A

THE BIG PICTURE

The Accounting
Cycle Completed

ccountants have come a long way from the old

stereotype of “bean counter”—a pale figure with
a green eyeshade who tends cloth-bound ledgers and
5
Simply or Peachtree accounting software. They don’t
have time to learn how to use it, much less use it
correctly. Many also can’t afford to pay a full-time
accountant to do their books. Enter the new account-
ing software consultant. These accountants are form-
ing different kinds of relationships with clients, even
to the extent of teaching them what has historically
been the job of the accountant. For instance, Brian
journals in a back room. In fact, today’s accountants Price of Price and Associates has built a $600,000
are more likely to be working from home, perhaps business by consulting on low-end or small-business
overlooking the Pacific Ocean while they serve clients accounting software. The typical client for a busi-
in other provinces via the Internet. At least that’s what ness like Price’s could be anyone from the mom-and-
life is like for Lance and Deanna Gildea, founders pop business bringing in $100,000–200,000 a year
of TAD, an online (or “virtual”) accounting service. to a $2-million services firm.
TAD accomplishes the entire accounting cycle Whether you end up being an online accoun-
using the accounting software of the client’s choice. tant or an accounting software consultant, you still
For the first step of the accounting cycle, which you need a thorough grounding in accounting basics.
learned in Chapter 3, TAD gets clients to scan their in- After all, in order to teach your clients how to do
voices, bank statements, and other source documents their books, as Brian Price does, you must be knowl-
into their computer. TAD even provides the scanner edgeable enough to explain each process clearly. In
free of charge to high-end clients. Scanned docu- this chapter, as you learn how to complete the ac-
ments are then transmitted to TAD, and within min- counting cycle and close the books, think how you
utes TAD updates the client’s accounts. One of the big would explain the process to a client. How will you
benefits of using TAD is that clients get real-time, 24- explain the process of posting adjusting and closing
hour access to their accounting data. They simply entries and preparing a post-closing trial balance?
use a Web browser to sign in to their home page
(prepared by TAD), where they can view, print, and
download reports, cheques, and other information. Sources: Based on Antoinette Alexander, “Pioneers on the
In addition to forming full-service outsourcing virtual frontier,” Accounting Technology, Jan/Feb 2000,
operations like TAD, accountants are morphing into pp. 18–24; Jeff Stimpson, “The new consultant,” The Practical
accounting software consultants. Harried entrepre- Accountant, September 1999, pp. 325–42; Antoinette
neurs or CEOs of small to mid-size companies often Alexander, “The Web: Giving life to a new generation,”
don’t know how to do more than boot up their Accounting Technology, March 2000, pp. 26–34.

ADJUSTING, CLOSING, AND POST-CLOSING TRIAL BALANCE

 ◆ Journalizing and posting adjusting entries (p. 170)
Chapter ◆ Journalizing and posting closing entries (p. 174)
Objectives ◆ Preparing a post-closing trial balance (p. 184)

I nClark’s
Chapters 3 and 4 we completed these steps of the manual accounting cycle for
Desktop Publishing Services:
Remember, for ease of Step 1: Business transactions occurred and generated source documents.
presentation we are using a Step 2: Business transactions were analyzed and recorded in a journal.
month as the accounting cycle Step 3: Information was posted or transferred from journal to ledger.
for Clark’s. In the business world,
Step 4: A trial balance was prepared.
the cycle can be any time period,
but is usually one year. Step 5: A worksheet was completed.
Step 6: Financial statements were prepared.
This chapter covers the following steps, which will complete Clark’s accounting
cycle for the month of May:
Step 7: Journalizing and posting adjusting entries
Step 8: Journalizing and posting closing entries
Step 9: Preparing a post-closing trial balance

LEARNING UNIT 5-1

Journalizing and Posting Adjusting Entries: Step 7 of the Accounting Cycle

RECORDING JOURNAL ENTRIES FROM THE WORKSHEET

The information in the worksheet is up to date. The financial reports prepared from
that information can give the business’s management and other interested parties
a good idea of where the business stands as of a particular date. The problem is
that the worksheet is an informal report. The information concerning the adjust-
At this point, many ledger ments has not been placed in the journal, or posted to the ledger accounts. This
accounts are not up to date. means that the books are not up to date and ready for the next accounting cycle to
begin. For example, the ledger shows $1,200 of prepaid rent (page 94), but the bal-
ance sheet we prepared in Chapter 4 shows an $800 balance. Essentially, the work-
sheet is a tool for preparing financial reports. Now we must use the adjustment
columns of the worksheet as a basis for bringing the ledger up to date. We do this
Purpose of adjusting entries. by adjusting journal entries (see Figure 5-1). Again, the updating must be done be-
fore the next accounting period starts. For Clark’s Desktop Publishing Services,
the next period begins on June 1.
Figure 5-1 shows the adjusting journal entries for Clark’s taken from the ad-
justments section of the worksheet (see Figure 5-2). Once the adjusting journal en-
tries are posted to the ledger, the accounts making up the financial statements that
were prepared from the worksheet will correspond with the updated ledger. (Keep
in mind that this is the same journal we have been using.) Let’s look at some simplified
T accounts to show how Clark’s ledger looked before and after the adjustments
were posted (see adjustments A to D on page 172).

170 CHAPTER 5
 CLARK'S DESKTOP PUBLISHING SERVICES
GENERAL JOURNAL

Page 2

Date Account Titles and Description PR Dr. Cr.

Adjusting Entries
May 31 Office Supplies Expense 514 5 0 0 00
Office Supplies 114 5 0 0 00
Office Supplies used up

31 Rent Expense 515 4 0 0 00

Prepaid Rent 115 4 0 0 00
Rent expired

31 Amortization Expense, DTP Equipment 516 8 0 00

Accumulated Amortization, DTP Equipment 122 8 0 00
Estimated amortization of asset

31 Office Salaries Expense 511 3 5 0 00

Salaries Payable 212 3 5 0 00
FIGURE 5-1 Accrued salary to May 31
Adjusting Journal Entries

Trial Balance Adjustments

Account Titles Dr. Cr. Dr. Cr.
Cash 61 5 5 00
Accounts Receivable 50 0 0 00
Office Supplies 6 0 0 00 (A) 5 0 0 00
Prepaid Rent 12 0 0 00 (B) 4 0 0 00
Desktop Publishing Equipment 6 0 0 0 00
Accounts Payable 3 3 5 0 00
Brenda Clark, Capital 10 0 0 0 00
Brenda Clark, Withdrawals 6 2 5 00
Desktop Publishing Fees 8 0 0 0 00
Office Salaries Expense 1 3 0 0 00 (D) 3 5 0 00
Advertising Expense 2 5 0 00
Telephone Expense 2 2 0 00
2 1 3 5 0 00 21 3 5 0 00

Office Supplies Expense (A) 5 0 0 00

Rent Expense (B) 4 0 0 00
Amortization Expense, (C) 8 0 00
DTP Equipment
FIGURE 5-2 Accumulated Amortization, (C) 8 0 00
DTP Equipment
Journalizing and Posting
Adjustments from the Salaries Payable (D) 3 5 0 00

Adjustments Section of the 1 3 3 0 00 1 3 3 0 00

Worksheet

THE ACCOUNTING CYCLE COMPLETED 171

Adjustments A to D in the Adjustment A
adjustments section of the
worksheet must be recorded in Before posting: Office Supplies 114 Office Supplies Expense 514
the journal and posted to the 600
ledger.
After posting: Office Supplies 114 Office Supplies Expense 514
600 500 500

Adjustment B
Before posting: Prepaid Rent 115 Rent Expense 515
1,200

After posting: Prepaid Rent 115 Rent Expense 515

1,200 400 400

Adjustment C
Before posting:
Amortization Accumulated
Desktop Publishing Expense, DTP Amortization,
Equipment 121 Equipment 516 DTP Equipment 122
6,000

After posting:
Amortization Accumulated
Desktop Publishing Expense, DTP Amortization,
Equipment 121 Equipment 516 DTP Equipment 122
6,000 80 80

This last adjustment shows the same balances for Amortization Expense and
Accumulated Amortization. However, in subsequent adjustments the Accumulated
Amortization balance will keep getting larger, but the debit to Amortization Expense
and the credit to Accumulated Amortization will be the same. We will see why in a
moment.

Adjustment D
Before posting: Office Salaries Salaries
Expense 511 Payable 212
650
650

After posting: Office Salaries Salaries

Expense 511 Payable 212
650 350
650
350

172 CHAPTER 5
 LEARNING UNIT 5-1 REVIEW

AT THIS POINT you should be able to:

◆ Define and state the purpose of adjusting entries. (p. 170)
◆ Journalize adjusting entries from the worksheet. (p. 171)
◆ Post journalized adjusting entries to the ledger. (p. 172)
◆ Compare specific ledger accounts before and after posting of the journalized
adjusting entries. (p. 172)

SELF-REVIEW QUIZ 5-1

( The blank forms you need are on pages 5-1 and 5-2 of the Study Guide with
Working Papers.)
Turn to the worksheet of P. Logan Company (p. 140) and (1) journalize and post
the adjusting entries and (2) compare the adjusted ledger accounts before and after
the adjustments are posted. T accounts with beginning balances are provided in
your Study Guide.

Solution to Self-Review Quiz 5-1

Quiz Tip
Page 2
These journal entries come from
the adjustments column of the Date Account Titles and Description PR Dr. Cr.
worksheet. Adjusting Entries
Dec. 31 Amortization Expense, Store Equipment 511 1 00
Accumulated Amortization, Store Equipment 122 1 00
Estimated amortization of equipment

31 Insurance Expense 516 2 00

Prepaid Insurance 116 2 00
Insurance expired

31 Supplies Expense 514 4 00

Store Supplies 114 4 00
Store Supplies used

31 Salaries Expense 512 3 00

Salaries Payable 212 3 00
Accrued salaries payable

THE ACCOUNTING CYCLE COMPLETED 173

 PARTIAL LEDGER
Before Posting After Posting
Amortization Accumulated Amortization Accumulated
Expense, Amortization, Expense, Amortization,
Store Equipment 511 Store Equipment 122 Store Equipment 511 Store Equipment 122
4 1 4
1

Prepaid Insurance 116 Insurance Expense 516 Prepaid Insurance 116 Insurance Expense 516
3 3 2 2

Store Supplies 114 Supplies Expense 514 Store Supplies 114 Supplies Expense 514
5 5 4 4

Salaries Expense 512 Salaries Payable 212 Salaries Expense 512 Salaries Payable 212
8 8 3
3

LEARNING UNIT 5-2

Journalizing and Posting Closing Entries: Step 8 of the Accounting Cycle

To make recording of the next fiscal year’s transactions easier, a mechanical step,
called closing, is taken by the accountant at Clark’s. Closing is used to end — or
close off—the revenue, expense, and withdrawal accounts at the end of the fiscal year.
The information needed to complete closing entries will be found in the income
statement and balance sheet sections of the worksheet.
To make it easier to understand this process, we will first look at the difference
between temporary (nominal) accounts and permanent (real) accounts.
Here is the expanded accounting equation we used in an earlier chapter:
Assets ! Liabilities " Capital # Withdrawals " Revenues # Expenses
Three of the items in that equation — assets, liabilities, and capital — are known
Permanent accounts are found as real or permanent accounts, because their balances are carried over from one
on the balance sheet. fiscal year to another. The other three items — withdrawals, revenue, and expenses —
are called nominal or temporary accounts, because their balances are not carried over
from one fiscal year to another. Instead, their balances are set at zero at the begin-
ning of each fiscal year. This allows us to accumulate new data about revenue, ex-
penses, and withdrawals in the new fiscal year. The process of closing summarizes
the effects of the temporary accounts on capital for that period by using closing
journal entries and by posting them to the ledger. When the closing process is com-
plete, the accounting equation will be reduced to:
Assets ! Liabilities " Ending Capital
After all closing entries are If you look back at page 142 in Chapter 4, you will see that we have calculated
journalized and posted to the the new capital on the balance sheet for Clark’s Desktop Publishing Services to be
ledger, all temporary accounts $14,275. But before the mechanical closing procedures are journalized and posted,
have a zero balance in the ledger. the capital account of Brenda Clark in the ledger is only $10,000 (Chapter 3, page 94).
Closing is a step-by-step process. Let’s look now at how to journalize and post closing entries.

174 CHAPTER 5
 HOW TO JOURNALIZE CLOSING ENTRIES
There are four steps to be performed in journalizing closing entries:
An Income Summary is a Step 1: Clear the revenue balances and transfer them to Income Summary. Income
temporary account located in the Summary is a temporary account in the ledger needed for closing. At the
chart of accounts under Owner’s end of the closing process there will be no balance in Income Summary.
Equity. It does not have a normal
balance of a debit or a credit.
Revenue → Income Summary
Step 2: Clear the individual expense balances and transfer them to Income Summary.
Expenses → Income Summary
Sometimes, closing the accounts Step 3: Clear the balance in Income Summary and transfer it to Capital.
is referred to as “clearing the
Income Summary → Capital
accounts.”
Step 4: Clear the balance in Withdrawals and transfer it to Capital.
Withdrawals → Capital
Figure 5-3 is a visual representation of these four steps. Keep in mind that this
information must first be journalized and then posted to the appropriate ledger
accounts. The worksheet presented in Figure 5-4 contains all the figures we will
need for the closing process.
Don’t forget two goals of closing:
1. Clear all temporary accounts
Step 1: Clear Revenue Balances and Transfer to Income Summary
in the ledger.
2. Update Capital to a new Here is what is in the ledger before closing entries are journalized and posted:
balance that reflects a
Desktop Publishing Fees 411 Income Summary 313
summary of all the temporary
accounts. 8,000

All numbers used in the closing The income statement section on the worksheet on page 176 shows that the Desktop
process can be found on the Publishing Fees have a credit balance of $8,000. To close or clear this to zero in the
worksheet in Figure 5-4 (page ledger, a debit of $8,000 is needed. But if we add an amount to the debit side, we must
176). Note that the account also add a credit—so we add $8,000 on the credit side of the Income Summary
Income Summary is not on the account.
worksheet.

Step 2: Step 1:
Expenses Revenue

Step 3:
INCOME SUMMARY
Net Income or Net Loss

Step 4:
Capital
Withdrawals
FIGURE 5-3
Four Steps in Journalizing
Closing Entries

THE ACCOUNTING CYCLE COMPLETED 175

 FIGURE 5-4
Closing Figures on the
Worksheet Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr.
Cash 6 1 5 5 00
Accounts Receivable 5 0 0 0 00
Office Supplies 1 0 0 00
Prepaid Rent 8 0 0 00
Desktop Publishing Equipment 6 0 0 0 00
Accounts Payable 3 3 5 0 00
Brenda Clark, Capital For Step 1 10 0 0 0 00
Brenda Clark, Withdrawals For Step 2 6 2 5 00
Desktop Publishing Fees 8 0 0 0 00
Office Salaries Expense 1 6 5 0 00 For Step 4
Advertising Expense 2 5 0 00
Telephone Expense 2 2 0 00

Office Supplies Expense 5 0 0 00

Rent Expense 4 0 0 00
Amortization Exp., DTP Equip. 8 0 00
Accum. Amort., DTP Equip. For Step 3 8 0 00
Salaries Payable 3 5 0 00
3 1 0 0 00 8 0 0 0 00 18 6 8 0 00 13 7 8 0 00
Net Income 4 9 0 0 00 4 9 0 0 00
8 0 0 0 00 8 0 0 0 00 18 6 8 0 00 18 6 8 0 00

The following is the journalized closing entry for step 1:

May 31 Desktop Publishing Fees 411 8 0 0 0 00

Income Summary 313 8 0 0 0 00
To close income account

This is what Desktop Publishing Fees and Income Summary should look like
in the ledger after step 1 closing entries are journalized and posted:

Desktop Publishing Fees 411 Income Summary 313

8,000 8,000 8,000
Closing Revenue Revenue

Note that the revenue balance is cleared to zero and transferred to Income Summary,
a temporary account also located in the ledger.

Step 2: Clear Individual Expense Balances and Transfer the Total

to Income Summary
Here is what is in the ledger for each expense before step 2 closing entries are jour-
nalized and posted. Each expense is listed on the worksheet in the debit column of
the income statement section as above.
Office Salaries Expense 511 Advertising Expense 512
650 250
650
350
176 CHAPTER 5
 Telephone Expense 513 Office Supplies Expense 514
220 500

Amortization Expense, DTP

Rent Expense 515 Equipment 516
400 80
The income statement section of the worksheet lists all the expenses as debits. If
we want to reduce each expense to zero, each one must be credited.
The following is the journalized closing entry for step 2:

The $3,100 is the total of the 31 Income Summary 313 3 1 0 0 00

expenses on the worksheet. Office Salaries Expense 511 1 6 5 0 00
Advertising Expense 512 2 5 0 00
Telephone Expense 513 2 2 0 00
Office Supplies Expense 514 5 0 0 00
Rent Expense 515 4 0 0 00
Amortization Expense, DTP Equipment 516 8 0 00
To close expense accounts

This is what individual expense accounts and the Income Summary should look
like in the ledger after step 2 closing entries are journalized and posted:

Office Salaries Expense 511 Advertising Expense 512

650 Closing 1,650 250 Closing 250
650
350

Telephone Expense 513 Office Supplies Expense 514

220 Closing 220 500 Closing 500

Rent Expense 515 Amortization Expense 516

400 Closing 400 80 Closing 80

Remember, the worksheet is a

Income Summary 313
tool. The accountant realizes that
the information about the total Expenses Revenue
of the expenses will be Step 2 3,100 8,000 Step 1
transferred to Income Summary.

Step 3: Clear Balance in Income Summary (Net Income) and

Transfer It to Capital
This is how the Income Summary and Brenda Clark, Capital, accounts look before
step 3:
Income Summary 313 Brenda Clark, Capital 311
3,100 8,000 10,000
4,900

Note that the balance of Income Summary (Revenue minus Expenses, or $8,000 !
$3,100) is $4,900. That is the amount we must clear from the Income Summary
account and transfer to the Brenda Clark, Capital, account.
THE ACCOUNTING CYCLE COMPLETED 177
 In order to transfer the balance of $4,900 from Income Summary (check the
bottom of the debit column of the income statement section on the worksheet; see
The opposite would take place if Figure 5-4) to Capital, it will be necessary to debit Income Summary for $4,900 (the
the business had a net loss. difference between the revenue and expenses) and credit or increase Capital of
Brenda Clark with $4,900.
This is the journalized closing entry for step 3:

31 Income Summary 313 4 9 0 0 00

Brenda Clark, Capital 311 4 9 0 0 00
Transfer profit for period to Capital acct.

At the end of these three steps, This is what the Income Summary and Brenda Clark, Capital, accounts will look
Income Summary has a zero like in the ledger after step 3 closing entries are journalized and posted:
balance. If we had a net loss the
end result would be to decrease Income Summary 313 Brenda Clark, Capital 311
Total of
capital. The entry would be to 3,100 8,000 Revenue
expenses 10,000
debit Capital and credit Income
Net Net income
Summary for the loss. Debit to close 4,900 4,900
account
income 4,900

Step 4: Clear the Withdrawals Balance and Transfer It to Capital

Today’s accounting software Next, we must close the Withdrawals account. The Brenda Clark, Withdrawals, and
handles the closing process Brenda Clark, Capital, accounts now look like this:
easily. However, accountants
usually have to do step 4 Brenda Clark, Withdrawals 312 Brenda Clark, Capital 311
separately. 625 10,000
4,900

To bring the Withdrawals account to a zero balance, and summarize its effect on
Capital, we must credit Withdrawals and debit Capital.
Remember, withdrawals are a non-business expense and thus not transferred to
Income Summary. The closing entry is journalized as follows:

31 Brenda Clark, Capital 311 6 2 5 00

Brenda Clark, Withdrawals 312 6 2 5 00
Transfer withdrawals to Capital account

Note that the $10,000 is a At this point the Brenda Clark, Withdrawals, and Brenda Clark, Capital, accounts
beginning balance since no would look like this in the ledger:
additional investments were
made during the period. Brenda Clark, Withdrawals 312 Brenda Clark, Capital 311
625 Closing 625 625 10,000
Withdrawals Beginning balance
4,900
Net income

178 CHAPTER 5
 CLARK'S DESKTOP PUBLISHING SERVICES
GENERAL JOURNAL
Date Account Title and Description Post.
2004 Ref. Dr. Cr.
May 31 Desktop Publishing Fees 411 8 0 0 0 00
Income Summary 313 8 0 0 0 00
To close income account

31 Income Summary 313 3 1 0 0 00

Office Salaries Expense 511 1 6 5 0 00
Advertising Expense 512 2 5 0 00
Telephone Expense 513 2 2 0 00
Office Supplies Expense 514 5 0 0 00
Rent Expense 515 4 0 0 00
Amortization Expense, DTP Equipment 516 8 0 00
To close expense accounts

31 Income Summary 313 4 9 0 0 00

Brenda Clark, Capital 311 4 9 0 0 00
Transfer profit to capital

31 Brenda Clark, Capital 311 6 2 5 00

Brenda Clark, Withdrawals 312 6 2 5 00
Transfer withdrawals to capital

Now let’s look at a summary of the closing entries. The complete ledger for
Clark’s Desktop Publishing Services is shown in Figure 5-5 beginning on this page.
Note that the word “adjusting” or “closing” is written in the explanation column
of individual ledgers, as for example in the one for Office Supplies. If the goals of clos-
ing have been achieved, only permanent accounts will have balances carried to the
next fiscal year. All temporary accounts should have zero balances.

CLARK'S DESKTOP PUBLISHING SERVICES

GENERAL LEDGER

Cash Account No. 111

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 1 GJ1 1 0 0 0 000 DR 1 0 0 0 000
1 GJ1 1 0 0 0 00 DR 9 0 0 000
1 GJ1 1 2 0 0 00 DR 7 8 0 000
7 GJ1 3 0 0 000 DR 1 0 8 0 000
11 GJ1 6 5 0 00 DR 1 0 1 5 000
20 GJ1 6 2 5 00 DR 9 5 2 500
25 GJ2 6 5 0 00 DR 8 8 7 500
28 GJ2 2 5 0 0 00 DR 6 3 7 500
FIGURE 5-5 29 GJ2 2 2 0 00 DR 6 1 5 500
Complete Ledger

THE ACCOUNTING CYCLE COMPLETED 179

(FIGURE 5-5 cont.)

Accounts Receivable Acct. No. 112

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 22 GJ1 5 0 0 0 00 DR 5 0 0 0 00

Office Supplies Acct. No. 114

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 3 GJ1 6 0 0 00 DR 6 0 0 00
31 Adjusting GJ2 5 0 0 00 DR 1 0 0 00

Prepaid Rent Acct. No. 115

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 1 GJ1 1 2 0 0 00 DR 1 2 0 0 00
31 Adjusting GJ2 4 0 0 00 DR 8 0 0 00

Desktop Publishing Equipment Acct. No. 121

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 1 GJ1 6 0 0 0 00 DR 6 0 0 0 00

Accumulated Amortization, Desktop Publishing Equipment Acct. No. 122

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Adjusting GJ2 8 0 00 CR 8 0 00

Accounts Payable Acct. No. 211

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 1 GJ1 5 0 0 0 00 CR 5 0 0 0 00
3 GJ1 6 0 0 00 CR 5 6 0 0 00
18 GJ1 2 5 0 00 CR 5 8 5 0 00
28 GJ2 2 5 0 0 00 CR 3 3 5 0 00

180 CHAPTER 5
Salaries Payable Acct. No. 212
Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Adjusting GJ2 3 5 0 00 CR 3 5 0 00

Brenda Clark, Capital Acct. No. 311 Note that this is

Date Post. DR the same ending
or
2004 Explanation Ref. Debit Credit CR Balance balance as on
page 142.
May 1 GJ1 10 0 0 0 00 CR 10 0 0 0 00
31 Closing (Net Income) GJ2 4 9 0 0 00 CR 14 9 0 0 00
31 Closing (Withdrawals) GJ2 6 2 5 00 CR 1 4 2 7 5 00 ➤

Brenda Clark, Withdrawals Acct. No. 312

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 20 GJ1 6 2 5 00 DR 6 2 5 00
31 Closing GJ2 6 2 5 00 – 0–

Income Summary Acct. No. 313

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Closing (Revenue) GJ2 8 0 0 0 00 CR 8 0 0 0 00
31 Closing (Expense) GJ2 3 1 0 0 00 CR 4 9 0 0 00
31 Closing (Net Income) GJ2 4 9 0 0 00 –0–

Desktop Publishing Fees Acct. No. 411

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 7 GJ1 3 0 0 0 00 CR 3 0 0 0 00
22 GJ1 5 0 0 0 00 CR 8 0 0 0 00
31 Closing GJ2 8 0 0 0 00 – 0–

Office Salaries Expense Acct. No. 511

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 11 GJ1 6 5 0 00 DR 6 5 0 00
25 GJ2 6 5 0 00 DR 1 3 0 0 00
31 Adjusting GJ2 3 5 0 00 DR 1 6 5 0 00
31 Closing GJ2 1 6 5 0 00 – 0–

THE ACCOUNTING CYCLE COMPLETED 181

(FIGURE 5-5 cont.)

Advertising Expense Acct. No. 512

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 18 GJ1 2 5 0 00 DR 2 5 0 00
31 Closing GJ2 2 5 0 00 –0–

Telephone Expense Acct. No. 513

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 29 GJ2 2 2 0 00 DR 2 2 0 00
31 Closing GJ2 2 2 0 00 –0–

Office Supplies Expense Acct. No. 514

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Adjusting GJ2 5 0 0 00 DR 5 0 0 00
31 Closing GJ2 5 0 0 00 –0–

Rent Expense Acct. No. 515

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Adjusting GJ2 4 0 0 00 DR 4 0 0 00
31 Closing GJ2 4 0 0 00 –0–

Amortization Expense, Desktop Publishing Equipment Acct. No. 516

Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
May 31 Adjusting GJ2 8 0 00 DR 8 0 00
Closing GJ2 8 0 00 –0–

182 CHAPTER 5
 LEARNING UNIT 5-2 REVIEW
AT THIS POINT you should be able to:
◆ Define closing. (p. 174)
◆ Differentiate between temporary (nominal) and permanent (real) accounts.
(p. 174)
◆ List the four mechanical steps of closing. (p. 175)
◆ Explain the role of the Income Summary account. (p. 175)
◆ Explain the role of the worksheet in the closing process. (p. 175)

SELF-REVIEW QUIZ 5-2

(The blank forms you need are on pages 5-2 and 5-3 of the Study Guide with Working
Papers.)
Go to the worksheet for P. Logan on page 140. Then (1) journalize and post the
closing entries and (2) calculate the new balance for P. Logan, Capital.

Solution to Self-Review Quiz 5-2

Closing Entries
Dec. 31 Revenue from Clients 410 2 5 00
Income Summary 312 2 5 00
To close income account

31 Income Summary 312 2 0 00

Rent Expense 518 2 00
Salaries Expense 512 1 1 00
Amortization Expense, Store Equipment 510 1 00
Insurance Expense 516 2 00
Supplies Expense 514 4 00
To close expense accounts

31 Income Summary 312 5 00

P. Logan, Capital 310 5 00
Transfer net income to Capital accounts

31 P. Logan, Capital 310 3 00

P. Logan, Withdrawals 311 3 00
Transfer withdrawals to Capital accounts

PARTIAL LEDGER
P. Logan, Capital 310 Revenue from Clients 410 Supplies Expense 514
3 14 25 25 4 4
5
16

P. Logan, Withdrawals 311 Amortization Expense, Store Equipment 510 Insurance Expense 516
3 3 1 1 2 2

THE ACCOUNTING CYCLE COMPLETED 183

 Income Summary 312 Salaries Expense 512 Rent Expense 518
20 25 11 11 2 2
5

Quiz Tip P. Logan, Capital $14

No calculations are needed in Net Income $5
the closing process. All numbers
Less: Withdrawals 3
come from the worksheet.
Income summary is a temporary Increase in Capital 2
account in the ledger. P. Logan, Capital (ending) $16

LEARNING UNIT 5-3

The Post-Closing Trial Balance: Step 9 of the Accounting Cycle and the
Accounting Cycle Reviewed

PREPARING A POST-CLOSING TRIAL BALANCE

The post-closing trial balance The last step in the accounting cycle is the preparation of a post-closing trial balance
helps prove the accuracy of the (sometimes called an opening trial balance), which lists only permanent accounts in
adjusting and closing process. It the ledger and their balances after adjusting and closing entries have been posted. This
contains the true ending figure post-closing trial balance aids in checking whether the ledger is in balance. It is im-
for capital. portant to do this checking because so many new postings go to the ledger from the
adjusting and closing process.
The procedure for taking a post-closing trial balance is the same as for a trial
balance, except that, since closing entries have closed all temporary accounts, the
post-closing trial balance will contain only permanent accounts (balance sheet).
Keep in mind, however, that adjustments have occurred.

THE ACCOUNTING CYCLE REVIEWED

Table 5-1 lists the steps we completed in the manual accounting cycle for Clark’s
Desktop Publishing Services for the month of May.
Insight: Most companies journalize and post adjusting and closing entries only at the
end of their fiscal year. A company that prepares interim reports may complete only
the first six steps of the cycle. Worksheets allow the preparation of interim reports
without the formal adjusting and closing of the books.
Insight: To prepare a financial report for April, the data needed can be obtained by
subtracting the worksheet accumulated totals for the end of March from the work-
sheet prepared at the end of April. In this chapter, we chose a month that would
show the completion of an entire cycle for Clark’s Desktop Publishing Services.

184 CHAPTER 5
 Table 5-1 Steps of the Manual Accounting Cycle

Step Explanation
1. Business transactions occur and Source documents are cash register
generate source documents. tapes, sales tickets, bills, cheques,
payroll cards, etc.
↓ ↓
2. Analyze and record business transactions Called journalizing
into a journal.
↓ ↓
3. Post or transfer information from Copying the debits and credits of the
journal to ledger. journal entries into the ledger accounts
↓ ↓
4. Prepare a trial balance. Summarizing each individual ledger
account and listing these accounts and
their balances to test for mathematical
accuracy in recording transactions
↓ ↓
5. Prepare a worksheet. A multicolumn form that summarizes
accounting information to complete
the accounting cycle
↓ ↓
6. Prepare financial statements. Income statement, statement of owner’s
equity, and balance sheet
↓ ↓
7. Journalize and post adjusting entries. Use figures in the adjustment columns of
worksheet.
↓ ↓
8. Journalize and post closing entries. Use figures in the income statement and
balance sheet sections of worksheet.
↓ ↓
9. Prepare a post-closing trial balance. Prove the mathematical accuracy of
the adjusting and closing process of
the accounting cycle.

LEARNING UNIT 5-3 REVIEW

AT THIS POINT you should be able to:
◆ Prepare a post-closing trial balance. (p. 184)
◆ Explain the relationship of interim reports to the accounting cycle. (p. 184)

SELF-REVIEW QUIZ 5-3

(The blank forms you need are on page 5-3 of the Study Guide with Working Papers.)
From the ledger on pages 179 to 182, prepare a post-closing trial balance.

THE ACCOUNTING CYCLE COMPLETED 185

 Solution to Self-Review Quiz 5-3
CLARK'S DESKTOP PUBLISHING SERVICES
POST-CLOSING TRIAL BALANCE
MAY 31, 2004

Dr. Cr.
Cash 6 1 5 5 00
Accounts Receivable 5 0 0 0 00
Office Supplies 1 0 0 00
Prepaid Rent 8 0 0 00
Desktop Publishing Equipment 6 0 0 0 00
Accumulated Amortization, Desktop Publishing Equipment 8 0 00
Accounts Payable 3 3 5 0 00
Salaries Payable 3 5 0 00
Brenda Clark, Capital 1 4 2 7 5 00
Totals 1 8 0 5 5 00 1 8 0 5 5 00

The post-closing trial balance contains only permanent accounts because all tem-
porary accounts have been closed. All temporary accounts are summarized in the
capital account.

T he doorbell rang at 1 a.m. “The

cavalry has arrived!” said the
giant in the doorway.
C LOSING IME T
Payroll Register and compared the
total to the Salaries Payable account.
It didn’t match! Remember, you hired
“You’re a real friend in need, Maria Sanchez on the 26th, so you
Lou,” said Fred gratefully, as he have to increase both the Salaries
opened the door. “I’ve been over and Expense and the Salaries Payable
over this, and I can’t get it to balance. lines, because she has accrued
And my monthly closing is due to wages. Salaries Expense is a debit
Dwayne at noon tomorrow! I hate and Salaries Payable is a credit. You
to bother you so late, but. . . .” Fred skipped the payable. Now,if you
had called Lou Jacobs, his roommate make this adjusting entry in the
at Dunkin’ Donuts University. Lou had ridden hard to General Journal, the worksheet will balance.”
the rescue—one and a half hours on the expressway. Fred’s sigh of relief turned into a big yawn, and
“You look as if you haven’t slept in days, Fred,” they both laughed. “Thank heavens you stayed awake
interrupted Lou. “This is what friends are for. Let me in accounting class!” said Fred, with another huge
at those accounts! You put a pot of coffee on. I’ll start yawn.
with payroll, because you hired someone this month.”
Dunkin’ Donuts company policy calls for a closing DISCUSSION QUESTIONS
before noon on the last Saturday every month. This
way comparisons between shops are most valid. 1. How would the adjustment be made if Maria
Dunkin’ Donuts University stresses to all shop owners Sanchez received $6.50 per hour and worked 25
that the monthly closing grows more difficult as the hours? Where would you place her accrued wages?
year progresses. Errors become harder to find, and 2. Fred bought six new uniforms for Maria Sanchez
accuracy becomes ever more critical. There is, for $72 each, but forgot to post this to the
unfortunately, no set way to find errors, and even no set Uniforms account. How much will the closing
place to start. Lou chose payroll because it is one of balance be off? In what way will it be off?
the largest expenses and because of the new hire. 3. Why does Dunkin’ Donuts require a monthly
At 2:45 a.m. Lou woke Fred, who was dozing. “I closing from each shop, no matter how much—or
think I’ve got it, Fred! It looks like you messed up on little—business each one does?
adjusting the Salaries Expense account. I looked at the
186 CHAPTER 5
Chapter Review

COMPREHENSIVE DEMONSTRATION PROBLEM WITH

SOLUTION TIPS
(The blank forms you need are on pages 5-4 to 5-10 of the Study Guide with Working
Papers.)

From the following transactions for Rolo Company, complete the entire accounting
cycle. The chart of accounts includes:

Assets Owner’s Equity

111 Cash 311 R. Kern, Capital
112 Accounts Receivable 312 R. Kern, Withdrawals
114 Prepaid Rent 313 Income Summary
115 Office Supplies
121 Office Equipment Revenue
122 Accumulated Amortization, 411 Fees Earned
Office Equipment
Expenses
Liabilities 511 Salaries Expense
211 Accounts Payable 512 Advertising Expense
212 Salaries Payable 513 Rent Expense
514 Office Supplies Expense
515 Amortization Expense,
Office Equipment

We will use unusually small numbers to simplify calculation and emphasize the
theory.
2004
Jan. 2 Rolo Kern invested $1,200 cash and $100 worth of office equipment to
open Rolo Co.
2 Paid rent for three months in advance, $300.
4 Purchased office equipment on account, $50.
6 Bought office supplies for cash, $40.
8 Collected $400 for services rendered.
12 Rolo paid his home electric bill from the company bank account, $20.
14 Provided $100 worth of services to clients who will not pay until next
month.
16 Paid salaries, $60.
18 Advertising bill for $70 was received but will not be paid until next
month.

Adjustment Data on January 31

a. Supplies on Hand $6
b. Rent Expired $100
c. Amortization, Office Equipment $20
d. Salaries Accrued $50

THE ACCOUNTING CYCLE COMPLETED 187

 Journalizing Transactions and Posting
to Ledger, Rolo Company

General Journal Page 1

Date Account Titles and Description PR Dr. Cr.

2004
Jan. 2 Cash 111 1 2 0 0 00
Office Equipment 121 1 0 0 00
R. Kern, Capital 311 1 3 0 0 00
Initial investment

2 Prepaid Rent 114 3 0 0 00

Cash 111 3 0 0 00
Rent paid in advance—3 months

4 Office Equipment 121 5 0 00

Accounts Payable 211 5 0 00
Purchased equipment on account

6 Office Supplies 115 4 0 00

Cash 111 4 0 00
Supplies purchased for cash

8 Cash 111 4 0 0 00
Fees Earned 411 4 0 0 00
Services rendered

12 R. Kern, Withdrawals 312 2 0 00

Cash 111 2 0 00
Personal payment of a bill

14 Accounts Receivable 112 1 0 0 00

Fees Earned 411 1 0 0 00
Services rendered on account

16 Salaries Expense 511 6 0 00

Cash 111 6 0 00
Paid salaries

18 Advertising Expense 512 7 0 00

Accounts Payable 211 7 0 00
Advertising bill, but not paid

Solution Tips to Journalizing and Posting Transactions

Jan. 2 Cash Asset ↑ Dr. $1,200

Office Equipment Asset ↑ Dr. $ 100
R. Kern, Capital Capital ↑ Cr. $1,300

Jan. 2 Prepaid Rent Asset ↑ Dr. $ 300

Cash Asset ↓ Cr. $ 300

188 CHAPTER 5
 Jan. 4 Office Equipment Asset ↑ Dr. $ 50
Accounts Payable Liability ↑ Cr. $ 50

Jan. 6 Office Supplies Asset ↑ Dr. $ 40

Cash Asset ↓ Cr. $ 40

Jan. 8 Cash Asset ↑ Dr. $ 400

Fees Earned Revenue ↑ Cr. $ 400

Jan. 12 R. Kern, Withdrawals Owner’s Equity (Withdr.) ↓ Dr. $ 20

Cash Asset ↓ Cr. $ 20

Jan. 14 Accounts Receivable Asset ↑ Dr. $ 100

Fees Earned Revenue ↑ Cr. $ 100

Jan.16 Salaries Expense Expense ↑ Dr. $ 60

Cash Asset ↓ Cr. $ 60

Jan. 18 Advertising Expense Expense ↑ Dr. $ 70

Accounts Payable Liability ↑ Cr. $ 70

Note: All account titles come from the chart of accounts. When journalizing, the PR
column of the general journal is blank. It is in the posting process that we update the
ledger. The Post. Ref. column in the ledger accounts tells us from which journal
page the information came. After posting to the account in the ledger, we fill in the
PR column of the journal, telling us to what account number the information was
transferred.

COMPLETING THE WORKSHEET

See the worksheet on page 190.

Solution Tips to the Trial Balance and Completion of the

Worksheet
After the posting process is complete from the journal to the ledger, we take the
ending balance in each account and prepare a trial balance on the worksheet. If an
account title has no balance, it is not listed on the trial balance. New titles on the work-
sheet will be added below the trial balance as needed.

THE ACCOUNTING CYCLE COMPLETED 189

 190
CHAPTER 5
ROLO COMPANY
WORKSHEET
FOR MONTH ENDED JANUARY 31, 2004

Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 1 1 8 0 00 1 1 8 0 00 1 1 8 0 00
Accounts Receivable 1 0 0 00 1 0 0 00 1 0 0 00
Prepaid Rent 3 0 0 00 (B) 1 0 0 00 2 0 0 00 2 0 0 00
Office Supplies 4 0 00 (A) 3 4 00 6 00 6 00
Office Equipment 1 5 0 00 1 5 0 00 1 5 0 00
Accounts Payable 1 2 0 00 1 2 0 00 1 2 0 00
R. Kern, Capital 1 3 0 0 00 1 3 0 0 00 1 3 0 0 00
R. Kern, Withdrawals 2 0 00 2 0 00 2 0 00
Fees Earned 5 0 0 00 5 0 0 00 5 0 0 00
Salaries Expense 6 0 00 (D) 5 0 00 1 1 0 00 1 1 0 00
Advertising Expense 7 0 00 7 0 00 7 0 00
1 9 2 0 00 1 9 2 0 00

Office Supplies Expense (A) 3 4 00 3 4 00 3 4 00

Rent Expense (B) 1 0 0 00 1 0 0 00 1 0 0 00
Amort. Expense, Office Equip. (C) 2 0 00 2 0 00 2 0 00
Accum. Amort., Office Equip. (C) 2 0 00 2 0 00 2 0 00
Salaries Payable (D) 5 0 00 5 0 00 5 0 00

2 0 4 00 2 0 4 00 1 9 9 0 00 1 9 9 0 00 3 3 4 00 5 0 0 00 1 6 5 6 00 1 4 9 0 00
Net Income 1 6 6 00 1 6 6 00
5 0 0 00 5 0 0 00 1 6 5 6 00 1 6 5 6 00
 ADJUSTMENTS

The amount of office supplies on Office Supplies Expense Expense ↑ Dr. $ 34 ($40 # $6)
hand ($6) is not the adjustment. Office Supplies Asset ↓ Cr. $ 34
Need to calculate amount used
up.

Expired Rent Expense Expense ↑ Dr. $100

Prepaid Rent Asset ↓ Cr. $100

Do not touch original cost of Amort. Exp., Office Equip. Expense ↑ Dr. $ 20
equipment. Accum. Amort., Office Equip. Asset (Contra) ↓ Cr. $ 20

Owed but not paid Salaries Expense Expense ↑ Dr. $ 50

Salaries Payable Liability ↑ Cr. $ 50

Note: This information is on the worksheet but has not been updated in the ledger.
(This will happen when we journalize and post adjustments at end of cycle.)
Note that the last four columns of the worksheet come from numbers on the
adjusted trial balance.
We move Net Income of $166 to the balance sheet credit column, since the
capital figure is the old one on the worksheet.

PREPARING THE FORMAL FINANCIAL STATEMENTS

ROLO COMPANY
INCOME STATEMENT
FOR MONTH ENDED JANUARY 31, 2004

Revenue:
Fees Earned $ 5 0 0 00

Operating Expenses:
Salaries Expense $ 1 1 0 00
Advertising Expense 7 0 00
Office Supplies Expense 3 4 00
Rent Expense 1 0 0 00
Amortization Expense, Office Equipment 2 0 00
Total Operating Expenses 3 3 4 00
Net Income $ 1 6 6 00

ROLO COMPANY
STATEMENT OF OWNER'S EQUITY
FOR MONTH ENDED JANUARY 31, 2004

R. Kern, Capital, January 1, 2004 $1 3 0 0 0 0

Net Income for January $ 1 6 6 00
Less: Withdrawals for January 2 0 00
Increase in Capital 1 4 6 00
R. Kern, Capital, January 31, 2004 $1 4 4 6 0 0

THE ACCOUNTING CYCLE COMPLETED 191

 ROLO COMPANY
BALANCE SHEET
JANUARY 31, 2004

Liabilities
Assets and Owner's Equity
Cash $1 1 8 0 0 0 Liabilities:
Accounts Receivable 1 0 0 00 Accounts Payable $ 1 2 0 00
Prepaid Rent 2 0 0 00 Salaries Payable 5 0 00
Office Supplies 6 00 Total Liabilities $ 1 7 0 00
Office Equipment $ 1 5 0 00 Owner's Equity:
Less: Acc. Amort. 2 0 00 1 3 0 00 R. Kern, Capital 1 4 4 6 00
Total Liabilities and
Total Assets $1 6 1 6 0 0 Owner's Equity $1 6 1 6 0 0

Solution Tips to Preparing the Financial Statements

The statements are prepared from the worksheet. (Many of the ledger accounts are
not up to date.) The income statement lists revenue and expenses. The net income
figure of $166 is used to update the statement of owner’s equity. The statement of
owner’s equity calculates a new figure for Capital, $1,446 (Beginning Capital + Net
Income ! Withdrawals). This new figure is then listed on the balance sheet (Assets,
Liabilities, and a new figure for Capital).

JOURNALIZING AND POSTING ADJUSTING AND CLOSING ENTRIES

See the journal at the top of page 193.

Solution Tips to Journalizing and Posting Adjusting and

Closing Entries

ADJUSTMENTS
The adjustments from the worksheet are journalized (same journal) and posted to the
ledger. Now ledger accounts will be brought up to date. Remember, we have already
prepared the financial reports from the worksheet. Our goal now is to get the ledger
up to date.

CLOSING
Note: Income Summary is a temporary account located in the ledger.

Goals
Where do I get my information 1. Adjust all temporary accounts in the ledger to zero balances.
for closing? 2. Determine a new figure for capital in the ledger.

192 CHAPTER 5
 General Journal Page 2

Date Account Titles and Description PR Dr. Cr.

Adjusting Entries
Jan. 31 Office Supplies Expense 514 3 4 00
Office Supplies 115 3 4 00
Supplies used

31 Rent Expense 513 1 0 0 00

Prepaid Rent 114 1 0 0 00
Rent expired

31 Amortization Expense, Office Equipment 515 2 0 00

Accumulated Amortization, Office Equip. 122 2 0 00
Estimated Amortization

31 Salaries Expense 511 5 0 00

Salaries Payable 212 5 0 00
Accrued salaries

Closing Entries
Step 1 31 Fees Earned 411 5 0 0 00
Income Summary 313 5 0 0 00
To close income accounts

Step 2 31 Income Summary 313 3 3 4 00

Salaries Expense 511 1 1 0 00
Advertising Expense 512 7 0 00
Office Supplies Expense 514 3 4 00
Closing Rent Expense 513 1 0 0 00
Amortization Expense, Office Equipment 515 2 0 00
To close expense accounts

Step 3 31 Income Summary 313 1 6 6 00

R. Kern, Capital 311 1 6 6 00
Transfer profit to Capital

Step 4 31 R. Kern, Capital 311 2 0 00

R. Kern, Withdrawals 312 2 0 00
Transfer withdrawals to Capital

Steps in the Closing Process

Step 1: Close revenue to Income Summary.
Step 2: Close individual expenses to Income Summary.
Step 3: Close balance of Income Summary to Capital. (This really is the net income
figure on the worksheet.)
Step 4: Close balance of Withdrawals to Capital.
All the journal closing entries are posted. (No new calculations are needed, since
all figures are on the worksheet.) The result in the ledger is that all temporary accounts
have a zero balance.

THE ACCOUNTING CYCLE COMPLETED 193

 GENERAL LEDGER

Cash Acct. No. 111 Rolo Kern, Capital Acct. No. 311
Date DR Date DR
Post. or Post. or
2004 Explanation Ref. Debit Credit CR Balance 2004 Explanation Ref. Debit Credit CR Balance
Jan. 2 GJ1 1 2 0 0 00 DR. 1 2 0 0 00 Jan. 2 GJ1 1 3 0 0 00 CR. 1 3 0 0 00
2 GJ1 3 0 0 00 DR. 9 0 0 00 31 Closing GJ2 1 6 6 00 CR. 1 4 6 6 00
6 GJ1 4000 DR. 8 6 0 00 31 Closing GJ2 2 0 00 CR. 1 4 4 6 00
8 G1 4 0 0 00 DR. 1 2 6 0 00
12 GJ1 2 0 00 DR. 1 2 4 0 00
16 GJ1 6 0 00 DR. 1 1 8 0 00
Rolo Kern, Withdrawals Acct. No. 312
Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
Jan. 12 GJ1 2 0 00 DR. 2 0 00
Accounts Receivable Acct. No. 112 31 Closing GJ2 2 0 00 –0–
Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
Jan. 14 GJ1 1 0 0 00 DR. 1 0 0 00
Income Summary Acct. No. 313
Date DR
Post. or
2004 Explanation Ref. Debit Credit CR Balance
Jan. 31 Closing GJ2 5 0 0 00 CR. 5 0 0 00
Prepaid Rent Acct. No. 114 31 Closing GJ2 3 3 4 00 CR. 1 6 6 00
Date DR 31 Closing GJ2 1 6 6 00 –0–
Post. or
2004 Explanation Ref. Debit Credit CR Balance
Jan. 2 GJ1 3 0 0 00 DR. 3 0 0 00
31 Adjustment GJ1 1 0 0 00 DR. 2 0 0 00
Fees Earned Acct. No. 411
Date Post. DR.
2004 Explanation Ref. Debit Credit CR. Balance
Office Supplies Acct. No. 115 Jan. 8 GJ1 4 0 0 00 CR. 4 0 0 00
Date DR 14 GJ1 1 0 0 00 CR. 5 0 0 00
Post. or
2004 Explanation Ref. Debit Credit CR Balance 31 Closing GJ2 5 0 0 00 –0–
Jan. 6 GJ1 4 0 00 DR. 4 0 00
31 Adjustment GJ2 3 4 00 DR. 6 00

Salaries Expense Acct. No. 511

Date Post. DR.
Office Equipment Acct. No. 121 2004 Explanation Ref. Debit Credit CR. Balance
Date Post. DR. Jan. 16 Closing GJ1 6 0 00 DR. 6 0 00
2004 Explanation Ref. Debit Credit CR. Balance 31 Adjusting GJ2 5 0 00 DR. 1 1 0 00
Jan. 2 GJ1 1 0 0 00 DR. 1 0 0 00 31 Closing GJ2 1 1 0 00 –0–
4 GJ1 5 0 00 DR. 1 5 0 00

Advertising Expense Acct. No. 512

Accumulated Amortization, Office Equipment Acct. No. 122 Date Post. DR.
Date Post. DR 2004 Explanation Ref. Debit Credit CR. Balance
or
2004 Explanation Ref. Debit Credit CR Balance Jan. 18 GJ1 7 0 00 DR. 7 0 00
Jan. 31 Adjustment GJ2 2 0 00 CR. 2 0 00 31 Closing GJ2 7 0 00 –0–

Rent Expense Acct. No. 513

Accounts Payable Acct. No. 211 Date Post. DR.
Date Post. DR 2004 Explanation Ref. Debit Credit CR. Balance
or
2004 Explanation Ref. Debit Credit CR Balance Jan. 31 Adjusting GJ2 1 0 0 00 DR. 1 0 0 00
Jan. 4 GJ1 5 0 00 CR. 5 0 00 31 Closing GJ2 1 0 0 00 –0–
18 GJ1 7 0 00 CR. 1 2 0 00

Office Supplies Expense Acct. No. 514

Salaries Payable Acct. No. 212
Date Post. DR.
Date DR 2004 Explanation Ref. Debit Credit CR. Balance
Post. or
2004 Explanation Ref. Debit Credit CR Balance Jan. 31 Adjusting GJ2 3 4 00 DR. 3 4 00
Jan. 31 Adjustment GJ2 5 0 00 CR. 5 0 00 31 Closing GJ2 3 4 00 –0–

Amortization Expense, Office Equipment Acct. No. 515

Date Post. DR.
2004 Explanation Ref. Debit Credit CR. Balance
Jan. 31 Adjusting GJ2 2 0 00 DR. 2 0 00
31 Closing GJ2 2 0 00 –0–

194 CHAPTER 5
These are all permanent
ROLO CO.
accounts. POST-CLOSING TRIAL BALANCE
JANUARY 31, 2004

Dr. Cr.
Cash 1 1 8 0 00
Accounts Receivable 1 0 0 00
Prepaid Rent 2 0 0 00
Office Supplies 6 00
Office Equipment 1 5 0 00
Accumulated Amortization, Office Equipment 2 0 00
Accounts Payable 1 2 0 00
Salaries Payable 5 0 00
R. Kern, Capital 1 4 4 6 00
Total 1 6 3 6 00 1 6 3 6 00

Solution Tips for the Post-Closing Trial Balance

The post-closing trial balance is a list of the ledger after adjusting and closing entries
have been completed. Note the figure for capital $1,446 is the new figure.
Beginning Capital $1,300
" Net Income 166
! Withdrawals 20
# Ending Capital $1,446
Next accounting period we will enter new amounts in the Revenues, Expenses, and
Withdrawals accounts. For now, the post-closing trial balance is made up only of
permanent accounts.

SUMMARY OF KEY POINTS

Learning Unit 5-1

1. After formal financial reports have been prepared, the ledger has still not been
brought up to date.
2. Information for journalizing adjusting entries comes from the adjustments sec-
tion of the worksheet.

Learning Unit 5-2

1. Closing is a mechanical process that is completed before the accountant can

record transactions for the next fiscal year.
2. Assets, Liabilities, and Capital are permanent (real) accounts; their balances are
carried over from one fiscal year to another. Withdrawals, Revenue, and Expenses
are nominal (temporary) accounts; their balances are not carried over from one
fiscal year to another.
3. Income Summary is a temporary account in the general ledger and does not
have a normal balance. It will summarize revenue and expenses and transfer the
balance to capital. Withdrawals do not go into Income Summary because they are
not business expenses.
4. All information for closing can be obtained from the worksheet.

THE ACCOUNTING CYCLE COMPLETED 195

 5. When closing is complete, all temporary accounts in the ledger will have a zero
balance, and all this information will be updated in the Capital account.
6. Closing entries are usually done only at year-end. Interim reports can be prepared
from worksheets that are prepared monthly, quarterly, etc.

Learning Unit 5-3

1. The post-closing trial balance is prepared from the ledger accounts after the ad-
justing and closing entries have been posted.
2. The accounts on the post-closing trial balance are all permanent accounts.

KEY TERMS
Adjusting journal entries Journal entries that are needed in order to up-
date specific ledger accounts to reflect correct balances at the end of an ac-
counting period (p. 170)
Closing The process of bringing the balances of all revenue, expense, and
withdrawal accounts to zero, ready for a new fiscal year (p. 174)
Closing journal entries Journal entries that are prepared to (a) reduce or
clear all temporary accounts to a zero balance or (b) update capital to a new
closing balance (p. 174)
Income Summary A temporary account in the ledger that summarizes rev-
enue and expenses and transfers its balance (net income or net loss) to capi-
tal. It does not have a normal balance. (p. 175)
Nominal accounts See Temporary accounts (p. 174)
Permanent accounts Accounts whose balances are carried over to the next
fiscal year; examples: assets, liabilities, capital (p. 174)
Post-closing trial balance The final step in the accounting cycle that lists
only permanent accounts in the ledger and their balances after adjusting and
closing entries have been posted (p. 184)
Real accounts See Permanent accounts (p. 174)
Temporary accounts Accounts whose balances at the end of a fiscal year
are not carried over to the next fiscal year. These accounts — Revenue,
Expenses, Withdrawals — help to provide a new or ending figure for capital
to begin the next fiscal year. Keep in mind that Income Summary is also a
temporary account. (p. 174)

196 CHAPTER 5
BLUEPRINT OF THE CLOSING PROCESS FROM THE WORKSHEET

WORKSHEET

Income Balance
Statement Sheet

Dr. Cr. Dr. Cr.

(1) (4)
Exp. (2) Rev. Withdr.
X
X
X
X
X
X
X
NI (3)

Expenses Revenue
Credit to close Debit to close
each individual XXX XXX
XXX expense XXX
1
2

Income Summary
Total of Expenses XXX Revenue XXX
Debit to close
(net income)* XXX
XXX XXX

3
Capital Withdrawals
Withdrawals XXX Beg. Capital XXX Credit to close
Net Income XXX XXX XXX
4

*If a net loss, it would require a credit to close.

The Closing Steps

1. Close revenue balances to Income Summary.
2. Close each individual expense and transfer the total of all expenses to Income
Summary.
3. Transfer the balance in Income Summary (Net Income or Net Loss) to Capital.
4. Close Withdrawals to Capital.

QUESTIONS, MINI EXERCISES, EXERCISES, AND PROBLEMS

Discussion Questions

1. When a worksheet is completed, what balances are found in the general ledger?
2. Why must adjusting entries be journalized even though the formal reports have
already been prepared?
3. “Closing slows down the recording of next year’s transactions.” Defend or reject
this statement with supporting evidence.
4. What is the difference between temporary and permanent accounts?

THE ACCOUNTING CYCLE COMPLETED 197