6-1

Chapter

6
Closing Entries
and the Postclosing
Trial Balance
Section 1: Closing Entries
Section Objectives

1. Journalize and post closing

entries.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

 The Accounting Cycle
Step 2 Step 3
Journalize the Post the
Step 1 data about data about Step 4
Analyze transactions transactions Prepare
transactions a
worksheet

Step 5
Prepare
financial
statements

Step 9 Step 6
Interpret Journalize and
the financial Step 7 post adjusting
information Step 8 Journalize and entries
Prepare a post closing
postclosing entries
trial balance

The seventh step in the accounting cycle is to journalize

and post closing entries.

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QUESTION:

What is the Income Summary account?

ANSWER:

The Income Summary account is a

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

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 Income Summary Account

 Classified as a temporary owner’s equity account.

 Does not have a normal balance.
 Has a zero balance after the closing process and remains with
a zero balance until after the closing procedure for the next
period.

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Objective 1 Journalize and post closing entries

There are 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.

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 JT’s Consulting Services
Worksheet
Month Ended December 31, 2010

TRIAL BALANCE ADJUSTMENTS ADJ. TRIAL BAL. INCOME STMT. BALANCE SHEET
ACCOUNT NAME
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 83,500 83,500 83,500
Accounts Receivable 5,000 5,000 5,000
Supplies 3,000 (a) 1,000 2,000 2,000
Prepaid Rent 7,000 (b) 3,500 3,500 3,500
Equipment 22,000 22,000 22,000
Accum. Depr.—Equip. (c) 367 367 367
Accounts Payable 7,000 7,000 7,000
Jason Taylor, Cap. 90,000 90,000 90,000
Jason Taylor, Draw. 4,000 4,000 4,000
Fees Income 35,000 35,000 35,000
Salaries Expense 7,000 7,000 7,000
Utilities Expense 500 500 500
Supplies Expense (a) 1,000 1,000 1,000
Rent Expense (b) 3,500 3,500 3,500
Depr. Exp.—Equip. (c) 367 367 367
Totals 132,000 132,000 4,083 4,083 120,583 120,583 12,367 35,000 120,000 97,367
Net Income 22,633 22,633
Fees Income has a credit 35,000 35,000 120,000 120,000
balance of $35,000.
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 Step 1: Close Revenue
Fees Income Income Summary

Balance 35,000 Closing 35,000

Closing 35,000

6-8
 Step 1: Close Revenue
GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT

REF.
2010 Closing Entries
Dec. 31 Fees Income 35,000
Income Summary 35,000

The words “Closing Entries” are written in the

Description column of the general journal.

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 Step 2: Close Expenses
 The Income Statement section of the worksheet for
JT’s Consulting Services lists five expense accounts.

 Since expense accounts have debit balances, enter a

credit in each account to reduce its balance to zero.

 This closing entry transfers total expenses to the

Income Summary account.

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 Step 2: Close Expenses
 The five expense account balances are reduced to
zero.

 The total, $12,367

of
expenses are transferred to
the temporary owner’s equity
account, Income Summary.

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 Step 2: Close Expenses
Income Summary Salaries Expense
BAL 35,000 Balance 7,000
Closing 12,367 Closing 7,000

Utilities Expense Supplies Expense

Balance 500 Balance 1000
Closing 500 Closing 1000

Rent Expense Depr. Expense – Equip.

Balance 3,500 Balance 367

Closing 3,500 Closing 367

6-12
 Step 2: Close Expenses

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT

REF.
2010 Closing Entries
Dec. 31 Income Summary 12,367.00
Salaries Expense 7,000.00
Utilities Expense 500.00
Supplies Expense 1,000.00
Rent Expense 3,500.00
Depreciation Exp.-Equip. 367.00

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The Income Summary account reflects all
entries in the Income Statement section of
the worksheet.
Income Summary

Dr. Cr.

Closing 12,367 Closing 35,000

Balance 22,633

Net Income

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Step 3: Close Net Income to Capital
 The journal entry to transfer net income to owner’s
equity is a debit to Income Summary, and a credit
to Jason Taylor, Capital.

 The balance of Income Summary is reduced to

zero; the owner’s capital account is increased by
the amount of net income.
 The Income Summary account is reduced to zero.
 The net income amount, $22,633, is transferred to the
owner’s capital account. Jason Taylor, Capital is
increased by $22,633.
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 Step 3: Close Net Income to Capital
Income Summary Jason Taylor, Capital

Balance 22,633
Balance 90,000

Closing 22,633
Closing 22,633

6-16
 Step 3: Close Net Income to Capital
GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT

REF.
Closing Entries
Dec. 31 Income Summary 22,633.00

Jason Taylor, Capital 22,633.00

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 Step 4: Close Drawing to Capital
•Withdrawals appear in the statement of owner’s
equity as a deduction from capital.

•The drawing account is closed directly to the capital

account.

•The drawing account balance is reduced to zero.

•The balance of the drawing account, $4,000, is

transferred to the owner’s capital account.

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 Step 4: Close Drawing to Capital
Jason Taylor, Capital Jason Taylor, Drawing

Balance 112,633 Balance 4,000

Closing 4,000 Closing 4,000

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 Step 4: Close Drawing to Capital

GENERAL JOURNAL PAGE 4

DATE DESCRIPTION POST. DEBIT CREDIT

REF.
Closing Entries
Dec. 31 Jason Taylor, Capital 4,000.00

Jason Taylor, Drawing 4,000.00

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 The new balance of the Jason Taylor, Capital
account agrees with the amount listed on the
balance sheet.

Jason Taylor, Drawing Jason Taylor, Capital

Dr. Cr. Dr. Cr.

Balance 4,000 Closing 4,000 Balance 90,000

Balance 0 Net Inc. 22,633

Drawing 4,000
Balance 108,633

Jason Taylor, Capital

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 Summary of Closing Entries

GENERAL JOURNAL PAGE 4

POST.
STEPS DATE DESCRIPTION REF. DEBIT CREDIT
2010 Closing Entries
1. CLOSE Dec. 31 Fees Income 401 35,000.00
REVENUE Income Summary 309 35,000.00
2. CLOSE 31 Income Summary 309 12,367.00
EXPENSE Salaries Expense 511 7,000.00
ACCOUNTS Utilities Expense 514 500.00
Supplies Expense 517 1,000.00
Rent Expense 520 3,500.00
Depr. Expense-Equip. 523 367.00
3. CLOSE 31 Income Summary 309 22,633.00
INCOME Jason Taylor, Capital 301 22,633.00
SUMMARY
4. CLOSE 31 Jason Taylor, Capital 301 4,000.00
DRAWING Jason Taylor , Draw. 302 4,000.00
ACCOUNT
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 Posting the Closing Entries
All journal entries are posted to the general
ledger accounts.
 “Closing” is entered in the Description column of
the ledger accounts.
 The ending balances of the drawing, revenue,
and expense accounts are zero.

6-23
 GENERAL JOURNAL PAGE 4

POST.
STEPS DATE DESCRIPTION REF. DEBIT CREDIT
2010 Closing Entries
1. CLOSE Dec. 31 Fees Income 401 35,000.00
REVENUE Income Summary 309 35,000.00
2. CLOSE 31 Income Summary 309 12,367.00
EXPENSE Salaries Expense 511 7,000.00
ACCOUNTS Fees Income
ACCOUNT Utilities Expense
ACCOUNT NO. 514 401 500.00
Supplies Expense 517 1,000.00
POST.
Rent Expense 520 BALANCE 3,500.00
DATE DESCRIPTION REF. DEBIT CREDIT DEBIT CREDIT
Depr. Expense-Equip. 523 367.00
3. CLOSE
2010 31 Income Summary 309 22,633.00
INCOME
Dec. 31 Jason
J2 Taylor, Capital26,000.00
301 22,633.00
26,000.00
SUMMARY
Dec. 31 J2 9,000.00 35,000.00
Dec. 31
4. CLOSE Closing 31 J4 Taylor,
Jason 35,000.00
Capital 301 4,000.00 –0–
DRAWING Jason Taylor, Draw. 302 4,000.00
ACCOUNT

6-24
 GENERAL JOURNAL PAGE 4

POST.
STEPS DATE DESCRIPTION REF. DEBIT CREDIT
2010 Closing Entries
1. CLOSE Dec. 31 Fees Income 401 35,000.00
REVENUE Income Summary 309 35,000.00
2. CLOSE 31 Income Summary 309 12,367.00
EXPENSE Salaries Expense 511 7,000.00
ACCOUNTS
ACCOUNT Income SummaryUtilities Expense ACCOUNT
514 NO. 309 500.00
Supplies Expense 517 1,000.00
Rent Expense
POST. 520 BALANCE 3,500.00
DATE DESCRIPTION REF. DEBIT CREDIT
Depr. Expense-Equip. 523 DEBIT CREDIT
367.00
3. CLOSE 31 Income Summary 309 22,633.00
2010
INCOME
Dec. 31 Closing Jason
J4 Taylor, Capital35,000.00
301 22,633.00
35,000.00
SUMMARY
4. CLOSE 31 Jason Taylor, Cap 301 4,000.00
DRAWING Jason Taylor, Draw. 302 4,000.00
ACCOUNT

6-25
 Chapter

6
Closing Entries
and the Postclosing
Trial Balance
Section 2: Using Accounting
Information
2. Prepare a postclosing trial
balance.
3. Interpret financial statements.
4. Review the steps in the
accounting cycle.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

 The Accounting Cycle
Step 2 Step 3
Journalize the Post the
Step 1 data about data about Step 4
Analyze transactions transactions Prepare
transactions a
worksheet

Step 5
Prepare
financial
statements

Step 9 Step 6
Interpret Journalize and
the financial Step 7 post adjusting
information Step 8 Journalize and entries
Prepare a post closing
postclosing entries
trial balance

6-27
QUESTION:

What is the postclosing trial balance

ANSWER:

A postclosing trial balance is a statement

that is prepared to prove the equality of
total debits and credits after the closing
process is completed. It verifies that
revenue, expense, and drawing accounts
have zero balances.

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 Postclosing Trial Balance
JT’s Consulting Services
Postclosing Trial Balance
December 31, 2010

ACCOUNT NAME DEBIT CREDIT

Cash 83,500.00
Accounts Receivable 5,000.00
Supplies 2,000.00
Prepaid Rent 3,500.00
Equipment 22,000.00
Accumulated Depreciation–Equipment 367.00
Accounts Payable 7,000.00
Jason Taylor, Capital 108,633.00
Totals 116,000.00 116,000.00

6-29
 Finding and Correcting Errors

If the postclosing trial balance does not

balance, the accounting records contain
errors.

Use the audit trail to trace data through

the accounting records.

6-30
 Objective 3

Interpret financial
statements.

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 JT’s Consulting Services
Balance Sheet
December 31, 2010
Assets
Cash $83,500.00
Accounts Receivable 5,000.00
Supplies 2,000.00
Prepaid Rent 3,500.00
Equipment $ 22,000.00
Less Accumulated Depreciation 367.00 21,633.00
Total Assets $ 115,633.00

What Liabilities
is the and Owner’s Equity How much do the
cash balance?
Liabilities customers owe the
Accounts Payable business?
$ 7,000.00
Owner’s Equity
Jason Taylor, Capital 108,633.00
Total Liabilities and Owner’s Equity $115,633.00

6-32
 JT’s Consulting Services
Balance Sheet
December 31, 2010
Assets
Cash $83,500.00
Accounts Receivable How much does the business 5,000.00
Supplies owe its suppliers? 2,000.00
Prepaid Rent 3,500.00
Equipment $ 22,000.00
Less Accumulated Depreciation 367.00 21,633.00
Total Assets $ 115,633.00

Liabilities and Owner’s Equity

Liabilities
Accounts Payable $ 7,000.00
Owner’s Equity
Jason Taylor, Capital 108,633.00
Total Liabilities and Owner’s Equity $115,633.00

6-33
 JT’s Consulting Services
Income Statement
Month Ended December 31, 2010

Revenue
Fees Income 35,000.00
Expenses
Salaries Expense 7,000.00
Utilities Expense 500.00
Supplies Expense What is the profit? 1,000.00
Rent Expense 3,500.00
Depr. Expense--Equipment 367.00
Total Expenses 12,367.00
Net Income for the Month 22,633.00

6-34
Objective 4
Review the steps in the
accounting cycle
The Accounting Cycle

Step 2 Step 3
Journalize the Post the
Step 1 data about data about Step 4
Analyze transactions transactions Prepare
transactions a
worksheet
Prepare financial statements.
 Income Statement Step 5
Prepare
 Statement of Owner’s Equity financial
statements
 Balance Sheet

6-35
 The Accounting Cycle
Step 2 Step 3
Journalize the Post the
Step 1 data about data about Step 4
Analyze transactions transactions Prepare
transactions a
worksheet

 Transfer net income or net loss Step 5

to owner’s equity. Prepare
financial
 Reduce the balances of the statements
temporary accounts to zero.
Step 6
Journalize and
Step 7 post adjusting
Journalize and entries
post closing
entries

6-36
 The Accounting Cycle
Step 2 Step 3
Journalize the Post the
Step 1 data about data about Step 4
Analyze transactions transactions Prepare
transactions a
worksheet

Step 5
Prepare
financial
statements

Step 9 Step 6
Interpret Journalize and
the financial Step 7 post adjusting
information Step 8 Journalize and entries
Prepare a post closing
postclosing entries
trial balance

6-37
 Flow of Data Through a Simple
Accounting System

Source General General Worksheet Financial

documents
Documents journal ledger statements

Source documents are analyzed.

6-38
 Thank You
for using

College Accounting, 12th Edition

Price • Haddock • Farina

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