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Module 7

The document outlines the steps involved in completing the accounting cycle, including preparing and posting adjusting, closing, and reversing entries, as well as preparing a post-closing trial balance. It explains the closing process for temporary accounts, detailing how income and expense accounts are closed to the Income Summary and subsequently transferred to the Capital Account. Finally, it emphasizes the importance of preparing a post-closing trial balance to ensure that all debits equal credits and that only balance sheet items remain.

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35 views18 pages

Module 7

The document outlines the steps involved in completing the accounting cycle, including preparing and posting adjusting, closing, and reversing entries, as well as preparing a post-closing trial balance. It explains the closing process for temporary accounts, detailing how income and expense accounts are closed to the Income Summary and subsequently transferred to the Capital Account. Finally, it emphasizes the importance of preparing a post-closing trial balance to ensure that all debits equal credits and that only balance sheet items remain.

Uploaded by

rpgervacio0203
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

COMPLETING THE

ACCOUNTING CYCLE
Chapter Objectives
• Prepare and post adjusting
entries, closing entries and
reversing entries
• Prepare a post-closing trial
balance.
Temporary accounts (income,
expense, withdrawal) accumulate
data for a specific accounting
period and facilitate the
preparation of income statements.
Purpose: At year-end, balances are transferred to
the Capital Account to reflect the cumulative net
result of all transactions.
Closing Process:
• Temporary accounts are closed when their
balances become zero.
• Balances are transferred using a Summary
Account (Income Summary) to close income
and expense accounts.
• Final transfer to the Capital Account
1. Close the income accounts

Income accounts have credit balances before the closing


entries are posted. For this reason, an entry debiting each
revenue account in the amount of its balance is needed to
close the account. The credit is made to the income
summary account.

The entry to close the income accounts for the Weddings


"R" Us is as follows:
2. Close the expense accounts

Expense accounts have debit balances before the closing


entries are posted. For this reason, a compound entry is
needed crediting each expense account for its balance and
debiting the income summary for the total. These data can
be found in the debit side of the income statement
columns of the worksheet.
3. Close the income summary account

After posting the closing entries involving the income and


expense accounts, the balance of the income summary
account will be equal to the profit or loss for the period. A
profit is indicated by a credit balance and a loss by a debit
balance. The income summary account, regardless of the
nature of its balance, must be closed to the capital
account. For the Weddings “R” Us, the entry is as follows:
4. Close the withdrawal account

The withdrawal account shows the amount by which capital


is reduced during the period by withdrawals of cash or
other assets of the business by the owner for personal use.
For this reason, the debit balance of the withdrawal
account must be closed to the capital account as follows:
PREPARATION OF A POST-CLOSING TRIAL
BALANCE (Step 9)

It is possible to commit an error in posting


the adjustments and closing entries to the
ledger accounts; thus, it is necessary to
test the equality of the accounts by
preparing a new trial balance. This final
trial balance is called a post-closing trial
balance.
 The post-closing trial balance verifies that
all the debits equal the credits in the trial
balance.
 The trial balance contains only balance
sheet items such as assets, liabilities, and
ending capital because all income and
expense accounts, as well as the withdrawal
account, have zero balances.

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