Week 6

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Week 6

  1. 1. Week 6
  2. 2.  Need to update certain general ledger accounts at the end of the fiscal period.  Reflect “internal” transactions ◦ Supplies used ◦ Prepaid Insurance used  Matching principle: capture expenses in same fiscal period in which they helped generate that fiscal period’s revenue.
  3. 3.  Business knows how much remains “on hand” which is subtracted from trial balance amount.
  4. 4.  Permanent accounts retain their balance from fiscal period to fiscal period ◦ Assets, liabilities and owner’s capital (balance sheet)  Temporary accounts have their balances “closed” to a zero balance at the end of the fiscal period. ◦ Revenue, expense (income statement) and withdrawals  Recall the temporary accounts were “used up” when preparing the financial statements so their balances can’t be carried forward.
  5. 5.  Entry to close income statement accounts with a credit balance (revenue)  Entry to close income statement accounts with a debit balance (expenses)  Entry to record net income or net loss to owner’s capital  Entry to close owner’s drawing account to owner’s capital account
  6. 6.  Temporary account used to transfer net income or net loss to owner’s capital account. Income Summary Debit Credit Total Expenses Total Revenue
  7. 7.  To close an account with a credit balance, debit it an equal amount. The matching credit goes to the income summary account.
  8. 8.  To close an account with a debit balance, credit it an equal amount. The matching debit goes to the income summary account.
  9. 9.  Income Summary has a debit and credit amount. The difference should be equal to either net income or net loss calculated on the worksheet. Income Summary Debit Credit Total Expenses Total Revenue $8,772$5,991
  10. 10.  To close Income Summary with net income (credit balance), debit it an equal amount. Where does matching credit go?  Owner’s CAPITAL account is credited (increased).  This is how the net income actually gets placed in the owner’s account.  To close Income Summary with net loss (debit balance), credit it an equal amount. The matching debit goes to owner’s CAPITAL account to reduce it.
  11. 11.  To close the drawing account (debit balance), credit it an equal amount then the matching debit is applied to the owner’s CAPITAL account.
  12. 12.  As with adjusting entries, all closing entries must be journalized then posted to the affected ledger accounts to update the balances.  All temporary accounts MUST have a zero balance to start the new fiscal period.
  13. 13.  Once adjusting and closing entries are complete a post closing trial balance is prepared to make sure debits = credits moving in to the new fiscal period.  Account balances of permanent accounts are listed. Temporary accounts with a zero balances are NOT listed.  The ACCOUNTING CYCLE for the fiscal period is complete.
  14. 14. 1. Analyze transactions (source documents) 2. Journalize transactions 3. Post transaction data to ledger 4. Prepare trial balance/worksheet 5. Prepare financial statements 6. Journalize adjusting and closing entries 7. Post adjusting and closing entries 8. Prepare post-closing trial balance

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