The Basic Accounting Cycle

Unit 2
The Basic Accounting Cycle

Chapter 3 Business Transactions and the Accounting Equation
Chapter 4 Transactions That Affect Assets, Liabilities, and Owner’s Capital
Chapter 5 Transactions That Affect Revenue, Expenses, and Withdrawals
Chapter 6 Recording Transactions in a General Journal
Chapter 7 Posting Journal Entries to General Ledger Accounts
Chapter 8 The Six-Column Work Sheet
Chapter 9 Financial Statements for a Sole Proprietorship
Chapter 10 Completing the Accounting Cycle for a Sole Proprietorship
Chapter 11 Cash Control and Banking Activities
Glencoe Accounting Unit 2 Chapter 10 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. 1
Chapter 10
Completing the Accounting Cycle for
a Sole Proprietorship
What You’ll Learn

 Explain why it is necessary to update accounts
through closing entries.
 Explain the purpose of the Income Summary
account.
 Explain the relationship between the Income
Summary account and the capital account.
 Analyze and journalize the closing entries.
 Post the closing entries to the general ledger.
 Prepare a post-closing trial balance.
 Define the accounting terms introduced in this
chapter.
Chapter 10, Section 1
Preparing Closing Entries
What Do You Think?

Why is it important to transfer the temporary account
balances to the permanent owner’s capital account?
SECTION 10.1 Preparing Closing Entries
Main Idea
Closing entries transfer the temporary account balances
to the owner’s capital account.
You Will Learn

 the last two steps of the accounting cycle.
 the purpose of closing entries.
 the purpose of the Income Summary account.
 how to journalize the closing entries.
Key Terms
 closing entries
 Income Summary account
 compound entry
Completing the Accounting Cycle

Closing entries are journal entries made at the end of an
accounting period to zero the balances in the temporary
accounts and transfer the net income or loss to the
capital account. After closing entries are made, the trial
balance can be prepared.
Starting the Eighth Step in the Accounting

Cycle: Journalizing the Closing Entries
The events leading up to the closing process are:
 Net income or loss is calculated on the work
sheet.
 The income statement is completed.
 The capital account ending balance is calculated
on the statement of changes in owner’s equity.
 The ending balance of the capital account
appears on the balance sheet.
 The capital account balance in the general ledger
does not equal the amount on the balance sheet.
Closing entries must be journalized and posted.
The Income Summary Account

The Income Summary account:
 serves as a simple income statement in the
general ledger.
 is used to accumulate revenue and expenses for
the period.
 equals the net income or loss for the period.
It is a temporary account that:
 is used only at the end of the accounting period to
summarize revenue and expense balances.
 does not have a normal balance.
 has a zero balance before and after the closing.
 does not appear on any financial statement.
Closing Revenue to Income Summary

To record closing entries in the general journal:
 Enter Closing Entries in the Description column.
 Enter the last day of the accounting period.
 Enter the name(s) and amount(s) of the
account(s) to be debited.
 Enter Income Summary as the name of the
account to be credited and the amount to be
credited.
Closing Expenses to Income Summary

A journal entry with two or more debits or credits is a
compound entry.
Closing Expenses to Income Summary

A journal entry with two or more debits or credits is a
compound entry.
Closing Income Summary to Capital

This entry transfers the balance of the Income
Summary account to the capital account.
An example of this closing entry can be seen here:



Closing Withdrawals to Capital
This entry transfers the balance of the withdrawals
account to the capital account.
An example of this closing entry is shown below:
Key Terms Review

 closing entries
Journal entries made to close, or reduce to zero,
the balances in the temporary accounts and to
transfer the net income or net loss for the period to
the capital account.
 Income Summary account
The general ledger account used to summarize the
revenue and expenses for the period.
 compound entry
A journal entry with two or more debits or two more
credits.
Chapter 10, Section 2
Posting Closing Entries and Preparing a
Post-Closing Trial Balance
What Do You Think?

What do you think a post-closing trial balance is?
SECTION 10.2 Posting Closing Entries and
Preparing a Post-Closing
Trial Balance
Main Idea
After the closing entries are posted, a post-closing trial
balance is prepared to verify that debits equal credits.
You Will Learn

 how to post the closing entries to the general
ledger.
 how to prepare a post-closing trial balance.
Trial Balance
Key Term
 post-closing trial balance
Trial Balance
Completing the Eighth Step in the
Accounting Cycle: Posting the Closing
Entries to the General Ledger
The next step in the closing process is to post closing
entries to general ledger accounts.
Trial Balance
Trial Balance
The Ninth Step in the Accounting Cycle:
Preparing a Post-Closing Trial Balance
Preparing a post-closing trial balance is the final step in
the accounting cycle. It is prepared after the closing
entries are posted in order to verify total debits equal
total credits.
Trial Balance
The Ninth Step in the Accounting Cycle:
Preparing a Post-Closing Trial Balance
Trial Balance
Key Term
 post-closing trial balance
A list of the permanent general ledger account
balances; it is prepared to prove the ledger after
the closing entries are posted.
CHAPTER 10 Chapter 10 Review
Question 1
As a result of the first two closing entries, the Income
Summary account had a debit of $2,250 and a credit of
$4,125.
(a) What does the debit of $2,250 represent?
(b) What does the credit of $4,125 represent?
List the process to use to complete the third closing
entry to close the balance of the Income Summary
account to Scott Jones, Capital.
Answer 1
Step 1: Calculate the balance of the Income Summary

account.
Credits are more than debits; therefore,
$4,125 - $2,250 = $1,875 credit balance,
which indicates a net income.
(continued)
Answer 1
Step 2: Identify the accounts affected.

The accounts Income Summary and Scott
Jones, Capital are affected.
(continued)
Answer 1
Step 3: Classify the accounts affected.

Income Summary is a temporary owner’s
equity account; Scott Jones, Capital is the
permanent owner’s capital account.
(continued)
Answer 1
Step 4: Are the accounts increased or decreased?

The Income Summary account is decreased
by its balance, $1,875, to zero. Scott Jones,
Capital is increased by $1,875.
(continued)
Answer 1
Step 5: Apply the debit/credit rule.

To reduce the Income Summary account to
zero, debit Income Summary $1,875. To
increase the capital account, credit Scott
Jones, Capital for $1,875.
Question 2
Why are all of the temporary accounts reset to zero at
the end of the fiscal year?
Answer 2
All revenues increase owner’s equity, and all expenses
reduce owner’s equity. These transactions are
separated from capital so the business can analyze how
a profit or loss was made during the year. At the end of
the year, the accumulation of these revenues and
expenses are transferred into the capital account. The
temporary accounts are reset to zero, which allows the
business to compare the revenue and expense data
from one period to the next.
Resources
Glencoe Accounting Online Learning Center
English Glossary
Spanish Glossary

The Basic Accounting Cycle

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Basic Accounting Cycle

Uploaded by

Copyright:

Available Formats

Unit 2

The Basic Accounting Cycle

What You’ll Learn

What Do You Think?

You Will Learn

Completing the Accounting Cycle

Starting the Eighth Step in the Accounting

The Income Summary Account

Closing Revenue to Income Summary

Closing Expenses to Income Summary

Closing Expenses to Income Summary

Closing Income Summary to Capital

Closing Income Summary to Capital

Closing Income Summary to Capital

Closing Income Summary to Capital

Key Terms Review

What Do You Think?

You Will Learn

Step 1: Calculate the balance of the Income Summary

Step 2: Identify the accounts affected.

Step 3: Classify the accounts affected.

Step 4: Are the accounts increased or decreased?

Step 5: Apply the debit/credit rule.

Glencoe Accounting Online Learning Center

You might also like