Title | L6 Closing Entries - Week 6 |
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Author | Bonzo |
Course | Accounting in Society |
Institution | Macquarie University |
Pages | 3 |
File Size | 345 KB |
File Type | |
Total Downloads | 57 |
Total Views | 143 |
Week 6...
ACCG100– Closing Entries Week 6- Lecture
Learning Intention -
What are Closing Entries? Why we record them? How we record them? Posting-closing trial balance
Temporary and Permanent Accounts -
Temporary accounts relate to only a given accounting period o i.e. revenues, expenses, drawings/dividends Permanent (real) Accounts are carried forward to future accounting periods o i.e. assets, liabilities, equity (capital, retained earnings)
Closing Entries -
closing entries are journal entries that effectively close all temporary accounts to the permanent equity A special temporary account “Profit or loss Summary” accounts, is created to facilitate the closing process Income and expense accounts then begin to the next accounting period with a zero balance
Step 1 -
Close all income accounts (-> zero bal.) to the P & L Summary account:
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Because INCOME accounts have a natural CREDIT balance, we must debit to close each GL must be zero *There may be more than 1 income account – all must be closed*
Step 2 -
Close all Expense accounts (-> zero bal.) to P & L Summary account:
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Because EXPENSES have a natural DEBIT balance, we must credit all expense to close each GL must be zero *There may be more than 1 expense account – all must be closed*
Step 3 FOR SOLE TRADER - Close P & L Summary account to the Capital account a) If the P & L Summary account has a CR balancer (i.e. net profit)
b) If the P & L Summary account has a DR balance (i.e. net loss)
*We INCREASE Capital account if profit is made, DECREASE for a loss P & L Summary account MUST be ZERO after this step* FOR COMPANY - Close P & L Summary account to the Retained earning account a) If the P & L Summary account has a CR balance (I.e. net profit)
b) If the P & L Summary account has a DR balance (i.e. net loss)
*We INCREASE Retained earnings account if profit is made, decrease for a loss. P & L Summary account MUST be ZERO after this step*
Step 4 FOR SOLE TRADER - Close Drawings account (-> zero bal.) to the Capital account - Drawings are also temporary – the balance of the drawings account will equal ZERO after this step *When owner withdraws cash from the business, the original entry was:* June 1. Dr Drawings 1000 Cr Cash at Bank 1000 FOR COMPANY - Close Dividends account (-> zero bal.) to the Retained earning account
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Dividends are also temporary – the balance of the dividends account will equal ZERO after this step *When dividends are declared the original entry was:* Dr Dividends 1000 Cr Cash at Bank 1000
The end results -
All income accounts have zero bal. All expense accounts have zero bal. The drawings (dividends) account has a zero bal. The capital (retained earnings) account has either been increased by the profit or decreased by the loss and decreased by the drawings (dividends)
Post-Closing Trial Balance -
Prepared to verify the equality of debits and credits Confirms the only permanent accounts have balances...