Accounting Cycle and Closing Entries

Completing the Accounting Cycle

• The accounting cycle is a series of steps to record and summarize financial transactions.
• Steps include identifying transactions, recording them, posting to a general ledger, preparing an unadjusted trial balance, adjusting journal entries, preparing an adjusted trial balance, preparing financial statements, and closing the accounts.
• The cycle ensures accurate financial reporting.

Concepts Underlying Closing Entries

• Closing entries are journal entries made at the end of an accounting period.
• Two main purposes: setting the stage for the next accounting period and summarizing period revenues and expenses.
• Closing entries zero out temporary accounts (revenue, expense, withdrawal) for the next period. This makes recording easier.
• The Income Summary account is a temporary account to summarize period revenues and expenses; its balance equals the net income or loss.
• The net income or loss is transferred to the owner's Capital account.

Overview of the Closing Entries

• Expense accounts are closed to the Income Summary account.
• Revenue accounts are closed to the Income Summary account.
• Withdrawals are closed to the owner's Capital account.
• The Income Summary account is closed to the owner's Capital account.

Concepts Underlying Closing Entries (continued)

• Periodicity is the process of splitting a business's life into time periods to estimate its net income.
• Permanent accounts (real accounts) carry their end-of-period balances to the next accounting period. They're balance sheet accounts (assets, liabilities, owner's equity.)
• Temporary accounts (nominal accounts) are those closed at the end of each period (revenues and expenses).

Preparing Closing Entries

• Steps: close credit balances on income statement accounts to Income Summary, close debit balances on income statement accounts to Income Summary, close the Income Summary account balance to owner's Capital, and close the Withdrawals account balance to owner's Capital.
• Data for closing entries is usually taken from an adjusted trial balance.

Preparing Closing Entries from the Adjusted Trial Balance -- Step 1: Closing the Credit Balances

• On July 31st, Design Revenue of $13,600 was closed to Income Summary.
• Debit Design Revenue $13,600, Credit Income Summary $13,600.
• This reduces the owner's equity associated with revenue. It increases the owner's equity through net income.

Preparing Closing Entries from the Adjusted Trial Balance -- Steps 2

• Expense accounts are closed to the Income Summary account.
• This decreases the owner's equity.

Preparing Closing Entries from the Adjusted Trial Balance -- Step 3: Closing the Income Summary Account

• On July 31st, Income Summary with a $3,960 balance was closed to J. Blue, Capital.
• Debit Income Summary $3,960, Credit J. Blue, Capital $3,960.
• This reduces the owner's equity via Income Summary, and increases the capital account.

Preparing Closing Entries from the Adjusted Trial Balance -- Step 4: Closing the Withdrawals Account

• On July 31st, Withdrawals with a $2,800 balance was closed to J. Blue, Capital.
• Debit Withdrawals $2,800. Credit J. Blue, Capital $2,800.
• This decreases the owner's equity related to withdrawals.

The Accounts After Closing

• After closing entries, revenue, expense, and withdrawal accounts (temporary) have zero balances.
• Owner's Capital account reflects net income or loss and withdrawals.
• Permanent accounts (balance sheet) reflect corrected balances and are carried forward.

Post-Closing Trial Balance

• A post-closing trial balance shows permanent account balances, ensuring debit and credit equality.

Exercise (Fountas Recreational Park)

• Partial adjusted trial balance is provided, requiring closing entries and calculating the ending balance for owner's Capital.

Reversing Entries

• Optional journal entries at the beginning of a period, reversing adjusting entries made in the previous period.
• Simplifies bookkeeping and reporting.
• Debits prior period credits, credits prior period debits.

Adjusting Entry to Accrue Wages Expense

• Accrued wages expense are wages incurred but not paid (recorded at period-end).
• Increases Wages Payable and Wages Expense.

Payment of Wages

• Paying wages decreases Cash and increases Wages Expense.
• Reversing entries help simplify recording payments.

Effect of Using a Reversing Entry on the Wages Expense Account

• Reversing entries streamline accounting, avoiding double-counting expenses or revenues.
• Zeroing out temporary accounts at period-start simplifies future recording.

Reversing Entry for Accrued Revenue

• Reversing entries apply to accrued expenses or revenues.
• Reverses the prior period's adjusting entry for accrued revenue earned.

This quiz covers the essential steps of the accounting cycle, including recording transactions and preparing financial statements. It also delves into the concepts of closing entries, their purposes, and how they prepare accounts for the next period. Master the fundamentals of accounting principles through this comprehensive quiz.