Record the Closing Entry for Revenues and Expenses and Sky Blue Corporation

Completing the Accounting Cycle

25 Describe and Prepare Closing Entries for a Business

In this chapter, we complete the final steps (steps 8 and 9) of the accounting cycle, the closing process. You will notice that we do not cover step 10, reversing entries. This is an optional step in the accounting cycle that you will learn about in future courses. Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7 were covered in The Adjustment Process.

A large circle labeled, in the center, The Accounting Cycle. The large circle consists of 10 smaller circles with arrows pointing from one smaller circle to the next one. The smaller circles are labeled, in clockwise order: 1 Identify and Analyze Transactions; 2 Record Transactions to Journal; 3 Post Journal Information to Ledger; 4 Prepare Unadjusted Trial Balance; 5 Adjusting Entries; 6 Prepare Adjusted Trial Balance; 7 Prepare Financial Statements; 8 Closing Entries; 9 Prepare Post-Closing Trial Balance; 10 Reversing Entries (optional). The circles for 8 Closing Entries and 9 Prepare Post-Closing Trial Balance are shaded a slightly different color.

Our discussion here begins with journalizing and posting the closing entries ((Figure)). These posted entries will then translate into a post-closing trial balance, which is a trial balance that is prepared after all of the closing entries have been recorded.

Final steps in the accounting cycle. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Two boxes: the one on the left says 8 Closing Entries, the one on the right say 9 Prepare Post-Closing Trial Balance. There is an arrow pointing from the left to the right box.

Should You Compromise to Please Your Supervisor?

You are an accountant for a small event-planning business. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand.

It is the end of the month, and you have completed the post-closing trial balance. You notice that there is still a service revenue account balance listed on this trial balance. Why is it considered an error to have a revenue account on the post-closing trial balance? How do you fix this error?

Introduction to the Closing Entries

Companies are required to close their books at the end of each fiscal year so that they can prepare their annual financial statements and tax returns. However, most companies prepare monthly financial statements and close their books annually, so they have a clear picture of company performance during the year, and give users timely information to make decisions.

Closing entries prepare a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period. Closing, or clearing the balances, means returning the account to a zero balance. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption.

To further clarify this concept, balances are closed to assure all revenues and expenses are recorded in the proper period and then start over the following period. The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period. However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period.

For example, a store has an inventory account balance of $100,000. If the store closed at 11:59 p.m. on January 31, 2019, then the inventory balance when it reopened at 12:01 a.m. on February 1, 2019, would still be $100,000. The balance sheet accounts, such as inventory, would carry over into the next period, in this case February 2019.

The accounts that need to start with a clean or $0 balance going into the next accounting period are revenue, income, and any dividends from January 2019. To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019. Zeroing January 2019 would then enable the store to calculate the income (profit or loss) for the next month (February 2019), instead of merging it into January's income and thus providing invalid information solely for the month of February.

However, if the company also wanted to keep year-to-date information from month to month, a separate set of records could be kept as the company progresses through the remaining months in the year. For our purposes, assume that we are closing the books at the end of each month unless otherwise noted.

Let's look at another example to illustrate the point. Assume you own a small landscaping business. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000.

You also review the following information:

Value December 31: Bank account balance $7,500, Electronics 3,250, Car 26,545, Furniture 7,200, Credit card balances 9,270, Bank loans 48,350.

The next day, January 1, 2019, you get ready for work, but before you go to the office, you decide to review your financials for 2019. What are your year-to-date earnings? So far, you have not worked at all in the current year. What are your total expenses for rent, electricity, cable and internet, gas, and food for the current year? You have also not incurred any expenses yet for rent, electricity, cable, internet, gas or food. This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period.

Next, you review your assets and liabilities. What is your current bank account balance? What is the current book value of your electronics, car, and furniture? What about your credit card balances and bank loans? Are the value of your assets and liabilities now zero because of the start of a new year? Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt. Therefore, these accounts still have a balance in the new year, because they are not closed, and the balances are carried forward from December 31 to January 1 to start the new annual accounting period.

This is no different from what will happen to a company at the end of an accounting period. A company will see its revenue and expense accounts set back to zero, but its assets and liabilities will maintain a balance. Stockholders' equity accounts will also maintain their balances. In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts.

Temporary and Permanent Accounts

All accounts can be classified as either permanent (real) or temporary (nominal) ((Figure)).

Permanent (real) accounts are accounts that transfer balances to the next period and include balance sheet accounts, such as assets, liabilities, and stockholders' equity. These accounts will not be set back to zero at the beginning of the next period; they will keep their balances. Permanent accounts are not part of the closing process.

Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts. The new account, Income Summary, will be discussed shortly. These accounts are temporary because they keep their balances during the current accounting period and are set back to zero when the period ends. Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings.

Location Chart for Financial Statement Accounts. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Financial Statement Presented On, Account, for the following accounts: Asset: Balance Sheet, Permanent; Contra Asset: Balance Sheet, Permanent; Liability: Balance Sheet, Permanent; Stockholders' Equity: Balance Sheet, Permanent; Dividends*: Statement of Retained Earnings, Temporary; Revenues: Income Statement, Temporary; Expenses: Income Statement, Temporary. *Contra Stockholders' Equity.

The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all of the closing information for revenues and expenses, resulting in a "summary" of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. This balance is then transferred to the Retained Earnings account.

Income summary is a nondefined account category. This means that it is not an asset, liability, stockholders' equity, revenue, or expense account. The account has a zero balance throughout the entire accounting period until the closing entries are prepared. Therefore, it will not appear on any trial balances, including the adjusted trial balance, and will not appear on any of the financial statements.

You might be asking yourself, "is the Income Summary account even necessary?" Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account? We could do this, but by having the Income Summary account, you get a balance for net income a second time. This gives you the balance to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings.

Permanent versus Temporary Accounts

Following is a list of accounts. State whether each account is a permanent or temporary account.

  1. rent expense
  2. unearned revenue
  3. accumulated depreciation, vehicle
  4. common stock
  5. fees revenue
  6. dividends
  7. prepaid insurance
  8. accounts payable

Solution

A, E, and F are temporary; B, C, D, G, and H are permanent.

Let's now look at how to prepare closing entries.

Journalizing and Posting Closing Entries

The eighth step in the accounting cycle is preparing closing entries, which includes journalizing and posting the entries to the ledger.

Four entries occur during the closing process. The first entry closes revenue accounts to the Income Summary account. The second entry closes expense accounts to the Income Summary account. The third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings. The information needed to prepare closing entries comes from the adjusted trial balance.

Let's explore each entry in more detail using Printing Plus's information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in (Figure).

Adjusted Trial Balance for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Printing Plus, Adjusted Trial Balance, For the Month Ended January 31, 2019. Account Title, Debit or Credit. Cash $24,800 debit. Accounts Receivable 1,200 debit. Interest Receivable 140 debit. Supplies 400 debit. Equipment 3,500 debit. Accumulated Depreciation: Equipment $75 credit. Accounts Payable 500 credit. Salaries Payable 1,500 credit. Unearned Revenue 3,400 credit. Common Stock 20,000 credit. Dividends 100 debit. Interest Revenue 140 credit. Service Revenue 10,100 credit. Supplies Expense 100 debit. Depreciation Expense: Equipment 75 debit. Salaries Expense 5,100 debit. Utility Expense 300 debit. Totals: $35,715 debits, $35,715 credits.

The first entry requires revenue accounts close to the Income Summary account. To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance. The closing entry will debit both interest revenue and service revenue, and credit Income Summary.

Journal entry dated January 31, 2019 with a debit to Interest Revenue of 140, a debit to Service Revenue 10,100, and a credit to Income Summary 10,240. Explanation:

The T-accounts after this closing entry would look like the following.

Service Revenue T-account has 4 entries on the credit side: January 10 5,500, January 17 2,800, January 27 1,200, January 31 600. The total on the credit side is then 10,100. There is a January 31 closing entry to the debit side of 10,100, leaving a 0 balance on the credit side. The Interest Revenue T-account has one credit entry on January 31 of 140, a credit balance of 140, a debit side closing entry on January 31 of 140, and a 0 balance on the credit side. The Income Summary T-Account has a debit of 10,240 on January 31 for Closing entry #1, leaving a credit side balance of 10,240.

Notice that the balances in interest revenue and service revenue are now zero and are ready to accumulate revenues in the next period. The Income Summary account has a credit balance of $10,240 (the revenue sum).

The second entry requires expense accounts close to the Income Summary account. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. Printing Plus has $100 of supplies expense, $75 of depreciation expense–equipment, $5,100 of salaries expense, and $300 of utility expense, each with a debit balance on the adjusted trial balance. The closing entry will credit Supplies Expense, Depreciation Expense–Equipment, Salaries Expense, and Utility Expense, and debit Income Summary.

Journal entry for January 31, 2019 debiting Income Summary for 5,575 and crediting Supplies Expense 100, Depreciation Expense: Equipment 75, Salaries Expense 5,100, and Utility Expense 300. Explanation:

The T-accounts after this closing entry would look like the following.

Supplies Expense T-account has a January 31 debit side entry of 100, a debit balance of 100, a credit closing entry of 100, leaving a 0 debit side balance. Depreciation Expense: Equipment T-account has a January 31 debit side entry of 75, a debit balance of 75, a credit closing entry of 75, leaving a 0 debit side balance. Salaries Expense T-account has a January 20 debit side entry of 3,600, January 31 debit side entry of 1,500, a debit balance of 5,100, a credit closing entry of 5,100, leaving a 0 debit side balance. Utilities Expense T-account has a January 31 debit side entry of 300, a debit balance of 300, a credit closing entry of 300, leaving a 0 debit side balance. Income Summary T-account has a January 31 debit side closing entry #2 of 5,575, a January 31 credit side closing entry #1 of 10,240, leaving a credit balance of 4,665.

Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses ((Figure)). The balance in Income Summary is the same figure as what is reported on Printing Plus's Income Statement.

Income Statement for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Printing Plus, Income Statement, For the Month Ended January 31, 2019. Revenues: Interest Revenue $140, Service Revenue 10,100, Total Revenues $10,240. Expenses: Supplies Expense 100, Depreciation Expense: Equipment 75, Salaries Expense 5,100, Utility Expense 300, Total Expenses 5,575. Net Income $4,665.

Why are these two figures the same? The income statement summarizes your income, as does income summary. If both summarize your income in the same period, then they must be equal. If they do not match, then you have an error.

The third entry requires Income Summary to close to the Retained Earnings account. To get a zero balance in the Income Summary account, there are guidelines to consider.

  • If the balance in Income Summary before closing is a credit balance, you will debit Income Summary and credit Retained Earnings in the closing entry. This situation occurs when a company has a net income.
  • If the balance in Income Summary before closing is a debit balance, you will credit Income Summary and debit Retained Earnings in the closing entry. This situation occurs when a company has a net loss.

Remember that net income will increase retained earnings, and a net loss will decrease retained earnings. The Retained Earnings account increases on the credit side and decreases on the debit side.

Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.

Journal entry for January 31, 2019 with a debit to Income Summary for 4,665 and a credit to Retained Earnings for 4,665. Explanation:

The T-accounts after this closing entry would look like the following.

Retained Earnings T-account has credit closing entry #3 on January 31 of 4,665, leaving a balance on the credit side of 4,665. Income Summary T-account has a January 31 debit side closing entry #2 of 5,575, a January 31 credit side closing entry #1 of 10,240, leaving a credit balance of 4,665. It then has a January 31 closing entry on the credit side of 4,665, leaving a 0 balance on the credit side.

Notice that the Income Summary account is now zero and is ready for use in the next period. The Retained Earnings account balance is currently a credit of $4,665.

The fourth entry requires Dividends to close to the Retained Earnings account. Remember from your past studies that dividends are not expenses, such as salaries paid to your employees or staff. Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits generated by the company to the owners of the company—in this case, its shareholders.

If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend. The second part is the date of record that determines who receives the dividends, and the third part is the date of payment, which is the date that payments are made. Printing Plus has $100 of dividends with a debit balance on the adjusted trial balance. The closing entry will credit Dividends and debit Retained Earnings.

Journal entry of January 31, 2019 debiting Retained Earnings for 100 and crediting Dividends 100. The explanation:

The T-accounts after this closing entry would look like the following.

Retained Earnings T-account has a debit closing entry #4 on January 31 for 100, a credit closing entry #3 for 4,665, and a credit balance of 4,565. Dividends T-account has a January 14 debit entry of 100, a debit balance of 100, a credit January 31 closing entry for 100, leaving a debit side 0 balance.

Why was income summary not used in the dividends closing entry? Dividends are not an income statement account. Only income statement accounts help us summarize income, so only income statement accounts should go into income summary.

Remember, dividends are a contra stockholders' equity account. It is contra to retained earnings. If we pay out dividends, it means retained earnings decreases. Retained earnings decreases on the debit side. The remaining balance in Retained Earnings is $4,565 ((Figure)). This is the same figure found on the statement of retained earnings.

Statement of Retained Earnings for Printing Plus. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Printing Plus, Statement of Retained Earnings, For the Month Ended January 31, 2019. Beginning Retained Earnings (January 1) $0. Net Income 4,665. Less Dividends (100). Ending Retained Earnings (January 31) $4,565.

The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted. When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match. It is important to understand retained earnings is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close. You should recall from your previous material that retained earnings are the earnings retained by the company over time—not cash flow but earnings. Now that we have closed the temporary accounts, let's review what the post-closing ledger (T-accounts) looks like for Printing Plus.

T-Account Summary

The T-account summary for Printing Plus after closing entries are journalized is presented in (Figure).

T-Account Summary. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Cash has a January 3 debit entry of 20,000, a January 9 debit entry of 4,000, a January 12 credit entry of 300, a January 14 credit entry of 100, a January 17 debit entry of 2,800, a January 18 credit entry of 3,500, a January 20 credit entry of 3,600, a January 23 debit entry of 5,500, leaving a debit balance of 24,800. Accounts Receivable has a January 10 debit entry of 5,500, a January 23 credit entry of 5,500, a January 27 debit entry of 1,200 and a debit balance of 1,200. Interest Receivable has a January 31 debit entry of 140 and a debit balance of 140. Supplies has a January 30 debit entry of 500, a January 31 credit entry of 100 and a debit balance of 400. Equipment has a January 5 debit entry of 3,500 and a debit balance of 3,500. Accumulated Depreciation: Equipment has a January 31 credit entry of 75 and a credit balance of 75. Accounts Payable has a January 5 credit entry of 3,500, a January 13 debit entry of 3,500, a January 30 credit entry of 500, and a credit balance of 500. Salaries Payable has a January 31 credit entry of 1,500 and a credit balance of 1,500. Unearned Revenue has a January 9 credit entry of 4,000, a January 31 debit entry of 600, leaving a credit balance of 3,400. Common Stock has a January 3 credit entry of 20,000 and a credit balance of 20,000. Dividends has a January 14 debit entry of 100, a debit balance of 100, a credit January 31 closing entry for 100, leaving a debit side 0 balance. Service Revenue account has 4 entries on the credit side: January 10 5,500, January 17 2,800, January 27 1,200, January 31 600. The total on the credit side is then 10,100. There is a January 31 closing entry to the debit side of 10,100, leaving a 0 balance on the credit side. The Interest Revenue has one credit entry on January 31 of 140, a credit balance of 140, a debit side closing entry on January 31 of 140, and a 0 balance on the credit side. Supplies Expense has a January 31 debit side entry for 100, a debit side balance of 100, a credit side January 31 closing entry for 100, leaving a 0 debit side balance. Salaries Expense has a January 20 debit side entry for 3,600, a debit side entry on January 31 for 1,500, a debit side balance of 5,100, a credit side January 31 closing entry of 5,100, leaving a 0 debit side balance. Depreciation Expense: Equipment has a January 31 debit side entry for 75, a debit side balance of 375, a credit side January 31 closing entry of 75, leaving a 0 debit side balance. Utilities Expense has a January 12 debit side entry for 300, a debit side balance of 300, a credit side January 31 closing entry of 300, leaving a 0 debit side balance. Income Summary has a January 31 debit side closing entry #2 of 5,575, a January 31 credit side closing entry #1 of 10,240, leaving a credit balance of 4,665. It then has a January 31 closing entry on the credit side of 4,665, leaving a 0 balance on the credit side. Retained Earnings has a debit closing entry #4 on January 31 for 100, a credit closing entry #3 for 4,665, and a credit balance of 4,565.

Notice that revenues, expenses, dividends, and income summary all have zero balances. Retained earnings maintains a $4,565 credit balance. The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.

Closing Entries

A company has revenue of $48,000 and total expenses of $52,000. What would the third closing entry be? Why?

Frasker Corp. Closing Entries

Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided.

Fraskar Corporation, Adjusted Trial Balance, For the Month Ended June 30, 2018. Cash $5,840 debit. Accounts Receivable 6,575 debit. Prepaid Machine Rental 6,000 debit. Office Supplies 435 debit. Accounts Payable 2,840 credit. Common Stock 10,000 credit. Retained Earnings 4,350 credit. Dividends 15,000 debit. Fees Earned 22,350 credit. Salaries Expense 2,970 debit. Advertising Expense 325 debit. Machine Rental Expense 1,000 debit. Office Rent Expense 1,250 debit. Utility Expense 145 debit. Totals: $39,540 debits, $39,540 credits.

Solution

June 30 debit Fee earned 22,350, credit Income Summary 22,350. Explanation:

Key Concepts and Summary

  • Closing entries: Closing entries prepare a company for the next period and zero out balance in temporary accounts.
  • Purpose of closing entries: Closing entries are necessary because they help a company review income accumulation during a period, and verify data figures found on the adjusted trial balance.
  • Permanent accounts: Permanent accounts do not close and are accounts that transfer balances to the next period. They include balance sheet accounts, such as assets, liabilities, and stockholder's equity
  • Temporary accounts: Temporary accounts are closed at the end of each accounting period and include income statement, dividends, and income summary accounts.
  • Income Summary: The Income Summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all the closing information for revenues and expenses, resulting in a "summary" of income or loss for the period.
  • Recording closing entries: There are four closing entries; closing revenues to income summary, closing expenses to income summary, closing income summary to retained earnings, and close dividends to retained earnings.
  • Posting closing entries: Once all closing entries are complete, the information is transferred to the general ledger T-accounts. Balances in temporary accounts will show a zero balance.

Multiple Choice

(Figure)Which of the following accounts is considered a temporary or nominal account?

  1. Fees Earned Revenue
  2. Prepaid Advertising
  3. Unearned Service Revenue
  4. Prepaid Insurance

(Figure)Which of the following accounts is considered a permanent or real account?

  1. Interest Revenue
  2. Prepaid Insurance
  3. Insurance Expense
  4. Supplies Expense

(Figure)If a journal entry includes a debit or credit to the Cash account, it is most likely which of the following?

  1. a closing entry
  2. an adjusting entry
  3. an ordinary transaction entry
  4. outside of the accounting cycle

(Figure)If a journal entry includes a debit or credit to the Retained Earnings account, it is most likely which of the following?

  1. a closing entry
  2. an adjusting entry
  3. an ordinary transaction entry
  4. outside of the accounting cycle

(Figure)Which of these accounts would be present in the closing entries?

  1. Dividends
  2. Accounts Receivable
  3. Unearned Service Revenue
  4. Sales Tax Payable

(Figure)Which of these accounts would not be present in the closing entries?

  1. Utilities Expense
  2. Fees Earned Revenue
  3. Insurance Expense
  4. Dividends Payable

(Figure)Which of these accounts is never closed?

  1. Dividends
  2. Retained Earnings
  3. Service Fee Revenue
  4. Income Summary

(Figure)Which of these accounts is never closed?

  1. Prepaid Rent
  2. Income Summary
  3. Rent Revenue
  4. Rent Expense

(Figure)Which account would be credited when closing the account for fees earned for the year?

  1. Accounts Receivable
  2. Fees Earned Revenue
  3. Unearned Fee Revenue
  4. Income Summary

(Figure)Which account would be credited when closing the account for rent expense for the year?

  1. Prepaid Rent
  2. Rent Expense
  3. Rent Revenue
  4. Unearned Rent Revenue

Questions

(Figure)Explain what is meant by the term real accounts (also known as permanent accounts).

Real/permanent accounts are those that carry over from one period to the next, with a continuing balance in the account. Examples are asset accounts, liability accounts, and equity accounts. In contrast, revenue accounts, expense accounts, and dividend accounts are not real/permanent accounts.

(Figure)Explain what is meant by the term nominal accounts (also known as temporary accounts).

(Figure)What is the purpose of the closing entries?

Closing entries are used to transfer the contents of the temporary accounts into the permanent account, Retained Earnings, which resets the temporary balances to zero, enabling tracking of revenues, expenses, and dividends in the next period.

(Figure)What would happen if the company failed to make closing entries at the end of the year?

(Figure)Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are credited in the closing entries? Why?

Expense accounts and dividend accounts are credited during closing. This is because closing requires that the account balances be cleared, to prepare for the next accounting period.

(Figure)Which of these account types (Assets, Liabilities, Equity, Revenue, Expense, Dividend) are debited in the closing entries? Why?

(Figure)The account called Income Summary is often used in the closing entries. Explain this account's purpose and how it is used.

Income Summary is a super-temporary account that is only used for closing. The revenue accounts are closed by a debit to each account and a corresponding credit to Income Summary. Then the expense accounts are closed by a credit to each account and a corresponding debit to Income Summary. Finally, the balance in Income Summary is cleared by an entry that transfers its balance to Retained Earnings. Thus, it is used in three journal entries, as part of the closing process, and has no other purpose in the accounting records.

(Figure)What are the four entries required for closing, assuming that the Income Summary account is used?

(Figure)After the first two closing entries are made, Income Summary has a credit balance of $125,500. What does this indicate about the company's net income or loss?

The fact that Income Summary has a credit balance (of any size) after the first two closing entries are made indicates that the company made a net profit for the period. In this case, a credit of $125,500 reflects the fact that the company earned net income of $125,500 for the period.

(Figure)After the first two closing entries are made, Income Summary has a debit balance of $22,750. What does this indicate about the company's net income or loss?

Exercise Set A

(Figure)Identify whether each of the following accounts is nominal/temporary or real/permanent.

  1. Accounts Receivable
  2. Fees Earned Revenue
  3. Utility Expense
  4. Prepaid Rent

(Figure)For each of the following accounts, identify whether it is nominal/temporary or real/permanent, and whether it is reported on the Balance Sheet or the Income Statement.

  1. Interest Expense
  2. Buildings
  3. Interest Payable
  4. Unearned Rent Revenue

(Figure)For each of the following accounts, identify whether it would be closed at year-end (yes or no) and on which financial statement the account would be reported (Balance Sheet, Income Statement, or Retained Earnings Statement).

  1. Accounts Payable
  2. Accounts Receivable
  3. Cash
  4. Dividends
  5. Fees Earned Revenue
  6. Insurance Expense
  7. Prepaid Insurance
  8. Supplies

(Figure)The following accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Advertising Expense $5,600, Dividends 4,000, Rent Expense 6,000, Salaries Expense 48,000, Service Revenue 85,000, Utilities Expense 7,500.

(Figure)The following accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Retained Earnings 22,000, Dividends 6,000, Fees Earned revenue 90,000, Selling Expenses 45,000, Administrative Expenses 16,000, Miscellaneous Expense 2,300.

(Figure)Use the following excerpts from the year-end Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Dividends 24,000 debit. Sales revenue 194,000 credit. Automobile expense 15,500 debit. Insurance expense 30,000 debit. Salaries expense 96,000 debit. Supplies expense 6,500 debit.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Cash debit balance 75,000. Service Revenue credit balance 220,000. Advertising expense debit balance 12,000. Rent Expense debit balance 18,000. Salaries Expense debit balance 120,000. Dividends debit balance 25,000. Retained Earnings credit balance 30,000.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Cash debit balance 23,300. Revenue Earned credit balance 43,000. Commission expense debit balance 6,000. Supplies Expense debit balance 3,200. Wages Expense debit balance 28,000. Dividends debit balance 4,000. Retained Earnings credit balance 21,500.

Exercise Set B

(Figure)Identify whether each of the following accounts are nominal/temporary or real/permanent.

  1. Rent Expense
  2. Unearned Service Fee Revenue
  3. Interest Revenue
  4. Accounts Payable

(Figure)For each of the following accounts, identify whether it is nominal/temporary or real/permanent, and whether it is reported on the Balance Sheet or the Income Statement.

  1. Salaries Payable
  2. Sales Revenue
  3. Salaries Expense
  4. Prepaid Insurance

(Figure)For each of the following accounts, identify whether it would be closed at year-end (yes or no) and on which financial statement the account would be reported (Balance Sheet, Income Statement, or Retained Earnings Statement).

  1. Retained Earnings
  2. Prepaid Rent
  3. Rent Expense
  4. Rent Revenue
  5. Salaries Expense
  6. Salaries Payable
  7. Supplies Expense
  8. Unearned Rent Revenue

(Figure)The following accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Automobile Expense $9,000, Dividends 6,000, Insurance Expense 7,500, Office Expense 14,000, Sales Revenue 120,000, Wages Expense 60,000.

(Figure)The following accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Retained Earnings 78,500, Dividends 12,500, Fees Earned revenue 195,000, Selling Expenses 101,000, Administrative Expenses 46,500, Miscellaneous Expense 3,600.

(Figure)Use the following excerpts from the year-end Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Dividends 20,000 debit. Service revenue 225,000 credit. Advertising expense 18,000 debit. Rent expense 30,000 debit. Utilities expense 6,600 debit. Wages expense 148,000 debit.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Cash debit balance 35,580. Revenue Earned credit balance 146,000. Advertising expense debit balance 24,000. Insurance Expense debit balance 18,000. Salaries Expense debit balance 90,000. Dividends debit balance 5,000. Retained Earnings credit balance 26,580.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Cash debit balance 25,222. Rent Revenue credit balance 112,000. Advertising expense debit balance 6,000. Insurance Expense debit balance 12,000. Salaries Expense debit balance 75,000. Dividends debit balance 16,000. Retained Earnings credit balance 22,222.

Problem Set A

(Figure)Identify whether each of the following accounts would be considered a permanent account (yes/no) and which financial statement it would be reported on (Balance Sheet, Income Statement, or Retained Earnings Statement).

  1. Accumulated Depreciation
  2. Buildings
  3. Depreciation Expense
  4. Equipment
  5. Fees Earned Revenue
  6. Insurance Expense
  7. Prepaid Insurance
  8. Supplies Expense
  9. Dividends

(Figure)The following selected accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Accounts receivable $45,000, Prepaid insurance 4,500, Land 50,000, Accounts payable 39,000, Notes payable 55,000, Retained earnings 12,000, Dividends 2,000, Fees earned revenue 65,000, Selling expenses 34,500, Administrative expenses 12,750, Miscellaneous expense 1,250.

(Figure)The following selected accounts and normal balances existed at year-end. Notice that expenses exceed revenue in this period. Make the four journal entries required to close the books:

Accounts receivable $46,200, Prepaid insurance 5,800, Land 12,000, Accounts payable 29,900, Notes payable 32,500, Retained earnings 55,400, Dividends 8,000, Fees earned revenue 89,200, Selling expenses 62,000, Administrative expenses 29,500, Miscellaneous expense 4,140.

(Figure)Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 38,750 debit. Prepaid insurance 4,500 debit. Equipment 35,000 debit. Notes Payable 32,000 credit. Common Stock 10,000 credit. Retained Earnings 17,325 credit. Dividends 22,000 debit. Sales revenue 200,000 credit. Automobile expense 24,575 debit. Insurance expense 18,000 debit. Salaries expense 110,000 debit. Supplies expense 6,500 debit. Total debits and total credits each are 259,325.

(Figure)Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 22,900 debit. Prepaid insurance 4,000 debit. Fixed Assets 44,000 debit. Notes Payable 40,000 credit. Common Stock 25,000 credit. Retained Earnings 48,350 credit. Dividends 22,000 debit. Sales revenue 150,000 credit. Automobile expense 26,500 debit. Insurance expense 20,000 debit. Salaries expense 122,500 debit. Supplies expense 1,450 debit. Total debits and total credits each are 263,350.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Accounts Receivable debit balance 45,500. Fees Earned Revenue credit balance 60,000. Commission expense debit balance 7,200. Supplies Expense debit balance 5,500. Wages Expense debit balance 42,000. Dividends debit balance 3,500. Retained Earnings credit balance 51,000.

(Figure)Assume that the first two closing entries have been made and posted. Use the T-accounts provided as follows to:

  1. complete the closing entries
  2. determine the ending balance in the Retained Earnings account

T-Accounts. Income Summary debit 212,000 and credit 277,500. Retained Earnings credit balance 45,900. Dividends debit balance 7,500.

Problem Set B

(Figure)Identify whether each of the following accounts would be considered a permanent account (yes/no) and which financial statement it would be reported on (Balance Sheet, Income Statement, or Retained Earnings Statement).

  1. Common Stock
  2. Dividends
  3. Dividends Payable
  4. Equipment
  5. Income Tax Expense
  6. Income Tax Payable
  7. Service Revenue
  8. Unearned Service Revenue
  9. Net Income

(Figure)The following selected accounts and normal balances existed at year-end. Make the four journal entries required to close the books:

Accounts receivable $33,200, Prepaid insurance 6,000, Land 48,000, Accounts payable 27,050, Notes payable 65,800, Retained earnings 9,350, Dividends 2,200, Fees earned revenue 70,500, Selling expenses 41,770, Administrative expenses 22,400, Miscellaneous expense 1,835.

(Figure)The following selected accounts and normal balances existed at year-end. Notice that expenses exceed revenue in this period. Make the four journal entries required to close the books:

Accounts receivable $85,500, Prepaid insurance 18,000, Land 15,000, Accounts payable 82,350, Notes payable 35,000, Retained earnings 129,650, Dividends 15,000, Fees earned revenue 311,000, Selling expenses 210,000, Administrative expenses 105,000, Miscellaneous expense 8,500.

(Figure)Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 75,500 debit. Accounts receivable 15,500 debit. Accounts Payable 4,000 credit. Unearned Revenue 6,000 credit. Common Stock 20,000 credit. Retained Earnings 12,500 credit. Dividends 30,000 debit. Service revenue 355,000 credit. Advertising expense 30,000 debit. Rent expense 36,000 debit. Utilities expense 9,500 debit. Wages expense 201,000 debit. Total debits and total credits each are 397,500.

(Figure)Use the following Adjusted Trial Balance to prepare the four journal entries required to close the books:

Adjusted Trial Balance. Cash 8,625 debit. Accounts receivable 11,600 debit. Accounts Payable 8,450 credit. Unearned Revenue 1,500 credit. Common Stock 10,000 credit. Retained Earnings 12,275 credit. Dividends 2,000 debit. Service revenue 97,500 credit. Advertising expense 2,500 debit. Rent expense 18,000 debit. Utilities expense 12,000 debit. Wages expense 75,000 debit. Total debits and total credits each are 129,725.

(Figure)Use the following T-accounts to prepare the four journal entries required to close the books:

T-Accounts. Cash debit balance 17,340. Rent Revenue credit balance 240,000. Advertising expense debit balance 12,000. Insurance Expense debit balance 34,500. Salaries Expense debit balance 128,000. Dividends debit balance 22,000. Retained Earnings credit balance 59,500.

(Figure)Assume that the first two closing entries have been made and posted. Use the T-accounts provided below to:

  1. complete the closing entries
  2. determine the ending balance in the Retained Earnings account

T-Accounts. Income Summary debit 148,500 and credit 162,200. Retained Earnings credit balance 11,500. Dividends debit balance 4,000.

Thought Provokers

(Figure)Assume you are the controller of a large corporation, and the chief executive officer (CEO) has requested that you refrain from posting closing entries at 20X1 year-end, with the intention of combining the two years' profits in year 20X2, in an effort to make that year's profits appear stronger.

Write a memo to the CEO, to offer your response to the request to skip the closing entries for year 20X1.

(Figure)Search the Securities and Exchange Commission website (https://www.sec.gov/edgar/searchedgar/companysearch.html) and locate the latest Form 10-K for a company you would like to analyze. Submit a short memo:

  • State the name and ticker symbol of the company you have chosen.
  • Review the company's end-of-period Balance Sheet, Income Statement, and Statement of Retained Earnings.
  • Use the information in these financial statements to answer these questions:
    1. If the company had used the income summary account for its closing entries, how much would the company have credited the Income Summary account in the first closing entry?
    2. How much would the company have debited the Income Summary account in the second closing entry?

Provide the web link to the company's Form 10-K, to allow accurate verification of your answers.

(Figure)Assume you are a senior accountant and have been assigned the responsibility for making the entries to close the books for the year. You have prepared the following four entries and presented them to your boss, the chief financial officer of the company, along with the company CEO, in the weekly staff meeting:

Debit Service revenue and credit Income summary 522,000. Debit Income summary for 463,520 and credit Promotional expenses 48,520, Salaries expense 375,500, and Travel expenses 39,500. Debit Income summary and credit Retained Earnings 58,480. Debit Retained earnings and credit Dividends 28,000.

As the CEO was reviewing your work, he asked the question, "What do these entries mean? Can we learn anything about the company from reviewing them?"

Provide an explanation to give to the CEO about what the entries reveal about the company's operations this year.

Glossary

closing
returning the account to a zero balance
closing entry
prepares a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period
income summary
intermediary between revenues and expenses, and the Retained Earnings account, storing all the closing information for revenues and expenses, resulting in a "summary" of income or loss for the period
permanent (real) account
account that transfers balances to the next period, and includes balance sheet accounts, such as assets, liabilities, and stockholder's equity
post-closing trial balance
trial balance that is prepared after all the closing entries have been recorded
temporary (nominal) account
account that is closed at the end of each accounting period, and includes income statement, dividends, and income summary accounts

gagneesces1944.blogspot.com

Source: https://opentextbc.ca/principlesofaccountingv1openstax/chapter/describe-and-prepare-closing-entries-for-a-business/

0 Response to "Record the Closing Entry for Revenues and Expenses and Sky Blue Corporation"

Post a Comment

Iklan Atas Artikel

Iklan Tengah Artikel 1

Iklan Tengah Artikel 2

Iklan Bawah Artikel