Closing Ents
Closing Ents
Closing Ents
ACCOUNTING FOR
CLOSING ENTRIES
Closing Process:
• Records the current year’s net income and dividends in Retained Earnings
• Zeros-out the balance in all revenue, expense and dividend accounts at year-end.
• Revenue and expense account balances are transferred into the Income Summary
account.
• The balance in the income summary represents net income which is then
transferred into Retained Earnings.
• Dividends are transferred directly into retained earnings, bypassing the income
summary because dividends are not part of the calculation of net income and do
not appear on the income statement.
• Closing entries are journalized and posted once per year at year-end after
financial statements have been prepared.
Trial Balances:
• The closing process begins with the adjusted trial balance.
• After the closing entries have been journalized and posted to the ledger, a Post-
Closing trial balance is prepared.
• The post-closing trial balance should have only permanent account balances. It
should also reflect the retained earnings balance as shown on the Statement of
Retained earnings.
Page 1 of 20
Revised Summer 2016 Chapter Review
• If any temporary account balances appear on the post-closing trial balance, there
is an error in the closing entries and they must be corrected.
Page 2 of 20
Revised Summer 2016 Chapter Review
Closing Process
• Closing prepares the general ledger for the next accounting cycle or year. The
general ledger is closed after financial statements have been prepared.
• All general ledger accounts are classified as Permanent or Temporary for purposes
of the closing process.
• Permanent Accounts are Balance Sheet accounts whose balances are carried
forward from year to year.
• Temporary accounts are the revenue, expense and dividend accounts which
measure activity for a specific time period. Temporary accounts are closed at the
end of the year.
• Income Summary is a special temporary account used only during the closing
process to summarize net income.
• The closing process involves four entries:
1) Zeroing-out the balance in each revenue account and transferring the total
revenues to the Income Summary account as a credit.
2) Zeroing-out the balance in each expense account and transferring the total
revenues to the Income Summary account as a debit.
3) Zeroing-out the balance in Income Summary, the net income (credit) or net
loss (debit) for the period, to the Retained Earnings account.
4) Zeroing-out the balance in each dividend account and transferring the total
dividends directly into retained earnings as a debit. Income Summary is not
used because dividends are not used to determine Net Income.
• After closing, only asset, liability and permanent stockholders’ equity accounts
should have balances.
Page 3 of 20
Revised Summer 2016 Chapter Review
Example #1
G Company
Adjusted Trial Balance
December 31
Cash $8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 400
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. $88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries & Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 208,250
Salaries and Wages Expense 72,500
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Depreciation Expense-Equipment 5,800
Depreciation Expense-Bldg 1,750
Miscellaneous Expense 4,050
Insurance Expense 2,900
Supplies Expense 1,550
Totals $444,900 $444,900
Page 4 of 20
Revised Summer 2016 Chapter Review
Solution #1
G Company
Post-Closing Trial Balance
December 31
Cash $8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 400
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. $88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries & Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 113,000
Totals $295,650 $295,650
Page 5 of 20
Revised Summer 2016 Chapter Review
Practice Problems
Practice Problem #1
Page 6 of 20
Revised Summer 2016 Chapter Review
Practice Problem #2
Page 7 of 20
Revised Summer 2016 Chapter Review
Practice Problem #3
Foley Staples Co. provided the adjusted trial balance as of year-end, August 31.
Adjusted Trial
Balance
Debit Credit
Accounts Receivable 17,610
Supplies 800
Prepaid Rent 9,000
Equipment 75,800
Accumulated Depreciation-
0 28,100
Equipment
Capital Stock 0 20,480
Wages Payable 0 2,500
Unearned Fees 0 1,500
Fees Earned 0 110,910
Wages Expense 44,700 0
Rent Expense 11,000 0
Depreciation Expense 3,400 0
Supplies Expense 1,180 0
163,490 163,490
Practice Problem #4
Required: List the steps in the order in which they are completed
Page 8 of 20
Revised Summer 2016 Chapter Review
Practice Problem #5
G Company provided the following information from its adjusted but not closed general ledger
in T-account form.
? 100 25 ? 45 ?
Required: Solve for the missing information to complete the closing process.
Page 9 of 20
Revised Summer 2016 Chapter Review
2. The closing entry for expense accounts includes a debit to Retained Earnings
and a credit to all expense accounts.
True False
3. The closing entry for dividends includes a debit to the Dividends account and a
credit to Retained Earnings.
True False
4. After closing entries are prepared, the balance of Retained Earnings is updated
to reflect the activity in the revenue, expense, and dividend accounts for the
period.
True False
5. The post-closing trial balance is a list of all accounts and their balances at a
particular date after the account balances have been updated for closing
entries.
True False
6. A post-closing trial balance is a list of all accounts and their balances after we
have updated account balances for adjusting entries.
True False
7. Income Summary is a permanent account only used for the closing process.
True False
8. Closing entries are required at the end of each accounting period to close all
ledger accounts.
True False
9. Closing entries are necessary so that retained earnings will begin each period
with a zero balance.
True False
10. If there is a net loss, Income Summary account would have a credit balance.
True False
Page 10 of 20
Revised Summer 2016 Chapter Review
11. The post-closing trial balance contains balance sheet accounts only.
True False
12. The entry to transfer net income to the retained earnings account would
include a debit to the retained earnings account.
True False
13. The entry to close the revenue account requires a debit to that account.
True False
14. The entry to close Prepaid insurance includes a credit to that account.
True False
15. Since a company prepares financial statements at the end of each month,
closing entries are prepared at the end of each month.
True False
Page 11 of 20
Revised Summer 2016 Chapter Review
4. The entry to close the income summary account when there is net income is:
a) Debit Retained Earnings; credit Income Summary
b) Debit Income Summary; credit Retained Earnings
c) Debit Income Summary; credit Dividends
d) Debit Dividends; credit Income Summary
6. After preparing and posting the closing entries for revenues and expenses, the
income summary account has a debit balance of $33,000. The entry to close
the income summary account will be:
a) Debit Dividends $33,000; credit Income Summary $33,000
b) Debit Income Summary $33,000; credit Dividends $33,000
c) Debit Income Summary $33,000; credit Retained Earnings $33,000
d) Debit Retained Earnings $33,000; credit Income Summary $33,000
Page 12 of 20
Revised Summer 2016 Chapter Review
8. The Retained Earnings account has a credit balance of $37,000 before closing
entries are made. Total revenues for the period are $55,200, total expenses
are $39,800, and dividends are $9,000. What is the correct closing entry for
the expense accounts?
a) Debit Income Summary $39,800; credit Expense accounts $39,800
b) Debit Expense accounts $37,000; credit Retained Earnings $37,000
c) Credit Expense accounts $39,800; debit Retained Earnings $39,800
d) Debit Expense accounts $39,800; credit Income Summary $39,800
11. Closing the temporary accounts at the end of each accounting period does all
of the following except:
a) Serves to transfer the effects of these accounts to the retained earnings
account on the balance sheet.
b) Prepares the dividends account for use in the next period
c) Has no effect on the retained earnings account
d) Causes retained earnings to reflect increases from revenues and decreases
from expenses and dividends.
Page 13 of 20
Revised Summer 2016 Chapter Review
14. The entry to close the Income Summary account at the end of the year, after
revenue and expense accounts have been closed, is:
a) Debit Retained Earnings $297,000; credit Income Summary $297,000
b) Debit Income Summary $81,300; credit Retained Earnings $81,300
c) Debit Income Summary $63,300; credit Retained Earnings $63,300
d) Debit Retained Earnings $81,300; credit Income Summary $81,300
15. The K Company paid $5,700 cash in dividends to the stockholders. The entry to
close the dividends account at the end of the year is:
a) Debit Retained Earnings $5,700; credit Dividends $5,700
b) Debit Dividends $5,700; credit Retained Earnings $5,700
c) Debit Retained Earnings $5,700; credit Salary Expense $5,700
d) Debit Income Summary $5,700; credit Retained Earnings $5,700
Page 14 of 20
Revised Summer 2016 Chapter Review
1. P
2. P
3. P
4. IS
5. IS
6. P
7. RE
8. P
9. IS
10. P
11. P
12. IS
13. P
14. P
15. P
16. IS
17. P
18. RE
19. IS
20. P
Page 15 of 20
Revised Summer 2016 Chapter Review
Practice Problem #2
Page 16 of 20
Revised Summer 2016 Chapter Review
Practice Problem #3
Practice Problem #4
1. Analyze transactions
2. Journalize transactions
3. Post transactions
4. Prepare an unadjusted trial balance
5. Adjust the ledger accounts
6. Prepare adjusted trial balance
7. Prepare the financial statements
8. Close the temporary accounts
9. Prepare a post-closing trial balance
Page 17 of 20
Revised Summer 2016 Chapter Review
Practice Problem #5
G Company provided the following information from its adjusted but not closed general ledger
in T-account form.
a) 100 100 25 d) 25 45 e) 45
Page 18 of 20
Revised Summer 2016 Chapter Review
Page 19 of 20
Revised Summer 2016 Chapter Review
Page 20 of 20