Chapter 6: Closing Entries and the Postclosing Trial Balance, Review

How is the Income Summary classified?

A temporary owner's equity account.

Income Statement

Accounts Receivable Total expenses for period Revenue earned during a period Net Income for period Cost of supplies used during period

Balance Sheet

Accumulated Depreciation on firms equipment Original cost of firm's equipment Book Value of firms equipment Accounts Payable Cash on hand Total Assets Owner's Capital at the end of the period Supplies on hand Accounts Receivable

What is the complete accounting cycle:

Analyze, Journalize-"in journal", Post-"in ledger", Prepare worksheet, Prepare financial statements, Record adjusting entries, Record closing entries, Prepare a postclosing trial balance, Interpret financial information.

What accounts appear on the postclosing trial balance?

Asset, liability, and the owner's capital accounts

After the closing entries are posted, which account normally has a balance other than zero?

Capital

Which accounts WILL appear on the Postclosing Trial Balance:

Cash, Accounts Receivable, Supplies, Equipment, Accumulated Depreciation, Accounts Payable, Owner Capital

What are the four steps in the closing process?

Close the revenue account to Income Summary Close the expense accounts to Income Summary Close Income Summary account to Capital Account Close drawing account to Capital Account

Step two in the closing process: The balances of the expense accounts are transferred to the Income Summary account.

Debit - Income Summary Credit - Expense Accounts

Step four in the closing process: The drawing account is closed to the owner's capital account.

Debit - Owner's Capital Credit - Drawing

Step one in the closing process: The balance of the revenue account is transferred to the Income Summary account.

Debit - Revenue Credit - Income Summary

What is the journal entry to close the drawing account?

Debit Capital and Credit Drawing

Closing Entries Example General Journal Page 4 Post Ref. Closing Entires 2016 Mar. 31 Fees Income 401 Income Summary 399 31 Income Summary 399 Depreciation Expense 510 Insurance Expense 511 Rent Expense 514 Salaries Expense 517 Supplies Expense 518 Telephone Expense 519 Utilities Expense 523 31 Income Summary 399 Owner Name, Capital 301 (fees income - expenses) 31 Income Summary 399 Owner Name, Drawing 302

Debit Credit 374,460 374,460 253,360 21,160 11,400 33,000 166,000 5,600 6,800 9,400 121,100 121,100 13,000 13,000

General Ledger Example Account Owner Name, Capital Account NO. 301 Debit Credit 2016 Description Post Mar 31 Balance / 31 Closing J4 121,100 31 Closing J4 13,000 Account Owner Name, Drawing Account NO 302 2016 Mar 31 Balance / 31 Closing J4 13,000 Account Income Summary Account NO. 399 2016 Mar 31 Closing J4 374,460 31 Closing J4 253,360 31 Closing J4 121,100 Account Fees Income J4 Account NO. 401 2016 Mar 31 Balance / 31 Closing J4 374,460

Debit Credit Balance 130,000 251,100 (capital) 238,100 (drawing) 13,000 (drawing) -0- 374,460(fees income) 121,100(expenses) -0- (capital) 374,460 (fees income) -0-

True or False? All owner's equity accounts appear on the postclosing trial balance.

False. The "temporary" owner's equity accounts do not appear on the postclosing trial balance.

A firm has $60,000 in revenue for the period. Give the entry to close the Fees Income account.

Fees Income 60,000 Income Summary 60,000

Which of the following accounts will NOT appear on the postclosing trial balance?

H.D. Hill, Drawing

Step three in the closing process: The balance of the Income Summary account - net income/net loss - is transferred to the owner's capital account.

If Income Summary has a credit balance: Debit - Income Summary Credit - Owner's Capital If Income Summary has a debit balance: Debit - Owner's Capital Credit - Income Summary

What three financial statements are prepared during the accounting cycle?

Income Statement, Statement of Owner's Equity, and Balance Sheet

Give the entry to close the following expense accounts: Rent Expenses, $7,200; Salaries Expense, $14,000; Supplies Expense, $3,000.

Income Summary 24,200 Rent Expense 7,200 Salaries Expense 14,000 Supplies Expense 3,000

What is the last step in the accounting cycle?

Interpret the financial statements

After the revenue and expense accounts are closed, Income Summary has a debit balance of $30,000. What does this figure represent?

Net loss of $30,000

The business owner removes supplies that are worth $900 from the company stockroom. She intends to use for personal use at home. What effect will this have on the company's net income?

No effect on net income.

Statement of Owner's Equity

Owner's withdrawals for the period Net income for the period Owner's capital end of period

After closing, which accounts have zero balances?

Revenue, drawing, and expense accounts

On which financial statement would you find the answer: What were the total fees earned this month? How much money is owed to suppliers? Did the business make a profit? Is there enough cash to purchase new equipment? What were the expenses? Do customers owe money to the business?

The income statement will answer questions about fees earned, expenses incurred, and profit. The balance sheet will answer questions about the cash balance, the amount owed by customers, and the amount owed to suppliers.

Why is a postclosing trial balance prepared?

To make sure the general ledger is in balance after the adjusting and closing entries are posted.

A postclosing trial balance is prepared to test the equality of total debit and credit balances in the general ledger

after the adjusting and closing entries have been recorded.

The temporary accounts - revenue, expenses, drawing, and Income Summary,

apply only to one accounting period and do not appear on the postclosing trial balance.

The revenue and expense accounts, with zero balances,

are ready to accumulate data for the next period.

The postclosing trial balance report lists only permanent accounts open at the end of the period -

asset, liability, and the owner's capital accounts.

The worksheet provides

data necessary for the closing entries.

Closing entries transfer the results of operations to owner's equity and

reduce the balances of the revenue and expense accounts to zero.

Income Summary is a

temporary owner's equity account.

After the closing entries have been posted,

the capital account reflects the results of operations for the period.

What are the last three steps in the accounting cycle?

(7) Record closing entries, (8) prepare a postclosing trial balance, (9) interpret the financial statements