25 Describe and also Prepare closeup of the door Entries for a Business

In this chapter, we finish the last steps (steps 8 and also 9) that the accountancy cycle, the closing process. You will an alert that we perform not cover step 10, reversing entries. This is one optional step in the accounting cycle that you will certainly learn around in future courses. Steps 1 through 4 were extended in examining and recording Transactions and also Steps 5 with 7 were covered in The adjustment Process.

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Should You compromise to Please her Supervisor?
You space an accountant because that a tiny event-planning business. The service has been operation for number of years however does not have actually the sources for bookkeeping software. This means you room preparing all measures in the accounting cycle by hand.

It is the end of the month, and also you have completed the post-closing trial balance. You notice that over there is quiet a business revenue account balance listed on this attempt balance. Why is it considered an error to have actually a revenue account ~ above the post-closing attempt balance? how do you solve this error?


Introduction come the close up door Entries

Companies are required to near their books at the end of every fiscal year so the they can prepare their annual financial statements and also tax returns. However, most companies prepare monthly gaue won statements and also close their books annually, therefore they have a clear snapshot of company performance during the year, and also give users timely details to do decisions.

Closing entries prepare a agency for the next accounting period by clearing any type of outstanding balances in details accounts that need to not move over come the next period. Closing, or clearing the balances, means returning the account come a zero balance. Having actually a zero balance in these accounts is necessary so a firm can to compare performance across periods, particularly with income. It likewise helps the firm keep thorough documents of account balances affecting maintained earnings. Revenue, expense, and also dividend accounts influence retained earnings and also are closed so they can accumulate brand-new balances in the following period, i beg your pardon is an applications of the time duration assumption.

To additional clarify this concept, balances room closed to assure all revenues and also expenses are recorded in the proper duration and then begin over the following period. The revenue and also expense accounts need to start at zero each period, since we are measuring exactly how much revenue is earned and expenses incurred throughout the period. However, the cash balances, and the other balance paper accounts, are carried over indigenous the end of a current period to the start of the following period.

For example, a store has actually an inventory account balance of $100,000. If the save closed in ~ 11:59 p.m. ~ above January 31, 2019, climate the list balance when it reopened in ~ 12:01 a.m. Top top February 1, 2019, would certainly still be $100,000. The balance sheet accounts, such as inventory, would bring over into the next period, in this case February 2019.

The accounts that need to start v a clean or $0 balance going right into the next accounting duration are revenue, income, and also any dividends from January 2019. To identify the earnings (profit or loss) indigenous the month of January, the store demands to near the revenue statement information from January 2019. Zeroing January 2019 would then enable the store to calculate the income (profit or loss) because that the following month (February 2019), rather of merger it into January’s income and also thus offering invalid information exclusively for the month the February.

However, if the company also want to store year-to-date information from month to month, a separate collection of records can be maintained as the agency progresses through the remaining months in the year. Because that our purposes, assume that we room closing the publications at the end of each month unless otherwise noted.

Let’s look at at another example to highlight the point. Assume you own a tiny landscaping business. That is the end of the year, December 31, 2018, and also you room reviewing her financials because that the entire year. You watch that girlfriend earned $120,000 this year in revenue and also had costs for rent, electricity, cable, internet, gas, and food that totaled $70,000.

You also review the complying with information:

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The income an overview account is an intermediary between revenues and also expenses, and the Retained earnings account. That stores all of the closing information for revenues and expenses, causing a “summary” of income or loss for the period. The balance in the Income an overview account amounts to the net income or loss for the period. This balance is then transferred to the Retained earnings account.

Income an introduction is a nondefined account category. This way that the is no an asset, liability, stockholders’ equity, revenue, or price account. The account has actually a zero balance throughout the entire accounting duration until the close up door entries space prepared. Therefore, it will certainly not appear on any type of trial balances, consisting of the readjusted trial balance, and also will not appear on any type of of the gaue won statements.

You might be questioning yourself, “is the Income an overview account even necessary?” could we just close out revenues and also expenses straight into kept earnings and not have actually this extra short-term account? We could do this, yet by having actually the Income review account, you acquire a balance because that net income a 2nd time. This gives you the balance to compare to the income statement, and permits you to twin check the all revenue statement accounts room closed and have exactly amounts. If you put the revenues and expenses directly into preserved earnings, you will not see that inspect figure. No matter which means you pick to close, the same last balance is in retained earnings.


Following is a perform of accounts. State whether each account is a permanent or short-lived account.

rent expenseunearned revenueaccumulated depreciation, vehiclecommon stockfees revenuedividendsprepaid insuranceaccounts payable

Solution

A, E, and F are temporary; B, C, D, G, and also H space permanent.


Journalizing and also Posting close up door Entries

The eighth step in the audit cycle is preparing closing entries, which includes journalizing and posting the entries come the ledger.

Four entries occur throughout the close up door process. The very first entry close the door revenue accounts to the Income an introduction account. The second entry closes price accounts to the Income review account. The 3rd entry close the door the Income review account to retained Earnings. The 4th entry closes the dividends account to kept Earnings. The details needed to prepare closing entries originates from the changed trial balance.

Let’s explore each entrance in much more detail utilizing Printing Plus’s details from evaluating and record Transactions and The Adjustment process as our example. The print Plus readjusted trial balance because that January 31, 2019, is gift in (Figure).


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The T-accounts ~ this close up door entry would look like the following.

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The T-accounts ~ this closing entry would look like the following.

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Why space these two figures the same? The earnings statement summarizes your income, as does earnings summary. If both summarize your revenue in the exact same period, climate they need to be equal. If they do not match, climate you have an error.

The third entry calls for Income review to close come the Retained revenue account. To acquire a zero balance in the Income review account, there are guidelines to consider.

If the balance in Income summary before close up door is a credit transaction balance, you will debit Income an introduction and credit Retained earnings in the close up door entry. This situation occurs once a agency has a net income.If the balance in Income an introduction before closing is a debit balance, you will credit Income an overview and debit Retained earnings in the closing entry. This case occurs once a agency has a network loss.

Remember the net revenue will boost retained earnings, and also a network loss will decrease maintained earnings. The Retained income account increases on the credit side and also decreases top top the debit side.

Printing Plus has actually a $4,665 credit transaction balance in the Income an introduction account before closing, therefore it will debit Income an overview and credit preserved Earnings.

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Notice the the Income summary account is currently zero and is all set for use in the following period. The Retained earnings account balance is at this time a credit of $4,665.

The 4th entry requires Dividends to close come the Retained revenue account. Remember indigenous your past studies the dividends space not expenses, such as salaries paid to her employees or staff. Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits created by the firm to the owner of the company—in this case, the shareholders.

If dividend were no declared, close up door entries would certainly cease at this point. If dividends space declared, to get a zero balance in the dividend account, the entrance will display a credit transaction to Dividends and a debit to kept Earnings. Together you will find out in corporation Accounting, there are three contents to the declaration and also payment of dividends. The an initial part is the date of declaration, which create the responsibility or liability to salary the dividend. The second component is the day of document that determines that receives the dividends, and also the third part is the day of payment, i m sorry is the day that payments space made. To press Plus has $100 that dividends v a debit balance top top the changed trial balance. The closeup of the door entry will credit Dividends and debit maintained Earnings.

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Why to be income summary not provided in the dividends closing entry? Dividends room not an income statement account. Only earnings statement accounts help us summarize income, for this reason only income statement accounts should enter income summary.

Remember, dividends space a contra stockholders’ equity account. The is contra to maintained earnings. If us pay out dividends, it method retained income decreases. Retained revenue decreases on the debit side. The staying balance in Retained income is $4,565 ((Figure)). This is the exact same figure discovered on the explain of maintained earnings.


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The declare of retained earnings shows the period-ending retained revenue after the close up door entries have been posted. When you to compare the retained revenue ledger (T-account) come the declare of preserved earnings, the figures must match. It is important to understand retained revenue is not close up door out, that is just updated. Retained income is the only account that shows up in the closeup of the door entries that does not close. You should recall from your previous product that retained earnings are the earnings retained by the firm over time—not cash flow but earnings. Currently that we have closed the momentary accounts, let’s evaluation what the post-closing ledger (T-accounts) looks favor for printing Plus.


T-Account Summary

The T-account review for Printing plus after closing entries are journalized is presented in (Figure).


Notice that revenues, expenses, dividends, and income summary all have actually zero balances. Retained earnings maintains a $4,565 credit balance. The post-closing T-accounts will certainly be moved to the post-closing psychological balance, i beg your pardon is action 9 in the audit cycle.

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A company has revenue of $48,000 and also total expenses of $52,000. What would certainly the third closing entrance be? Why?


Key Concepts and also Summary

Closing entries: closeup of the door entries prepare a firm for the next period and zero the end balance in short-lived accounts.Purpose of closing entries: closeup of the door entries room necessary since they aid a agency review income accumulation during a period, and also verify data figures uncovered on the changed trial balance.Permanent accounts: irreversible accounts execute not close and are account that move balances to the next period. They encompass balance paper accounts, such as assets, liabilities, and stockholder’s equityTemporary accounts: temporary accounts room closed at the end of each accounting period and encompass income statement, dividends, and also income summary accounts.Income Summary: The Income an introduction account is an intermediary in between revenues and also expenses, and also the Retained revenue account. It stores all the closing details for revenues and expenses, bring about a “summary” of revenue or loss because that the period.Recording closing entries: there are 4 closing entries; closing revenues to revenue summary, closing costs to revenue summary, close up door income an overview to kept earnings, and close dividends to kept earnings.Posting closing entries: once all closing entries are complete, the details is transferred to the general ledger T-accounts. Balances in momentary accounts will show a zero balance.