Lesson FA Financial Accounting Fundamentals - Closing Entries and Post-Closing Trial Balance Part 1

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1 Lesson FA Financial Accounting Fundamentals - Closing Entries and Post-Closing Trial Balance Part 1 This workbook contains notes and worksheets to accompany the corresponding video lesson available online at: Permission is granted for educators and students to make copies and redistribute this document without fee provided the copyright notice and page footer is retained. All other intellectual property rights are reserved by the copyright holder. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 1 of 6

2 Financial Accounting Fundamentals Closing Entries and Post-Closing Trial Balance Part 1 [Clip 01] The Accounting Cycle - Closing Entries Directly to Retained Earnings Pre-Requisites Before watching this video, you should understand the concepts covered in video lesson FA xx on Basic Accounting Concepts and Transaction Analysis, and video lesson FA xx on Adjusting Entries for Accruals and Deferrals. Recommended Pre-requisites Lesson FA on Financial Statements is also related to this lesson. You might find it helpful to review lesson FA Objectives The primary objectives of this lesson are: 1. To understand the closing process and closing entries in the accounting cycle 2. To understand the post-closing trial balance 3. To illustrate the closing process and the post-closing trial balance in an example 4. To conclude comprehensive problem 1 for Malorie Stylists, preparing closing entries and the post-closing trial balance for January 20x0 Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 2 of 6

Closing Entries Journal entries which close out the temporary accounts (revenue, expenses, and dividends) and reset their balances to a zero-balance are called closing entries.

3 Closing Entries Journal entries which close out the temporary accounts (revenue, expenses, and dividends) and reset their balances to a zero-balance are called closing entries. If you think of the revenue, expense, and dividend accounts as a scoreboard for a business s operation for an accounting period, then the idea of closing entries is like resetting the scoreboard for a new game where the new game is the new accounting period. Ultimately, the revenue, expense, and dividend account balances are closed out (transferred to) the retained earnings account. However, there are two approaches that might used to close out these accounts. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 3 of 6

4 One approach is to transfer the balances of Revenue, Expense, and Dividend Accounts Directly to Retained Earnings. In practice, professional accountants often use an alternative approach, usually studied in intermediate accounting, in which 1. Balances of Revenue and Expense accounts are transferred to Income Summary 2. Balance of Income Summary is transferred to Retained Earnings 3. Balance of Dividends is transferred to Retained Earnings We will illustrate both approaches in our examples. Journalizing Directly to Retained Earnings includes three journal entries: Debit Revenue Accounts (individually) Credit Retained Earnings (for total of all revenue accounts) Debit Retained Earnings (for total of all expense accounts) Credit Expense Accounts (individually) Debit Retained Earnings (for balance of dividends account) Credit Dividends Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 4 of 6

[Clip 02] The Accounting Cycle - Closing Entries Using Income Summary Journalizing To Retained Earnings Through Income Summary includes four journal entries: Debit Revenue Accounts (individually)

5 [Clip 02] The Accounting Cycle - Closing Entries Using Income Summary Journalizing To Retained Earnings Through Income Summary includes four journal entries: Debit Revenue Accounts (individually) Credit Income Summary (for total of all revenue accounts) Debit Income Summary (for total of all expense accounts) Credit Expense Accounts (individually) Assuming Net Income Results (i.e., credit balance in Income Summary) Debit Income Summary Credit Retained Earnings (for the balance of Income Summary) Debit Retained Earnings (for balance of dividends account) Credit Dividends Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 5 of 6

6 [Clip 03] The Accounting Cycle - Post-Closing Trial Balance Post-Closing Trial Balance The final step in the basic accounting cycle is the preparation of a Post-Closing Trial Balance in which the balances of the asset, liabilities, and owners equity accounts are summarized and the sum of debit balances is shown to equal the sum of credit balances. Revenue, expense, and dividend accounts are not shown in the Post-Closing Trial Balance because their balances are zero after the closing entries are posted to the general ledger. Copyright 2011 by Rocky Spears Enterprises LLC, All Rights Reserved Page 6 of 6

Lesson FA Financial Accounting Fundamentals - Concepts and Transaction Analysis Part 3

Lesson FA Financial Accounting Fundamentals - Concepts and Transaction Analysis Part 3 Lesson FA-10-010-03 Financial Accounting Fundamentals - Concepts and Transaction Analysis Part 3 This workbook contains notes and worksheets to accompany the corresponding video lesson available online