Chapter 5

Closing Entries and

the Post-Closing
Trial Balance

College Accounting
10th Edition

McQuaig

McQuaig
Bille

Bille

Nobles
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine
51
2011 Cengage Learning
University

Steps
Steps in
in the
the Accounting
Accounting Cycle
Cycle
Step 1.

Step 2.

Analyze
source
documents
and record
business
transactions in
a journal.

End of the
accounting
period

Post journal
entries to the
accounts in
the ledger.

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Step 3.

Prepare the trial balance.

Step 4.

Gather adjustment data and record the adjusting

entries on a work sheet.

Step 5.

Complete the work sheet.

End of the
accounting
period

To the income
statement
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Step 6.
Prepare
financial
statements
from the data
on the work
sheet.

From work sheet

To journalize
adjusting entries

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Step 7. Journalize
and post the
adjusting entries
from the data on the
work sheet.
Step 8. Journalize
and post the closing
entries.
Step 9. Prepare a
post-closing trial
balance.

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Purpose
Purpose of
of Closing
Closing Entries
Entries
The purpose of closing entries is to close
(or zero) the temporary-equity or nominal
accounts, especially Revenue, Expenses,
and Drawing accounts.
Closing entries are made after the last
adjusting entry and after the financial
statements have been prepared.
Closing entries update the owners capital
account.
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Procedure
Procedure for
for Closing
Closing
The procedure for closing is simply to balance
off the account; in other words, to make the
balance equal to zero.

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Steps
Steps in
in the
the Closing
Closing Procedure
Procedure
Step 1. Close the revenue account(s) into
Income Summary.
Step 2. Close the expense accounts into
Income Summary.
Step 3. Close the Income Summary account
into the Capital account, transferring
the net income or net loss to the
Capital account.
Step 4. Close the Drawing account into the
Capital account.
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Closing
Closing the
the Accounts
Accounts for
for Conners
Conners
Whitewater
Whitewater Adventure
Adventure
Step 1. Close the revenue account(s) into
Income Summary.

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Step 2. Close the expense account(s) into

Income Summary.

to Income Summary

Balance

Utilities Expense
+
225 Closing

Insurance Expense
+
Balance
625 Closing

225

625

Depreciation Expense, Equipment

+
Balance
512 Closing
512

510

Step 2. Close the expense account(s) into

Income Summary.

Balance

Wages Expense
+
2,832 Closing

2,832

Balance

Rent Expense
+
1,250 Closing

1,250

Balance

Supplies Expense
+
675 Closing

675

Advertising Expense
+
Balance
620 Closing

Income Summary
+
(Expenses) 6,739 (Revenue) 23,320

620
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Step 3. Close the Income Summary account

into the Capital account, transferring
the net income or net loss to the
Capital account.

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Step 4. Close the Drawing account into the

Capital account.

Balance

3,500

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Closing
Closing Entries
Entries for
for Conners
Conners
Whitewater
Whitewater Adventures
Adventures

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In case there is a net loss, Income Summary

and Capital are both reduced. Assume J. Doe
Company experienced a $600 net loss.

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The resulting journal entry:

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Closing
Closing Entries
Entries Taken
Taken
Directly
Directly from
from the
the Work
Work Sheet
Sheet
You can gather information for the closing
entries either directly from the ledger
accounts or from the work sheet (figures
for three of the four entries can be taken
from the last four columns) .
You may plan the closing entries by
balancing off all the figures that appear in
the Income Statement columns.
In the Item column of the ledger account,
we write the word Closing.
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Partial work sheet for Conners Whitewater Adventures

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Posting
Posting the
the Closing
Closing Entries
Entries
Accountants call the accounts that are to be
closed (such as revenue, expenses, Income
Summary, and Drawing) nominal
(temporary-equity) accounts.
Accountants call the accounts that remain
open from one fiscal period to the next real
(permanent) accounts.

519

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The
The Post-Closing
Post-Closing Trial
Trial Balance
Balance
To verify the balances of the accounts that remain open, a postclosing trial balance is prepared using the final balance figures
from the ledger accounts.
Note that the accounts listed in the post-closing trial balance are
the real or permanent accounts.

The Post-Closing
Trial Balance

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Tracking
Tracking Down
Down an
an Error
Error
If the totals of the post-closing trial balance are not equal,
heres the recommended procedures for tracking down
the error.
1. Re-add the trial balance columns.
2. Check to see that the figures were correctly transferred
from the ledger accounts to the post-closing trial
balance.
3. Verify the posting of the adjusting entries and the
recording of the new balances.
4. Make sure that the closing entries have been posted
and that all revenues, expense, Income Summary, and
Drawing accounts have zero balances.
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Cash
Cash and
and Accrual
Accrual Accounting
Accounting
Under the cash basis of accounting,
revenue is recorded when it is received in
cash, and generally expenses are recorded
when they are paid in cash.
Under the accrual basis of accounting,
revenue is recorded when it is earned, and
expenses are recorded when they are
incurred.

524

Interim
Interim Statements
Statements
Financial statements prepared during the
fiscal year, for periods of less than twelve
months, are called interim statements.
A business may prepare the financial
statements monthly to provide up-to-date
information about the results of operations.

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