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Closing Process
Must do at the end of the accounting period after financial statements have been completed. It prepares accounts for next accounting period.
The purpose is to
1. Reset Revenue,expenses, and dividend accounts back to zero for the end of the accounting period.
2. Helps summarize the revenues and expenses for that period. |
Steps for Closing
1. Identify what accounts need to be closed |
2. Record and post the entries to be closed |
3. Prepare the post-closing trial balance |
Temporary/ Permanent accounts
Temporary |
Permanent |
Revenues |
Assets |
Expenses |
Liabilities |
Dividends |
Common Stock |
Income Summary |
Retained Earnings |
(The closing process applies only to these accounts) |
(These accounts carry ending balances to the next period) |
Recording Closing Entries
Income Summary |
Is a temporary account (used for CLOSING). The balance equals net income(loss) and it goes to the retained earnings. |
Dividends goes to retained earnings. |
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Recording Closing Entries
Revenues
1. They have a debit balance
2. Close to income summary, it has a credit balance.
Expenses
1. Close to income summary, it has a debit balance.
2. All expenses are going to have a credit balance
Close income summary to retained earnings
1. Income Summary has a debit balance
2. Retained Earnings has a credit balance
Close dividends account
1. Retained Earnings is going to have a debit balance
2. Dividends has a credit balance |
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