4.5 Closing the Books Flashcards
temporary account
Because revenues, expenses, and dividends declared relate only to a specific accounting period, they are temporary accounts.
permanent account
In contrast, all statement of financial position accounts are permanent accounts. Asset, liability, and shareholders’ equity (Common Shares and Retained Earnings) accounts are not closed at the end of the period because their balances are carried forward in the next accounting period.
closiing entries
transfer the balances in the revenue, expense, and dividends declared accounts to Retained Earnings, updating that account to its end-of-period balance.
what happens to temp accts at end of period
In addition to updating Retained Earnings to its ending balance, closing entries result in a zero balance in each temporary account
income summary
Each revenue and expense account will be closed to Income Summary, a new temporary account set up to help with the closing process.Once all of the revenue and expense accounts have been closed to Income Summary, the resulting account balance is equal to the net income or loss for the accounting period.Income Summary is then closed, which transfers the net income or loss from this account to the Retained Earnings account.
rev and exp accounts go to
income summary
which goes to retained earnings
div declared goes to re right away
closing accts process
1 Close all revenue accounts to Income Summary: Revenue accounts normally have a credit balance. As such, to close revenue accounts, each individual revenue account is debited for the balance in the account, with a credit to the Income Summary account for total revenues. After this entry, all revenue accounts will have zero balances and the total of all revenue accounts will have been transferred into the Income Summary account.2Close all expense accounts to Income Summary: Expense accounts normally have debit balances. As such, the Income Summary account is debited for total expenses, and each individual expense account is credited for the balance in the account. After this entry, all expense accounts will have zero balances and the total of all expense accounts will have been transferred into the Income Summary account.3Close Income Summary to Retained Earnings: After recording the first two closing entries, the Income Summary account will normally have a credit balance because revenues usually exceed expenses (at least we hope so!). This balance is equal to net income. Income Summary will have a debit balance if there is a net loss (if expenses exceed revenues). The Income Summary account is debited for the balance in the account (or credited if there is a loss), while Retained Earnings is credited (debited if there is a loss). After this, the Income Summary account balance is zero because the net income or net loss has been transferred into the Retained Earnings account.4Close Dividends Declared to Retained Earnings: The Dividends Declared account has a normal debit balance, so it must be credited to be closed. In this final closing entry, Retained Earnings is debited for the balance in the Dividends Declared account, while Dividends Declared is credited for the same amount, bringing the account balance to zero. Note: Do not close Dividends Declared to the Income Summary account along with expenses. Dividends declared are not an expense and do not affect net income; they are a distribution of retained earnings to shareholders.
When preparing closing entries from an adjusted trial balance, it can be helpful to draw a line under Common Shares (if it is a new company) or Retained Earnings (if it is an established company not in its first year of operations). The accounts above this line are permanent and should not be closed. The accounts below this line are temporary and each of them should be closed.
When preparing closing entries from an adjusted trial balance, it can be helpful to draw a line under Common Shares (if it is a new company) or Retained Earnings (if it is an established company not in its first year of operations). The accounts above this line are permanent and should not be closed. The accounts below this line are temporary and each of them should be closed.
After all closing entries are journalized and posted, another trial balance, called a post-closing trial balance, is prepared from the general ledger.It lists all permanent accounts and their balances after closing entries are journalized and posted.The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next annual accounting period.Since all temporary accounts will have zero balances, the post-closing trial balance will contain only permanent—statement of financial position—accounts.
After all closing entries are journalized and posted, another trial balance, called a post-closing trial balance, is prepared from the general ledger.It lists all permanent accounts and their balances after closing entries are journalized and posted.The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next annual accounting period.Since all temporary accounts will have zero balances, the post-closing trial balance will contain only permanent—statement of financial position—accounts.
what does post closing trial balance contaon
only permanent accounts
