University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

344

Pages:

3
Author:

stud_ice13

1. Recording Closing Entries The closing process involves four main journal entries: Step 1: Close Revenue Accounts to Income Summary • To close revenue accounts, debit each revenue account and credit the Income Summary account. This brings the balance of revenue accounts to zero. Example Journal Entry: bash Debit: Service Revenue Credit: Income Summary $XX,XXX $XX,XXX Step 2: Close Expense Accounts to Income Summary • To close expense accounts, credit each expense account and debit the Income Summary account. This brings the balance of expense accounts to zero. Example Journal Entry: bash Debit: Income Summary $XX,XXX Credit: Salaries Expense $X,XXX Credit: Rent Expense $X,XXX Credit: Utilities Expense $X,XXX Credit: Supplies Expense $X,XXX Credit: Depreciation Expense $X,XXX Step 3: Close Income Summary to Retained Earnings • After closing revenues and expenses, the Income Summary will have a balance that represents net income or net loss. Close this balance to the Retained Earnings account. Example Journal Entry (assuming net income): bash Debit: Income Summary Credit: Retained Earnings $X,XXX $X,XXX Step 4: Close Dividends to Retained Earnings • To close the Dividends account, debit Retained Earnings and credit Dividends. This brings the Dividends account to zero. Example Journal Entry: bash Debit: Retained Earnings Credit: Dividends $X,XXX $X,XXX 2. Preparing a Post-Closing Trial Balance After posting all the closing entries, only permanent accounts (assets, liabilities, and equity) will have balances. The post-closing trial balance ensures that the ledger is in balance and that all temporary accounts have been properly closed. Example Format: bash Magic Company Post-Closing Trial Balance December 31, 2021 Account Debit Credit ----------------------------------------------------Cash $XX,XXX Accounts Receivable $X,XXX Supplies $X,XXX Equipment $XX,XXX Accumulated Depreciation $X,XXX Accounts Payable $X,XXX Salaries Payable $X,XXX Interest Payable $X,XXX Common Stock $XX,XXX Retained Earnings $XX,XXX ----------------------------------------------------Total $XX,XXX $XX,XXX Key Points: • Temporary accounts (revenues, expenses, and dividends) should have zero balances after the closing process. • • • Income Summary is a temporary account used only during the closing process and should also have a zero balance afterward. The Retained Earnings account is updated to reflect net income or loss and dividends, resulting in the balance reported on the statement of retained earnings. The Post-Closing Trial Balance verifies that total debits equal total credits and that only permanent accounts remain.