Chapter 7: Completing the Accounting Cycle

The final steps in the accounting cycle are to journalize and post closing entries, and then to prepare a post-closing trial balance. 

Closing Entries are journal entries made at the end of the accounting period to zero out the balances in the temporary accounts. The temporary accounts are Revenue, Expenses & Withdrawals. Each of these accounts has an affect on Capital, as seen when preparing the Statement of Changes in Owner's Equity financial statement. In order to zero out each of these accounts, a company will take the total ending balance in that account at the end of the period, and transfer it to the Income Summary account. Remember, the Income Statement and all its account only run for accounting year. They are not like the permanent accounts that are located in the Balance Sheet. 

This account is a temporary account that holds the final balances for Revenue and Expenses from each accounting period. After moving all revenue and expense accounts to the income summary, the final balance should reflect the net income or net loss for the period, as seen on the income statement. The income summary account does not actually have a normal balance, but will have a debit balance if there was a net loss, and a credit balance if there was a net income. 

• • First, identify all of the revenue accounts within the company (400's) from the general ledger - this should hold the final balances in each account

  • As seen in the general ledger, all of the revenue accounts have a final total sitting on the credit side since this is their normal balance. Therefore, in order to zero these accounts out, you will need to debit them for the same amount as their ending balance. Your credit will be to the income summary account. 

  • After performing the journal entry, you will then need to post to the general ledger - your ending balance in your revenue accounts should show $0 on the credit side. 

• • First, identify all of the expense accounts within the company (500's) from the general ledger - this should hold the final balances in each account

  • As seen in the general ledger, all of the expense accounts have a final total sitting on the debit side since this is their normal balance. Therefore, in order to zero these accounts out, you will need to credit them for the same amount as their ending balance. Your debit will be to the income summary account. 

  • After performing the journal entry, you will then need to post to the general ledger - your ending balance in your expense accounts should show $0 on the debit side.

• • Since the income summary is also a temporary account, it needs zeroed out as well. This usually happens at the end of each accounting year, after accumulating the net income/loss balances from the end of each month. 

  • Again, as seen on the statement of changes in OE, this balance gets closed out to the capital account

  • If a company has an overall net loss, the balance would sit on the debit side. Therefore, to zero out, you would need to credit income summary and debit the capital account. 

  • If a company has an overall net income, the balance would sit on the credit side. Therefore, to zero out, you would need to debit income summary and credit capital. 

  • After performing the journal entry, you will then need to post to the general ledger - your ending balance in your expense accounts should show $0 on the debit side.

Withdrawals is the final temporary account that needs zeroed out at the end of the accounting period. This affects the capital account, therefore it will get moved to the capital account. The normal balance in withdrawals is debit, so to close it out, you would credit withdrawals and debit capital. 

The final step in the accounting cycle is to prepare a post-closing trial balance. The only accounts listed on this report, would be the permanent accounts. 

The final step in the accounting cycle is to prepare a post-closing trial balance. The only accounts listed on this report, would be the permanent accounts.