ACCG101 Lecture Notes - Lecture 6: Retained Earnings, Capital Account

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limehound700

30 May 2018

School

Macquarie University

Department

Accounting and Corporate Governance

Course

ACCG101

Professor

All

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Week 6 - Closing Entries

Closing Accounts

Temporary accounts -

- a given accounting period e.g. revenues, expenses, dividends

- Must be closed to set the account balance to zero

Permanent accounts -

- all statement of financial position accounts e.g. assets, liability, equity

(capital, retained earnings)

Closing Entries

- Closing entries are journal entries that effectively close all temporary accounts

to the permanent equity account (capital) at the end of the accounting period

- A temporary account of a profit and loss summary

- Formally recognise in the ledger the transfer of profit and dividends to

retained earnings

- Which will be shown in the statement of changes in equity

- Closing balances produce a nil balance in each temporary account

- Permanent accounts are not closed

Step 1:

1. Close all income accounts (zero balance) to the summary account

2. DR each individual income account

3. CR summary

- Because income accounts have a natural credit balance, we must debit to

Step 2:

1. Close all expense accounts (zero balance) to the summary account

2. DR summary

3. Cr each individual expense account

- Because expenses have a natural debit balance, we must credit all expenses

to close

Step 3: (SOLE TRADER)

1. Close the summary account to the capital account

2. If the summary account has a credit balance (profit)

> DR summary and CR capital

3. If the summary has a debit balance

> DR capital and CR summary

Step 3: (COMPANY)

1. Close the summary account to retained earnings account

2. If the summary account has a credit balance (profit)

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Document Summary

A given accounting period e. g. revenues, expenses, dividends. Must be closed to set the account balance to zero. Permanent accounts - all statement of financial position accounts e. g. assets, liability, equity (capital, retained earnings) Closing entries are journal entries that effectively close all temporary accounts to the permanent equity account (capital) at the end of the accounting period. A temporary account of a profit and loss summary. Formally recognise in the ledger the transfer of profit and dividends to retained earnings. Which will be shown in the statement of changes in equity. Closing balances produce a nil balance in each temporary account. Step 1: close all income accounts (zero balance) to the summary account, dr each individual income account, cr summary. Because income accounts have a natural credit balance, we must debit to close. Step 2: close all expense accounts (zero balance) to the summary account, dr summary, cr each individual expense account.

Related Questions

Chandler, Inc. is owned by Roscoe Chandler and providesappraisal services to individuals and companies wishing to purchaseand sell fine art. Chandler, Inc. began business on January 1,2016, and is just completing its first year of business. Roscoeasks for your help in completing the accounting cycle for thecompany by assisting with the closing process.

Before the closing entries are made, you begin with an adjustedtrial balance. The closing entries are essentially the link fromthe adjusted trial balance to the post-closing trial balance.

Chandler, Inc.

ADJUSTED TRIAL BALANCE

December 31, 2016

	ACCOUNTTITLE	DEBIT	CREDIT
1	Cash	76,000.00
2	Accounts Receivable	29,000.00
3	Prepaid Insurance	16,000.00
4	Equipment	60,000.00
5	Accumulated Depreciation-Equipment		40,000.00
6	Accounts Payable		6,000.00
7	Salaries Payable		8,000.00
8	Income Taxes Payable		4,000.00
9	Common Stock		2,000.00
10	Retained Earnings		18,000.00
11	Dividends	5,000.00
12	Income Summary
13	Fees Earned		175,600.00
14	Rent Revenue		92,000.00
15	Interest Revenue		17,200.00
16	Salaries Expense	71,000.00
17	Selling Expense	25,600.00
18	Income Taxes Expense	15,000.00
19	Depreciation Expense-Equipment	47,200.00
20	Insurance Expense	17,000.00
21	Miscellaneous Expense	1,000.00
22	Totals	362,800.00	362,800.00

The final step of the accounting cycle is the closing process.The main goal of this stage of the cycle is to ensure that thebalance of each temporary account is returned to zero and that netincome is transferred to the retained earnings account. The firststep in successfully undertaking the closing process is tounderstand the difference between a temporary account and apermanent account. Roscoe has some questions about the process.

Answer questions (1) - (3) below.

1. If a temporary account has an ending balance of $57,000, whatis its beginning balance for the following accounting period?

2. If a permanent account has an ending balance of $57,000, whatis its beginning balance for the following accounting period?

3. Roscoe will be preparing his yearly financial statementsafter completing Chandler, Inc.âs closing process, and is asomewhat confused about the characteristics of the accounts on hisChart of Accounts. He has started by creating the chart below, andasks for your help in completing it. For each account or type ofaccount listed, choose all descriptions that apply.

Temporary Account

Permanent Account

Closed to Income SummaryAccount

Yes

Revenues

Asset accounts

Retained Earnings account

Expenses

Liability accounts

Dividends account

Roscoe has attempted to prepare the closing entries forChandler, Inc. on this panel. Heâs not sure if heâs entered thejournal entries correctly, and asks you to review them. You findthat two of the entries are correct, but two are incorrect.

Determine which entries are incorrect, and enter all four of theclosing entries for Chandler, Inc. as of Dec. 31 on the Journalpanel.

PAGE 25

JOURNAL

	DATE	DESCRIPTION	DEBIT	CREDIT
1		Closing Entries
2	Dec. 31	Income Summary	284,800.00
3		Fees Earned		175,600.00
4		Rent Revenue		92,000.00
5		Interest Revenue		17,200.00
6	31	Income Summary	176,800.00
7		Salaries Expense		71,000.00
8		Selling Expense		25,600.00
9		Income Taxes Expense		15,000.00
10		Depreciation Expense-Equipment		47,200.00
11		Insurance Expense		17,000.00
12		Miscellaneous Expense		1,000.00
13	31	Retained Earnings	461,600.00
14		Income Summary		461,600.00
15	31	Retained Earnings	5,000.00
16		Dividends		5,000.00