Accounting 88 Notes week 6

-some accounts are temporary and we have to close these accounts at the end of an accounting period

-what exactly I mean by closing accounts means bringing their balance to zero!
-one of the reasons we do this is because we want to be able to have these accounts be fresh for a new
period.

-think of an example of if you had a convenience store, it would become tiresome to have to look at the
revenue of the store from its inception. By zeroing out the revenue we can compare periods by
comparing ledgers. This makes the data more useful

We DO NOT EVER ZERO OUT assets or liabilities.

The only accounts that are zeroed are out are as follows

-All Revenue Accounts

-All Expense Accounts

-Drawings

-The Capital account is how we track of owners equity so we do not zero this account out.

Recall our formula for owners equity is

Beginning O.E + Investments – Drawings + Revenue – Expenses = Ending Owners Equity.

 Revenue Capital

$4000

$6000 Dec 31 1500 6000 Dec 31

6000 Dec 31 Dec 31 500

Jan 1st 8000

Recall that Revenue has a credit balance. In order to make a Closing entry we need to bring this account
to zero, we can do this by debiting revenue for the amount of $6000. Because we have made a debit
somewhere, we need to make a credit, so in this case we can just credit Capital $6000 as well. (Closing
entries are Dec 31st)

The process for closing Revenue involves a

Dr (debit) to revenue to bring the balance to zero
Cr (credit) to capital to show where the revenue has moved

Recall that expenses have a debit balance. In order to make a Closing entry, we need to bring this
account to zero. We can do this by crediting the expense for the amount. Since we have made a credit,
we need to make a debit somewhere else, and this debit is then made to capital.

Rent Expense

$1500

1500 Dec 31

The Process for closing any expense accounts involves a

Cr (credit) to the expense to bring the balance to zero

Dr (debit) to capital to show where that expense has moved

Note that I only showed you rent expense, but all expenses are handled the same way
Because drawings is also a debit balance it will look exactly like an expense

Drawings

500

500 Dec 31

By closing our temporary accounts, we now have them ready for a new accounting period. This overall
creates less of a mess and makes things easier to comprehend.

All revenue accounts

All expense accounts
The drawings accounts

Are now all at zero and ready for a new period.

Date Account Dr Cr
Dec 31 Revenue $4000
Capital $4000
Close revenue

Dec 31 Capital 1500

Rent Expense 1500
Close Rent Expense

Dec 31 Capital 500

Drawings 500
Close Drawings