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Questions and Answers
Why are closing entries prepared at the end of an accounting period?
Why are closing entries prepared at the end of an accounting period?
- To correct errors that may have occurred during the accounting period.
- To adjust the balances of permanent accounts to reflect their current values.
- To prepare temporary accounts for the next accounting period by zeroing out their balances. (correct)
- To finalize the financial statements for external reporting purposes.
Which of the following accounts is NOT considered a temporary account?
Which of the following accounts is NOT considered a temporary account?
- Salaries Expense
- Withdrawals
- Service Revenue
- Accumulated Depreciation (correct)
In the closing process, what is the purpose of the Income Summary account?
In the closing process, what is the purpose of the Income Summary account?
- To track the cash inflows and outflows of the business.
- To permanently store the cumulative net income (or loss) of the company.
- To record owner's equity transactions.
- To serve as a temporary account for closing income and expense accounts. (correct)
Gray Electronic Repair Services has a net loss, what is the journal entry to close the Income Summary account?
Gray Electronic Repair Services has a net loss, what is the journal entry to close the Income Summary account?
For a sole proprietorship, which account is debited when closing the owner's drawing account?
For a sole proprietorship, which account is debited when closing the owner's drawing account?
Why closing entries are not needed for dividends under some corporations?
Why closing entries are not needed for dividends under some corporations?
If a company uses a temporary 'Dividends' account, which of the following describes the correct closing entry?
If a company uses a temporary 'Dividends' account, which of the following describes the correct closing entry?
What is the effect of the closing entries on the accounting equation?
What is the effect of the closing entries on the accounting equation?
A company forgot to record depreciation expense. How does the omission of this adjusting entry affect the closing process?
A company forgot to record depreciation expense. How does the omission of this adjusting entry affect the closing process?
After preparing closing entries, what balances should temporary accounts have?
After preparing closing entries, what balances should temporary accounts have?
Flashcards
Closing Entries
Closing Entries
Entries made at the end of an accounting period to zero-out temporary account balances, preparing records for the next period.
Temporary Accounts
Temporary Accounts
Accounts that are closed at the end of an accounting period. Includes revenue, expense, and withdrawal accounts.
Income Summary
Income Summary
A temporary account used during the closing process to summarize all revenues and expenses before transferring the balance to the capital account.
Purpose of Closing Entries
Purpose of Closing Entries
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Closing Income Accounts
Closing Income Accounts
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Closing Expense Accounts
Closing Expense Accounts
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Closing Income Summary
Closing Income Summary
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Closing Withdrawals
Closing Withdrawals
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Permanent Accounts
Permanent Accounts
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Result of Closing Entries
Result of Closing Entries
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Study Notes
- Closing entries prepare accounting records for the next period by zeroing out temporary account balances.
- Closing entries are dated December 31, 2021, according to the example.
Temporary Accounts
- Temporary accounts include revenue, expenses, and owner's withdrawal accounts (or dividends for corporations).
- Permanent accounts are not closed.
Four Steps for Closing Entries
- Close all income accounts to Income Summary.
- Close all expense accounts to Income Summary.
- Close Income Summary to the appropriate capital account (owner's capital, partners' capital, or retained earnings).
- Close withdrawals/distributions to the appropriate capital account.
Closing Entries Example: Gray Electronic Repair Services
Adjusted Trial Balance Information
- Cash: $7,480 (Debit)
- Accounts Receivable: $3,700 (Debit)
- Service Supplies: $600 (Debit)
- Furniture and Fixtures: $3,000 (Debit)
- Service Equipment: $16,000 (Debit)
- Accumulated Depreciation: $720 (Credit)
- Accounts Payable: $9,000 (Credit)
- Utilities Payable: $1,800 (Credit)
- Loans Payable: $12,000 (Credit)
- Mr. Gray, Capital: $13,200 (Credit)
- Mr. Gray, Drawing: $7,000 (Debit)
- Service Revenue: $9,850 (Credit)
- Rent Expense: $1,500 (Debit)
- Salaries Expense: $3,500 (Debit)
- Taxes and Licenses: $370 (Debit)
- Utilities Expense: $1,800 (Debit)
- Service Supplies Expense: $900 (Debit)
- Depreciation Expense: $720 (Debit)
Step 1: Close Income to Income Summary
- Debit Service Revenue $9,850.00
- Credit Income Summary $9,850.00
- Income Summary is a temporary account for closing income and expenses, eventually closed to capital.
Step 2: Close Expenses to Income Summary
- Debit Income Summary $8,790.00
- Credit Rent Expense $1,500.00
- Credit Salaries Expense $3,500.00
- Credit Taxes and Licenses $370.00
- Credit Utilities Expense $1,800.00
- Credit Service Supplies Expense $900.00
- Credit Depreciation Expense $720.00
Step 3: Close Income Summary to Capital
- Income Summary balance represents net income (income minus expenses).
- Initial credit to Income Summary: $9,850
- Subsequent debit to Income Summary: $8,790
- Income Summary credit balance: $1,060, representing net income.
- Debit Income Summary $1,060.00
- Credit Mr. Gray, Capital $1,060.00
- For net loss scenarios, debit the capital account and credit Income Summary.
Step 4: Close Withdrawals to Capital
- Drawing accounts track owner withdrawals in sole proprietorships or partnerships.
- Debit Mr. Gray, Capital $7,000.00
- Credit Mr. Gray, Drawing $7,000.00
- For corporations, dividends declared reduce Retained Earnings directly.
- If a temporary "Dividends" account is used:
- Debit Retained Earnings
- Credit Dividends
Conclusion
- Closing entries "restart" income and expense accounts.
- Mr. Gray, Capital ending balance: $7,260 ($13,200 + $1,060 - $7,000).
Key Takeaways
- Temporary accounts are closed to avoid mixing amounts between accounting periods.
- Income and expenses go to Income Summary, then to the capital account.
- Withdrawal or dividend accounts are closed to the capital account.
- The purpose is updating the capital balance and resetting temporary account balances.
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