Completing the Accounting Cycle

Chapter 7
 CLOSING JOURNAL ENTRIES
• Closing entries are prepared at the
end of the accounting period to
update the owner's capital account.
• This will also eliminate the balances
of the nominal accounts so that they
may be ready for the next period.
 Steps in Closing the Accounts
1. Close the income accounts.
2. Close the expense accounts.
3. Close the income summary account.
4. Close the drawing account.
Step 1: CLOSE THE INCOME ACCOUNTS

Since income accounts have normal credit balances,

each revenue account will have to be debited in the
amount of its balance to bring their balances to zero.
The credit is made to the income summary account.

2022
Sept. 30 Painting Revenue 350,000
Income Summary 350,000
To close income accounts.
Step 2: CLOSE THE EXPENSE ACCOUNTS
Expense accounts have normal debit balances, each of these will have to be
credited to close the account. Thus, a compound entry is needed considering
the number of expense accounts. The total of all expense accounts is then
debited to income summary. The entry to close the expense accounts of Niko
Ong Art Gallery:
Sept. 30, 2022
Income Summary 47,400
Salaries Expense 2,500
Utilities Expense 4,900
Bad Debts Expense 2,500
Depreciation Expense 10,000
Art Supplies Expense 3,000
Rent Expense 20,000
Insurance Expense 4,500
To close expense accounts.
Step 3: CLOSE THE INCOME SUMMARY ACCOUNT

Notice that after posting the entries involving the income and expense
accounts, the balance of the income summary account is exactly the net
income or net loss for the period. A credit balance indicates a net income and
a debit balance indicates a net loss. Regardless of whether the business yields
a net income or a net loss, the income summary account must be closed to the
capital account. For Niko Ong Art Gallery, the entry is:

2022
Sept. 30 Income Summary 302,600
Ong, Capital 302,600
To close income summary account to capital.

Note: The balancing figure of the income summary account to be closed to

capital is the net income or net loss of the business. In the case of Niko Ong Art
Gallery, P302,600 is the amount of net income.
Step 4: CLOSE THE DRAWING ACCOUNT

The drawing account represents the amount withdrawn

by the owner either in cash and non-cash assets for
personal use. It is for this reason that the debit balance
of the drawing account should be closed to capital. The
following entry is an illustration using Niko Ong Art
Gallery:

2022
Sept. 30 Ong, Capital 30,000
Ong, Drawing 30,000
To close drawing account to capital.
 POST CLOSING TRIAL BALANCE
• After the closing entries have been posted,
the post closing trial balance is prepared
from the general ledger accounts.
• This is necessary to assure that these entries
have been correctly posted.
• This will also check the equality of the
debits and credits after the closing entries.
 FINANCIAL STATEMENTS
1. Statement Financial Position
2. Statement of Financial Operations
3. Statement of Changes in Owner's Equity
4. Statement of Cash Flows

The above statements are prepared to provide

useful information to parties interested in the
financial information of the business.
END OF CHAPTER