Completing the

Chapter
Accounting Cycle

4
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Closing
Closing Process
Process
 Resets revenue,
1 - Identify accounts for
expense and
closing.
withdrawal account
balances to zero at
the end of the
period. 2 - Record and post
closing entries.
 Helps summarize a
period’s revenues
and expenses in the 3 - Prepare post-closing
Income Summary trial balance.
account.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Temporary
Temporary and
and Permanent
Permanent Accounts
Accounts
Revenues Assets

Liabilities
Dividends
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
Theclosing
closingprocess
process
applies
appliesonly
onlyto
to
temporary
temporaryaccounts.
accounts.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Recording
Recording Closing
Closing Entries
Entries

Close
Close Revenue
Revenue accounts
accounts
to
to Income
Income Summary.
Summary. Let’s see how the
closing process

Close
Close Expense
Expense accounts
accounts works!
to
to Income
Income Summary.
Summary.


Close
Close Income
Income Summary
Summary
account
account to
to Retained
Retained
Earnings.
Earnings.


Close
Close Dividends
Dividends to
to
Retained
Retained Earnings.
Earnings.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 25,000

10,000 25,000
Income Summary

Retained Earnings Withdrawals Account

5,000

Balances before closing. 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 Close Revenue 25,000 25,000
accounts to Income
Summary.
10,000 -
Income Summary
25,000

Retained Earnings 25,000 Withdrawals Account

5,000

5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000 Close Expense 25,000 25,000
accounts to Income
Summary.
- -
Income Summary
10,000 25,000

Retained Earnings 15,000 Withdrawals Account

5,000

The
Thebalance
balancein
inIncome
Income
Summary
Summaryequals
equalsnet
net 5,000
income.
income.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000 Close Income 25,000 25,000
Summary to
Retained Earnings.
- -
Income Summary
10,000 25,000
15,000

Owner's Earnings
Capital - Withdrawals Account
Retained
30,000 5,000
15,000

45,000
15,000 5,000

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Closing
Closing Process
Process
Expense Accounts Revenue Accounts
10,000 10,000 25,000 25,000

- -
Income Summary
10,000 25,000
15,000

- Withdrawals Account
Owner's Earnings
Retained Capital
5,000 30,000
15,000 5,000 5,000
15,000 Close Withdrawals
account to Owner’s 5,000
-
45,000
Capital.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Using the
adjusted trial
balance, let’s
prepare the
closing
entries for
FastForward.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close Revenue
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
 Close
Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

Dec.
Dec. 31
31 Consulting
Consulting revenue
revenue 7,850
7,850
Rental
Rental revenue
revenue 300
300
Income
Income summary
summary 8,150
8,150

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
 Close
Close Revenue
Revenue Accounts
Accounts to
to Income
Income
Summary
Summary

Consulting Revenue
7,850 7,850

-
Income Summary
7,850
300
Rental Revenue
300 300

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close Expense
accounts to
Income Summary.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
Close
Close Expense
Expense Accounts
Accounts to
to Income
Income
Summary
Summary

Dec. 31 Income summary 4,365

Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
 Close
Close Expense
Expense Accounts
Accounts to
to Income
Income
Close Expense Accounts to Income
Summary
Summary
Summary
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Income Summary
Salaries Expense Supplies Expense
4,365 7,850
1,610 1,610 1,050 1,050 3,785 300
- -

Net Income
Insurance Expense Utilities Expense
100 100 230 230
- -
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Close Income
Summary to
Retained Earnings

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
Close
Close Income
Income Summary
Summary to
to Owner’s
Owner’s
Capital
Capital

Dec-31 Income summary 3,785

Retained Earnings 3,785

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
 Close
Close Income
Income Summary
Summary to
to Owner’s
Retained
Close Income Summary to Retained
Capital
Earnings
Earnings

Retained Earnings Income Summary

4,365 7,850
3,785 3,785 300
-
3,785

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Close Dividends
to Retained
Earnings.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
Close
Close Dividends
Dividends to
to Retained
Retained Earnings
Earnings

Dec-31 Retained Earnings 600

C. Taylor /Dividends 600

Now, let’s look at the ledger accounts after

posting this closing entry.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 
 Close
Close Dividends
Dividends to
to Retained
Retained
Earnings
Earnings

C. Taylor,Dividends
600 600 Retained Earnings
600
3,185 3,785
-

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Post-Closing
Post-Closing Trial
Trial Balance
Balance

Let’s look at
 List
List of
of permanent
permanent FastForward’s
accounts post-closing trial
accounts and
and their
their
balances balance.
balances after
after posting
posting
closing
closing entries.
entries.

 Total
Total debits
debits and
and
credits
credits must
must be
be equal.
equal.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Post-Closing
Post-Closing Trial
Trial Balance
Balance

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Correcting
Correcting Entry
Entry
 Sometimes, errors
may occur in the
recording process

 Companies should
correct errors As
Soon As they
Discover them by
Journalizing and
Posting Correcting 1-Incorrect Entry
Entries

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Correcting
Correcting Entry
Entry
Meerkat Co journalized and posted a $50 Cash
collection on account from a customer as a debit to
Cash $50 and a credit to Service Revenue $50. Pass
correcting entry in its books.
Incorrect
Incorrect Entry
Entry $$ $$
Cash
Cash 50
50
Service
Service Revenue
Revenue 50
50

Correct
Correct Entry
Entry $$ $$
Cash
Cash 50
50
Account
Account Receivable
Receivable 50
50

Correcting
Correcting Entry
Entry $$ $$
Service
Service Revenue
Revenue 50
50
Account
Account Receivable
Receivable 50
50
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 Do it!

Sanchez Company discovered the following errors made in January

2020.
1.A payment of Salaries and Wages Expense of $600 was debited to
Supplies and credited to Cash, both for $600.
2.A collection of $3,000 from a client on account was debited to Cash
$200 and credited to Service Revenue $200.
3.The purchase of supplies on account for $860 was debited to
Supplies $680 and credited to Accounts Payable $680.
4.A cash payment of repair expense on equipment for £125 was
recorded as a debit to Equipment £152 and a credit to Cash £152.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Let’s discuss
the
components
of a classified
balance
sheet.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Classified
Classified Balance
Balance Sheet
Sheet
Assets Liabilities and Equity
Intangible Assets
Property Plant & Equipment Equity
Long-Term Investments Non-current Liabilities
Current Assets Current Liabilities

Current Assets/Liabilities are those items which are

expected to be received/paid within one year.

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 Intangible assets are long-term resources
used to produce or sell products and
services and that lack physical form.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 PPE are tangible long-lived assets used to
produce or sell products and services.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Long term investments are investments in
ordinary shares and bonds of other
companies that are normally held for many
years

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Current assets are expected to be sold,
collected, or used within one year.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Equity is the owner’s claim on the assets.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Non-current liabilities are obligations not due
within one year

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Current liabilities are obligations due within
one year

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Prepare
Prepare Classified
Classified Balance
Balance Sheet
Sheet
Assets Liabilities and Equity
Intangible Assets
Property Plant & Equipment Equity
Long-Term Investments Non-current Liabilities
Current Assets Current Liabilities

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

 Appendix
Appendix 44 A
A

Appendix 4A not in syllabus.

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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
 End of Chapter 4

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