25 Describe and also Prepare close up door Entries for a Business

In this chapter, we finish the last steps (steps 8 and 9) the the bookkeeping cycle, the close up door process. You will notification that we execute not cover action 10, reversing entries. This is an optional action in the accountancy cycle that you will certainly learn about in future courses. Procedures 1 v 4 were spanned in analyzing and record Transactions and Steps 5 through 7 were extended in The adjustment Process.

You are watching: When a company prepares closing entries, which one of the following is not a correct closing entry?

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Should You damage to Please her Supervisor?
You room an accountant because that a little event-planning business. The business has been operating for several years but does not have actually the sources for bookkeeping software. This means you space preparing all procedures in the audit cycle by hand.

It is the end of the month, and you have actually completed the post-closing psychological balance. You an alert that there is tho a company revenue account balance provided on this trial balance. Why is it considered an error to have actually a revenue account ~ above the post-closing attempt balance? exactly how do you deal with this error?


Introduction to the close up door Entries

Companies are required to nearby their publications at the end of each fiscal year so the they can prepare their annual financial statements and also tax returns. However, most companies prepare monthly financial statements and close their publications annually, for this reason they have actually a clear snapshot of company performance during the year, and also give individuals timely information to do decisions.

Closing entries prepare a firm for the following accounting duration by clearing any kind of outstanding balances in specific accounts that have to not transfer over to the next period. Closing, or clearing the balances, way returning the account come a zero balance. Having a zero balance in this accounts is necessary so a firm can to compare performance across periods, particularly with income. It also helps the agency keep thorough documents of account balances affecting preserved earnings. Revenue, expense, and also dividend accounts impact retained earnings and are closed so they have the right to accumulate new balances in the following period, i beg your pardon is an application of the time period assumption.

To additional clarify this concept, balances are closed to assure all revenues and also expenses are videotaped in the proper period and then start over the following period. The revenue and expense accounts must start in ~ zero every period, due to the fact that we room measuring exactly how much revenue is earned and expenses incurred throughout the period. However, the cash balances, and the various other balance paper accounts, are lugged over native the end of a current period to the start of the following period.

For example, a store has an perform account balance the $100,000. If the store closed at 11:59 p.m. ~ above January 31, 2019, then the perform balance once it reopened at 12:01 a.m. Top top February 1, 2019, would still it is in $100,000. The balance sheet accounts, such together inventory, would carry over into the following period, in this instance February 2019.

The account that have to start through a clean or $0 balance going right into the next accounting duration are revenue, income, and any dividends from January 2019. To identify the income (profit or loss) native the month the January, the store demands to near the earnings statement info from January 2019. Zeroing January 2019 would certainly then enable the store to calculation the earnings (profit or loss) for the following month (February 2019), rather of merging it right into January’s income and thus giving invalid information solely for the month that February.

However, if the agency also want to store year-to-date info from month to month, a separate set of records can be retained as the firm progresses through the staying months in the year. Because that our purposes, assume the we room closing the publications at the finish of each month uneven otherwise noted.

Let’s look at an additional example to show the point. I think you own a tiny landscaping business. The is the finish of the year, December 31, 2018, and also you are reviewing her financials for the entire year. You watch that you earned $120,000 this year in revenue and had prices for rent, electricity, cable, internet, gas, and also food the totaled $70,000.

You likewise review the following information:

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The income review account is one intermediary in between revenues and expenses, and also the Retained revenue account. The stores all of the closing info for revenues and expenses, resulting in a “summary” of income or loss because that the period. The balance in the Income an overview account equals the net revenue or loss because that the period. This balance is then transferred to the Retained revenue account.

Income summary is a nondefined account category. This means that it is no an asset, liability, stockholders’ equity, revenue, or cost account. The account has a zero balance throughout the whole accounting duration until the closing entries room prepared. Therefore, it will not show up on any type of trial balances, consisting of the adjusted trial balance, and will not show up on any type of of the financial statements.

You could be questioning yourself, “is the Income review account also necessary?” might we just close out revenues and also expenses straight into maintained earnings and also not have this extra momentary account? We could do this, yet by having actually the Income an introduction account, you obtain a balance for net income a second time. This gives you the balance to to compare to the revenue statement, and allows you to twin check that all income statement accounts room closed and also have exactly amounts. If you put the revenues and also expenses directly into maintained earnings, you will certainly not check out that inspect figure. No issue which method you choose to close, the same last balance is in retained earnings.


Following is a perform of accounts. State whether every account is a permanent or momentary account.

rent expenseunearned revenueaccumulated depreciation, vehiclecommon stockfees revenuedividendsprepaid insuranceaccounts payable

Solution

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


Journalizing and Posting closeup of the door Entries

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

Four entries occur during the close up door process. The first entry closes revenue account to the Income an introduction account. The 2nd entry closes cost accounts come the Income review account. The 3rd entry closes the Income summary account to kept Earnings. The fourth entry closes the dividend account to maintained Earnings. The info needed to prepare closeup of the door entries comes from the changed trial balance.

Let’s explore each entrance in an ext detail using Printing Plus’s information from analyzing and recording Transactions and The Adjustment process as our example. The printing Plus changed trial balance because that January 31, 2019, is gift in (Figure).


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The T-accounts after this close up door entry would look favor the following.

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

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Why room these two numbers the same? The income statement summarizes her income, together does revenue summary. If both summary your income in the exact same period, climate they have to be equal. If they do not match, then you have actually an error.

The 3rd entry needs Income an introduction to close to the Retained revenue account. To obtain a zero balance in the Income review account, there are guidelines to consider.

If the balance in Income an introduction before close up door is a credit balance, you will debit Income an introduction and credit transaction Retained revenue in the closeup of the door entry. This case occurs when a agency has a net income.If the balance in Income review before closeup of the door is a debit balance, you will credit Income an overview and debit Retained revenue in the close up door entry. This case occurs once a firm has a net loss.

Remember the net earnings will increase retained earnings, and a net loss will decrease retained earnings. The Retained earnings account rises on the credit transaction side and also decreases top top the debit side.

Printing Plus has actually a $4,665 credit balance in the Income an introduction account prior to closing, therefore it will debit Income summary and credit retained Earnings.

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Notice that the Income review account is currently zero and is all set for use in the following period. The Retained earnings account balance is right now a credit transaction of $4,665.

The 4th entry needs Dividends come close to the Retained revenue account. Remember indigenous your past studies the dividends space not expenses, such as wages paid to your employees or staff. Instead, declaring and also paying dividends is a technique utilized by corporations to return component of the profits produced by the company to the owner of the company—in this case, its shareholders.

If dividends were not declared, close up door entries would cease at this point. If dividends space declared, to acquire a zero balance in the dividend account, the entry will display a credit to Dividends and also a debit to maintained Earnings. Together you will find out in coporation, group Accounting, there room three components to the declaration and also payment that dividends. The an initial part is the day of declaration, which creates the duty or legal responsibility to salary the dividend. The second part is the day of document that determines that receives the dividends, and the third part is the day of payment, which is the day that payments room made. To press Plus has $100 that dividends v a debit balance top top the adjusted trial balance. The closeup of the door entry will credit Dividends and also debit kept Earnings.

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Why was income summary not offered in the dividends closing entry? Dividends are not an revenue statement account. Only income statement accounts assist us summarize income, so only revenue statement account should go into income summary.

Remember, dividends are a contra stockholders’ same account. The is contra to kept earnings. If us pay the end dividends, it method retained income decreases. Retained earnings decreases on the debit side. The continuing to be balance in Retained revenue is $4,565 ((Figure)). This is the very same figure found on the explain of maintained earnings.


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The declare of retained revenue shows the period-ending retained earnings after the closeup of the door entries have been posted. When you compare the retained income ledger (T-account) come the explain of preserved earnings, the numbers must match. The is important to understand retained revenue is not closed out, it is only updated. Retained revenue is the just account that shows up in the closing entries that does not close. You must recall from her previous product that retained earnings are the earnings retained by the company over time—not cash flow however earnings. Now that we have actually closed the short-lived accounts, let’s testimonial what the post-closing ledger (T-accounts) looks choose for printing Plus.


T-Account Summary

The T-account an introduction for Printing add to after closeup of the door entries are journalized is presented in (Figure).


Notice the revenues, expenses, dividends, and income summary all have actually zero balances. Retained revenue maintains a $4,565 credit balance. The post-closing T-accounts will be moved to the post-closing trial balance, which is step 9 in the accountancy cycle.

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A firm has revenue of $48,000 and also total prices of $52,000. What would the third closing entry be? Why?


Key Concepts and also Summary

Closing entries: close up door entries prepare a company for the next period and zero out balance in temporary accounts.Purpose of close up door entries: closing entries are necessary due to the fact that they help a agency review income build-up during a period, and verify data figures found on the adjusted trial balance.Permanent accounts: permanent accounts perform not close and are accounts that carry balances to the next period. They encompass balance sheet accounts, such as assets, liabilities, and also stockholder’s equityTemporary accounts: short-term accounts room closed in ~ the finish of each accounting period and include income statement, dividends, and also income an overview accounts.Income Summary: The Income summary account is one intermediary in between revenues and also expenses, and also the Retained earnings account. The stores every the closing details for revenues and also expenses, leading to a “summary” of revenue or loss for the period.Recording close up door entries: there are 4 closing entries; closing earnings to income summary, closing prices to revenue summary, closing income an overview to retained earnings, and also close dividends to preserved earnings.Posting closeup of the door entries: once all closing entries are complete, the info is moved to the general ledger T-accounts. Balances in short-term accounts will display a zero balance.