1. Week 6

2.  Need to update certain general ledger accounts at
the end of the fiscal period.
 Reflect “internal” transactions
◦ Supplies used
◦ Prepaid Insurance used
 Matching principle: capture expenses in same
fiscal period in which they helped generate that
fiscal period’s revenue.

3.  Business knows how much remains “on hand”
which is subtracted from trial balance amount.

4.  Permanent accounts retain their balance from
fiscal period to fiscal period
◦ Assets, liabilities and owner’s capital (balance sheet)
 Temporary accounts have their balances “closed”
to a zero balance at the end of the fiscal period.
◦ Revenue, expense (income statement) and withdrawals
 Recall the temporary accounts were “used up”
when preparing the financial statements so their
balances can’t be carried forward.

5.  Entry to close income statement accounts with a
credit balance (revenue)
 Entry to close income statement accounts with a
debit balance (expenses)
 Entry to record net income or net loss to owner’s
capital
 Entry to close owner’s drawing account to owner’s
capital account

6.  Temporary account used to transfer net income or
net loss to owner’s capital account.
Income Summary
Debit Credit
Total Expenses Total Revenue

7.  To close an account with a credit balance, debit it an
equal amount. The matching credit goes to the income
summary account.

8.  To close an account with a debit balance, credit it an
equal amount. The matching debit goes to the income
summary account.

9.  Income Summary has a debit and credit amount.
The difference should be equal to either net
income or net loss calculated on the worksheet.
Income Summary
Debit Credit
Total Expenses Total Revenue
$8,772$5,991

11.  To close Income Summary with net income (credit
balance), debit it an equal amount. Where does
matching credit go?
 Owner’s CAPITAL account is credited (increased).
 This is how the net income actually gets placed in
the owner’s account.
 To close Income Summary with net loss (debit
balance), credit it an equal amount. The matching
debit goes to owner’s CAPITAL account to reduce
it.

12.  To close the drawing account (debit balance),
credit it an equal amount then the matching debit
is applied to the owner’s CAPITAL account.

13.  As with adjusting entries, all closing entries must
be journalized then posted to the affected ledger
accounts to update the balances.
 All temporary accounts MUST have a zero
balance to start the new fiscal period.

14.  Once adjusting and closing entries are complete a
post closing trial balance is prepared to make sure
debits = credits moving in to the new fiscal period.
 Account balances of permanent accounts are
listed. Temporary accounts with a zero balances
are NOT listed.
 The ACCOUNTING CYCLE for the fiscal period is
complete.

15. 1. Analyze transactions (source documents)
2. Journalize transactions
3. Post transaction data to ledger
4. Prepare trial balance/worksheet
5. Prepare financial statements
6. Journalize adjusting and closing entries
7. Post adjusting and closing entries
8. Prepare post-closing trial balance