Accounting Chapter 10

1
Accounting - Chapter 10

• Recording Adjusting and Closing Entries for a
  Service Business

2
Adjusting Entries

• Journal entries made to bring general ledger
  accounts up-to-date
• Recorded on the journal page after the monthly
  entries
• Adjusting Entries centered in the journal (no
  source documents)
• Two adjusting entries are made
• supplies and prepaid insurance
• Information is taken from worksheet adjustment
  columns

3
Four Closing Entries are Made

• Revenue (Brings the sales account back to zero
  for the new fiscal period.)
• Expenses (Brings the expense accounts back to
  zero for the new fiscal period.)
• Net Income or Net Loss and Income Summary
  (Transfers net income or net loss into the
  capital account and brings the income summary
  account back to zero for the new fiscal
  period.)
• Drawing (Brings the drawing account back to
  zero for the new fiscal period.)

4
Closing Entries

• Permanent Accounts
• an account that accumulates (carries over) from
  one fiscal period to the next
• assets, liabilities, and owners equity are all
  permanent accounts
• Temporary Accounts
• accounts that accumulate information until it is
  transferred into the owners equity account
  (a.k.a. nominal accounts)
• show changes in capital over a fiscal period
• temporary accounts are closed out (transferred
  into capital) and start a new fiscal period with
  a zero balance
• revenue, expenses, owners drawing, and INCOME
  SUMMARY are all temporary accounts.

5
Closing Entries (continued)...

• Closing entries will prepare temporary accounts
  for the new fiscal period.
• To close entry accounts, you must do the OPPOSITE
  of their normal balance!!!
• Example advertising expense. To close
  advertising expense, it must be credited.
• Closing Entries is centered on the journal
  right below the adjusting entries

6
The Income Summary Account...

• All entries must have a debit and credit part.
• Income summary is used to close the expense and
  revenue accounts
• INCOME SUMMARY HAS NO NORMAL BALANCE
• Has a credit balance when there is a net income
  (revenuegtexpenses, creditgtdebit)
• Has a debit balance when there is a net loss
  (expensesgtrevenue, debitgtcredit)

7
Close Sales

• An income statement account
• Has a credit balance
• To close, do the OPPOSITE of its normal balance
• Sales is closed into income summary
• Entry
• Debit Sales
• Credit Income Summary

8
Close Expenses

• Income statement accounts
• Normal debit balance
• To close, do the OPPOSITE of its normal balance
• Expenses are exposed into Income Summary
• Entry
• debit income summary for the TOTAL of all
  expenses
• credit each expense

9
Close Net Income or Loss and Income Summary

• Net income increases capital
• Net loss decreases capital
• Entry when there is a net income
• debit income summary for the amount of net income
• credit capital for the amount of net income
• Entry when there is a net loss
• debit capital for the amount of net loss
• credit income summary for the amount of net loss

10
Close Drawing

• Drawing decreases capital
• Balance sheet account
• Normal debit balance
• To close, do the OPPOSITE of its normal balance
• Entry
• Debit capital for the balance of drawing
• Credit drawing for the balance of drawing

11
After Adjusting and Closing Entries are Made.

• They must be posted to the general ledger
• Post-closing trial balance is prepared
• information is taken from the general ledger
• this proves the equality of debits and credits in
  the general ledger
• Concept Accounting Period Cycle
• activities included in recording financial
  information
• this is now complete