance.

c. Record closing entries, prepare a postclosing trial balance; interpret the financial information

After closing, which accounts have zero balances? a. Liability and Capital accounts b. Asset and Liability accounts c. Revenue, drawing, and expense accounts d. Liability, drawing, and expense accounts

c. Revenue, drawing, and expense accounts

Which of the following accounts will appear on the postclosing trial balance? a. The owner's drawing account b. Fees Income c. The owner's capital account d. Rent Expense

c. The owner's capital account

Which financial statement would indicate total revenues, total expenses, and whether the business had a net income or net loss? a. Balance sheet b. Statement of owner's equity c. Statement of cash flows d. Income statement

d. Income statement

The Income Summary account is a temporary a. Liability account b. Expense account c. Drawing account d. Owner's Equity account

d. Owner's Equity account

Which of the following statements regarding the income summary account is accurate? a. The income summary account appears above the revenue accounts within the adjusted trial balance b. The income summary account is a permanent account c. The income summary account can be used in two of the four closing entries of the closing process d. The income summary account is an owner's equity account.

d. The income summary account is an owner's equity account.

In a circumstance where a firm experiences a net loss, and the owner has made withdrawals during the period, which of the following statements is accurate? a. The revenue account(s) will be closed within the second closing entry of the closing process. b. The owner's drawing account will be debited in the fourth closing entry of the closing process. c. Only three closing entries are necessary to complete the closing process. d. The owner's capital account will be debited within the third closing entry of the closing process.

d. The owner's capital account will be debited within the third closing entry of the closing process.

Which of the following accounts would be closed within the fourth entry of the closing process? a. The owner's capital account b. Fees Income c. Advertising Expense d. The owner's drawing account

d. The owner's drawing account

Which of the following statements is not correct? a. The audit trail can be used to trace data through the accounting records to find and correct errors. b. If the post-closing trial balance does not balance, there are errors in the accounting records. c. The balance of the owner's capital account on the adjusted trial balance will ordinarily be a different amount than that reported in the post-closing trial balance. d. The post-closing trial balance must include all accounts that appeared on the adjusted trial balance and may include additional accounts as well.

d. The post-closing trial balance must include all accounts that appeared on the adjusted trial balance and may include additional accounts as well.