Closing Entries Closing the books, 1 Closing Entries (zero out certain accounts): Think opposite of the normal balance to zero out an account. A Purpose 1. To prepare the Income Statement accounts and the Dividends account for the next reporting period. 2 To adjust the Retained Earnings account in the ledger to agree with the Balance Sheet figure. 3. To finalize the accounting cycle for a given period (Last Step). B Procedure 1. Zero out All Revenue Accounts: DR: Revenue XXX CR: Income Summary XXX 2. Zero out All Expense Accounts XXX DR: Income Summary CR: Expenses XXX 3. Zero out Income Summary If Net Income for the period: XXX XXX DR: Income Summary CR: Retained Earnings If Net Loss for the period: DR: Retained Earnings CR: Income Summary XXX XXX XXX 4. Zero out Dividends Account: XXX DR: Retained Earnings CR: Dividends $XXX Ees: Income Summary is a temporary account. It does not appear on any financial statement. Even though Retained Earnings is part of the closing entries process, it is not closed (not zeroed) out; it is closed into. (i.e., updated) 58 Prepare the CLOSING ENTRIES for the Halverson Company and POST to the "T" accounts on the following page. 1: Close Revenue Accounts: 1-31: 5,740 23,00 DR: Sales reve CR: Income Sumery 23,00 2. Close Expense Accounts: 1-31: DR: Income Summary. CR:oper. exp. 4,790 CR: buld. exp. 500 CR: Depre. exp. 250 15,740 CR: Intre. exp. 150 CR: Ingur exe, 50 Tono CR: CO 3. Close Income Summary: 1-31: DR:Income sunrwaty 7260 CR: RE 7,260 4. Close Dividends: 1-31: DR: RE 21000 CR: divid. 7000 ADDITIONAL PRACTICE MULTIPLE CHOICE 1. An unearned revenue can best be described as an amount DR:Cash XXX collected and currently matched with expenses. collected and not currently matched with expenses. CR: Mnestend Rex. xxx not collected and currently matched with expenses. not collected and not currently matched with expenses. 2. Which of the following is a real (permanent) account? Goodwill dont get closed out b. Sales Accounts receivable Both goodwill and accounts receivable 3. Which of the following is a nominal (temporary) account? Unearned revenue 6. Salary expense Inventory d. Retained earnings a ab. you a. > c. d. do get closed out a. c. 59 2 Post the journal entries to accounts. (Only the accounts remaining to be closed are shown.) THESE ARE THE SAME IDENTICAL "T" ACCOUNTS ON PAGE 51 Sales (1-3123,000 2,000 (1-13) 4900 110(1-31) (1-22) Operating Exp Dividends Bad Debt Exp 01.30 2000 2.000 (51) 0.90 500 500 (-31) 4790(1-311 4790 Interest exp. Depreciation Exp.Bldg. (1-31) 250 Insurance Exp. (1-31350 50 (1-31) 250 (1-31) (131) 150 150 (1-31) ex P. Revenue Purchases Cost of Goods Sold (1-31) 10,000 19000-31) (2-6) 23.0 25,000 (131) Income Summary (1-3 15,740 23,000 (1-3 (1-31) 7,260 7,260 0 NI RE BS 2,000 (7,260 15, 2607 RE on the BS QUICK REVIEW QUESTIONS: 1. If the following ustimet journal entries are not recorded, please indicate the effect on the company's Net Income, Retained Ramings and Balance Sheet (assume the regular method was used where applicable) NI RE BS a. Prepaid rent/insurance: Dr. Rent exp. too AO A=L+CSTRE high to ok ok too high Criprepaid Rent Cexotoo low) b. Unearned Revenue: c. Supplies on Hand: d. Salaries expense: e. Depreciation expense: 2. If closing journal entries are not recorded which account will not be updated in the ledger to agree with the number on the Balance Sheet? 61 Closing Entries Closing the books, 1 Closing Entries (zero out certain accounts): Think opposite of the normal balance to zero out an account. A Purpose 1. To prepare the Income Statement accounts and the Dividends account for the next reporting period. 2 To adjust the Retained Earnings account in the ledger to agree with the Balance Sheet figure. 3. To finalize the accounting cycle for a given period (Last Step). B Procedure 1. Zero out All Revenue Accounts: DR: Revenue XXX CR: Income Summary XXX 2. Zero out All Expense Accounts XXX DR: Income Summary CR: Expenses XXX 3. Zero out Income Summary If Net Income for the period: XXX XXX DR: Income Summary CR: Retained Earnings If Net Loss for the period: DR: Retained Earnings CR: Income Summary XXX XXX XXX 4. Zero out Dividends Account: XXX DR: Retained Earnings CR: Dividends $XXX Ees: Income Summary is a temporary account. It does not appear on any financial statement. Even though Retained Earnings is part of the closing entries process, it is not closed (not zeroed) out; it is closed into. (i.e., updated) 58 Prepare the CLOSING ENTRIES for the Halverson Company and POST to the "T" accounts on the following page. 1: Close Revenue Accounts: 1-31: 5,740 23,00 DR: Sales reve CR: Income Sumery 23,00 2. Close Expense Accounts: 1-31: DR: Income Summary. CR:oper. exp. 4,790 CR: buld. exp. 500 CR: Depre. exp. 250 15,740 CR: Intre. exp. 150 CR: Ingur exe, 50 Tono CR: CO 3. Close Income Summary: 1-31: DR:Income sunrwaty 7260 CR: RE 7,260 4. Close Dividends: 1-31: DR: RE 21000 CR: divid. 7000 ADDITIONAL PRACTICE MULTIPLE CHOICE 1. An unearned revenue can best be described as an amount DR:Cash XXX collected and currently matched with expenses. collected and not currently matched with expenses. CR: Mnestend Rex. xxx not collected and currently matched with expenses. not collected and not currently matched with expenses. 2. Which of the following is a real (permanent) account? Goodwill dont get closed out b. Sales Accounts receivable Both goodwill and accounts receivable 3. Which of the following is a nominal (temporary) account? Unearned revenue 6. Salary expense Inventory d. Retained earnings a ab. you a. > c. d. do get closed out a. c. 59 2 Post the journal entries to accounts. (Only the accounts remaining to be closed are shown.) THESE ARE THE SAME IDENTICAL "T" ACCOUNTS ON PAGE 51 Sales (1-3123,000 2,000 (1-13) 4900 110(1-31) (1-22) Operating Exp Dividends Bad Debt Exp 01.30 2000 2.000 (51) 0.90 500 500 (-31) 4790(1-311 4790 Interest exp. Depreciation Exp.Bldg. (1-31) 250 Insurance Exp. (1-31350 50 (1-31) 250 (1-31) (131) 150 150 (1-31) ex P. Revenue Purchases Cost of Goods Sold (1-31) 10,000 19000-31) (2-6) 23.0 25,000 (131) Income Summary (1-3 15,740 23,000 (1-3 (1-31) 7,260 7,260 0 NI RE BS 2,000 (7,260 15, 2607 RE on the BS QUICK REVIEW QUESTIONS: 1. If the following ustimet journal entries are not recorded, please indicate the effect on the company's Net Income, Retained Ramings and Balance Sheet (assume the regular method was used where applicable) NI RE BS a. Prepaid rent/insurance: Dr. Rent exp. too AO A=L+CSTRE high to ok ok too high Criprepaid Rent Cexotoo low) b. Unearned Revenue: c. Supplies on Hand: d. Salaries expense: e. Depreciation expense: 2. If closing journal entries are not recorded which account will not be updated in the ledger to agree with the number on the Balance Sheet? 61