At the end of each fiscal period, certain general ledger accounts need to be updated and temporary accounts must be closed out. Temporary accounts, like revenue and expense accounts, have their balances reset to zero through closing entries. Closing entries credit revenue accounts and debit expense accounts, then transfer the net income or loss to the owner's capital account through an income summary account. Once adjusting and closing entries are posted, a post-closing trial balance is prepared to verify the accounting cycle for the period is complete.

1. Week 6

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.  Business knows how much remains “on hand”
which is subtracted from trial balance amount.

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.  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.  Temporary account used to transfer net income or
net loss to owner’s capital account.
Income Summary
Debit Credit
Total Expenses Total Revenue

7.  To close an account with a credit balance, debit it an
equal amount. The matching credit goes to the income
summary account.

8.  To close an account with a debit balance, credit it an
equal amount. The matching debit goes to the income
summary account.

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

11.  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.

12.  To close the drawing account (debit balance),
credit it an equal amount then the matching debit
is applied to the owner’s CAPITAL account.

13.  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.

14.  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.

15. 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