Accounting Tutorial: Closing Entries Chapter 13
Income and Expense Summary
Tutorial : Closing Entries
You may want to wait until the end of the VE simulation, April 30, to close your books. By waiting until then you will be able to see how much your company made over the entire year. If you close books each month, you can see how much you made each month, but cannot see the amount for the whole year. Ask your instructor or email me at email@example.com on how to proceed. Revenue and expense accounts are really only temporary stockholders' equity accounts. A revenue transaction increases stockholders' equity and and expense transactions reduces stockholders' equity. It is impractical to debit and credit stockholders' equity each time there is a business transaction, that is why we set up a series of revenue and expense accounts. We also need to classify the expenses to make better business decisions. At the close of the period, after the income statement has been prepared, the account balances for these temporary accounts are totaled, zeroed out and the difference between expense and revenue is transfered to the retained earning account in the stockholders' equity section. The balance of each revenue and the balance of each expense account are transferred to one ledger account to summarize the increases and decreases in owners' equity. The account name is Income and Expense Summary. It is the stockholders' equity section of the chart of accounts. It is a temporary account used only for adjustments and closing entries.We have used this account briefly in the worksheet chapter for some of our adjustments. The balance of the revenue and expense accounts are transferred into the income and expense summary account by journal entries. Look at the income and expense summary link to see a graphical representation of this process. There are already two adjusting entries in this account that relate to beginning and ending inventory. They were posted to this account in the last chapter. Looking at the chart you will see that sales is on the right. Sales has a credit balance as you can see. To close the sales account, we will debit sales the amount that is in the account, 274,549.36 and credit income and expense summary account the same amount.The expense accounts are all listed on the lef-hand of the page. To close all expenses accounts we will credit each expense account the amount that is in the account and then debit the income and expense summary for the total of the expenses. Listed below are the closing entries for Bromley's formal wear. If you have a service business, the only difference in closing the books is that you do not have a purchases account, merchandise inventory account and there will be no adjusting entries in the income summary account. CLOSING ENTRIES Debit Credit Account Name Sales 274,549.36 Income and Expense 274,549.36 Income /Expense 213,753.99 Sales Returns 47.95 Purchases 108,915.41 Salary Expense 83,331.20 Rent Expense 4,000.00 Repairs Expense 350.00 Advertising Exp 1,000.00 Supplies Expense 285.00 Depreciation Exp 491.12 Insurance Expense 100.00 Miscellaneous Ex 200.00 Payroll Taxes Exp 9,958.07 Utilities Expense 3,082.99 Alterations Exp 459.25 Interest Expense 1,508.00 Delivery Expense 25.00 Now let's journalize these entries into the general journal Click on the link for the general journal and key in the entries above.Save the file on your computer and print out a copy of the general journal to facilitate the posting process. Now its time to post these entries. Click on the general ledger link to bring in Bromley's adjusted general ledger. Post to each of the accounts from your general journal. Use GJ3 as the posting reference and November 30 as the date for all entries. When finished posting, check the trial balance below. Don' worry that it is not in balance. There is one more journal entry we need to make and then post it befor the trial balance is in balance. In the existing trial balance all revenue and expense accounts should show a zero balance. The reason we are not in balance, is that the income and expense summary account is not listed in the trial balance and it as a credit balance of 7,842.51. The last closing entry is to close out the income and expense account into the Retained Earnings account. Date Account Name PR Debit Credit 11-30 Income Summary GJ3 8,550.31 11-30 Retained Earn GJ3 8,550.31 Journalize this entry in your general journal. Post this entry to the general ledger. After posting this last closing entry, your trial balance should be in balance. This is a special type of trial balance and it is called a post-closing trial balance - all revenue and expense accounts show a zero balance and the net profit or loss has been transferred to the retained earnings account.
The Accounting Cycle
We have now completed the accounting cycle. Every set of books you work on should have all the elements of the accounting cycle 1. Journalize 2. Post to general ledger and accounts receivable and accounts payable ledgers. 3. Take a trial balance to verify the accuracy of the postings. 4. Enter adjustments and extend out the trial balance columns to complete a worksheet. 5. Journalize and post the adjustments from the worksheet to the general ledger. 5. Using the information you obtained from the worksheet, produce all three financial reports: Income Statement, Statement of Retained Earnings and Balance Sheet. 6. Journalize the closing entries. 7. Post the closing entries 8. Take a post-closing trial balance.
The purpose of all of these chapter was to give you some knowledge about accounting. As you can see by your studies that accounting is a critically important ingredient in any business enterprize. A knowledge of accounting is necsssary for all business majors in college. If you ever to own your own business someday, the knowledge of accounting is invaluable.
1. What two accounts are temporary stockholders' equity accounts?
Revenue and Expense
Accounts receivable and accounts payable
Payroll taxes and depreciation
2. To close the sales account, we?
Debit income & expense summary and credit sales
Debit sales and credit income & expense summary
Debit sales and credit stockholders' equity
3. To close all expense accounts, we?
Credit each expense account and debit the total of all of them to income & expense summary.
Debit each expense account and credit the total to income & expense summary
Debit sales and credit income & expense summary
4. In a post-closing trial balance?
All asset account should have a zero balance.
All expenses and revenue should have zero balances
All stockholders' equity accounts should have a zero balance.