BUS103: Introduction to Financial Accounting

4a. Explain the closing process for the accounting cycle 

• What are the steps required to complete the closing process?
• How does the Income Summary account relate to the income statement?
  

The closing process is when entries are made to reduce all temporary accounts to a zero balance at the end of each accounting period. This is accomplished by debiting or crediting the balances in the revenue and expense accounts and making a corresponding debit or credit to the Income Summary Account. This temporary clearing house account is used to organize the closing process. The balance in Income Summary and the balance in the Dividends accounts are closed to the Retained Earnings account. When the closing process is complete, the accounts have a zero balance and are ready to receive new entries in the next accounting period.
 
The Income Summary account is only used during the closing process to facilitate and summarize the appropriate entries. The balance of the Income Summary Account will translate to the Net Income or Loss on the Income Statement.
 
To review, see Completing the Accounting Cycle.
 

4b. Perform the necessary closing entries

• What accounts get closed at the end of the cycle?
• What are the entries required to complete the closing process?
  

At the end of the accounting period, the revenue, expense, and dividend accounts are closed, not the asset liability, capital stock, or retained earnings accounts. Accounts that are closed are called temporary accounts, whereas those that are not are called permanent accounts.
 
The closing process has four steps:

1. Debit the revenue accounts and credit Income Summary.
2. Credit the expense accounts and debit Income Summary.
3. Close the balance in the Income Summary to the capital account.
4. Credit dividends (or owner's draw) and debit the capital account.

 
To review, see Adjusting and Closing Entries.
 

4c. Describe the process for preparing a post-closing trial balance 

• What is the post-closing trial balance?
• How is the post-closing trial balance different from the adjusted trial balance?
  

The post-closing trial balance is a trial balance completed after all the closing entries have been posted. Once the closing entries are completed, the revenue, expense, and dividend accounts should all have zero balances. Record all the balances on the post-closing worksheet in the proper debit or credit column. Only the permanent accounts (asset, liability, capital stock, and retained earnings) should have balances that will appear on the post-closing trial balance. The total debits should equal the total credits as a check that the closing process was completed accurately.
 
The post-closing trial balance is different from the adjusted trial balance because it does not have any temporary accounts as they were closed. It has the updated retained earnings balance after the net income or net loss is determined.
 
To review, see Completing the Accounting Cycle.
 

4d. Create an income statement and balance sheet from the adjusted trial balance 

• What statements do the adjusted trial balance accounts appear on?
• In what order are the financial statements prepared?
  

The adjusted balances for revenues and expenses will appear on the income statement and will result in the determination of the net income or net loss for the period. The permanent accounts of assets, liabilities, and equity appear on the balance sheet. The income statement is prepared first to determine the net income or net loss. The statement of retained earnings must be prepared before the balance sheet to show the changes in the equity account as a result of dividends and retained earnings. Finally, the balance sheet is prepared.
 
To review, see Completing the Accounting Cycle.
 

Unit 4 Vocabulary

This vocabulary list includes terms you will need to know to successfully complete the final exam.

• closing process
• Income Summary
• post-closing trial balance