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LESSON 8

LESSON 8. Recording Adjusting and Closing Entries for a Service Business. TERMS REVIEW. Adjusting Entries = journal entries recorded to update general ledger accounts at the end of a fiscal period

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LESSON 8

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  1. LESSON 8 Recording Adjusting and Closing Entries for a Service Business

  2. TERMS REVIEW Adjusting Entries = journal entries recorded to update general ledger accounts at the end of a fiscal period Permanent Accounts = also referred to as real accounts . . . They are the asset, liability and owner’s capital accounts . . . The ending balances for one fiscal period are the beginning account balances for the next fiscal period. Temporary Accounts = also referred to as nominal accounts . . . Revenue, expenses & drawing PLUS the new income summary . . . Temporary accounts begin a new fiscal period with a zero balance.

  3. TERMS REVIEW Closing Entries = journal entries used to prepare temporary accounts for a new fiscal period. The temporary account balances must be reduced to zero at the end of each fiscal period. Post-Closing Trial Balance = a statement prepared at the end to verify that debits equal credits Accounting Cycle = the series of accounting activities included in recording financial information for a fiscal period Analyze Transactions, Journalize Transactions, Post, Prepare a Work Sheet, Prepare Financial Statements (Income Statement & Balance Sheet), Journalize Adjusting and Closing Entries, Post Adjusting & Closing Entries, Prepare a Post-Closing Trial Balance.

  4. Notes About Adjusting Entries • You do not have to decide the debit or credit parts of the entry . . . It is already on the work sheet • All you need to do is record the entry in the journal • There will be no document associated with Adjusting Entries so leave the Doc. No. Column blank • Don’t forget to post • Once the entry is posted, the supplies account balance will reflect the amount of supplies on hand at the end of the period

  5. Notes about closing entries • The 4 closing entries are taken from the Income Statement and Balance Sheet columns of the work sheet • Closing entries make the balances of all the temporary accounts ZERO • The other account used for closing revenue and expenses is INCOME SUMMARY • Income Summary doesn’t have a normal balance, its balance depends on the amount of revenue and expenses the business had for the period (net income or net loss . . . Get it?☺)

  6. Other important notes • The word POST means AFTER . . . Therefore a Post- Closing Trial Balance is prepared after the closing entries are posted. • Only general ledger accounts with balances will be found on the Post-Closing Trial Balance • It is very important to prove debits equal credits at the close of one fiscal period because you don’t want to begin the next period with errors!

  7. ADJUSTING ENTRY FOR SUPPLIES

  8. ADJUSTING ENTRY FOR PREPAID INSURANCE

  9. NEED FOR THE INCOME SUMMARY ACCOUNT

  10. CLOSING ENTRY FOR AN INCOME STATEMENT ACCOUNT WITH A CREDIT BALANCE

  11. CLOSING ENTRY FOR INCOME STATEMENT ACCOUNTS WITH DEBIT BALANCES

  12. CLOSING ENTRY TO RECORD NET INCOME OR LOSS AND CLOSE THE INCOME SUMMARY ACCOUNT

  13. CLOSING ENTRY FOR THE OWNER’S DRAWING ACCOUNT

  14. GENERAL LEDGER ACCOUNTS AFTER ADJUSTING AND CLOSING ENTRIES ARE POSTED

  15. POST-CLOSING TRIAL BALANCE

  16. ACCOUNTING CYCLE FOR A SERVICE BUSINESS

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