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Lesson 12 (printer-friendly version)

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Chapter 1

Introduction

In Chapter 11, you learned how to journalize and post the adjusting entries on
Children's Capers worksheet. This is an important step in closing out the year's records
and preparing the General Ledger for the next fiscal period.

You're now about to learn the final step in the accounting cycle. In this last lesson, you'll
learn how to journalize and post closing entries to the General Ledger. You'll also be
preparing a post closing trial balance as the final financial report for the year.

I always get excited when I reach this point in accounting. I can see the finish-line
clearly ahead and can't wait until I cross it so I can begin a new fiscal period. So, let's
get going!

Chapter 2

Why Close Out Accounts and Which Ones?

You're going to be closing out certain accounts in your General Ledger. This is necessary so that certain General
Ledger accounts have zero-balances with which to begin the new fiscal period.

All asset accounts will remain open. Those balances will be carried into the next fiscal period. Think about those asset
accounts for a minute. Cash needs to be carried forward. If you were to close out Cash, Children's Capers would show
a zero-balance. Accounts Receivable's balance is also carried forward. Just because a new fiscal period is occurring
doesn't mean that people don't owe you any money. Likewise for the rest of the asset accounts. All of the balances are
carried into the next fiscal period.

Liability account balances are also carried into the next fiscal period. Again, just because a new year or fiscal period is
occurring doesn't mean that all Children's Capers debts are wiped out. Wouldn't that be neat, though?

Under the classification Owners' Equity, the drawing account is closed out. The capital account balance is carried into
the next cycle's work. However, the balance in the capital account will change, as you will see later in this lesson.

Your Sales account will close out, as will all of your expense accounts. Purchases will also close out. The reason behind
closing out these account balances is quite reasonable. You cannot have a balance in any of these accounts when you
begin a new accounting cycle. If you did, Children's Capers would not have a true picture of the next year's financial
progress because the previous year's figures would be included in the new year's figures.

You cannot build on the previous year's balances and have an honest picture of what the business did in the new year.

Therefore, the following accounts will be closed out and will have no balances at the

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beginning of the new fiscal period: drawing, Sales, Purchases, plus all expense accounts.

The following accounts will have balances to carry forward into the new fiscal period: assets, liabilities, and the capital
accounts.

Chapter 3

Journalizing Closing Entries

In order to close out an account, you must enter an amount equal to the balance showing in that account, but the
opposite of the balance. In other words, the drawing account has a debit balance. To close this account, you need to
enter a credit entry for the amount of the debit balance. That credit entry will completely cancel out the debit balance
and leave Drawing with a zero-balance.

The same concept applies to the Sales account. Sales has a normal credit balance. To zero out this credit balance, you
will need to enter a debit entry for the same amount to close out Sales.

All expenses will also be closed out in preparation for the new fiscal period.

Look at the journal page depicted below. This is an example of how closing entries are entered into a journal. Notice
that the account Income Summary is used three times. This account is used to summarize amounts before they are
transferred to other accounts. When all the closing entries have been posted to the General Ledger, Income Summary
will have no balance.

Closing entries in J & J Auto Repair's journal

Using the illustration above as a guide, let's journalize our closing entries for Children's Capers.

There are four transactions to be completed to properly close out the required accounts at the end of the year. Let's
enter them into your journal page 16 one at a time.

Use December 31 as the date for these closing entries. On the first line of the journal, enter Closing Entries in the
Account Title area.

On the next line, enter Sales and enter a debit for $7,200.00 in the General Debit column of the journal. I arrived at this
figure by looking on the worksheet for Children's Capers. Sales is showing a credit balance for $7,200.00 on the

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worksheet, so you need to make a debit entry in the journal. When this is posted, the Sales account will zero out.

Now, you need a credit for the same amount. Remember, the debits and credits must equal after each transaction. On
the next line in the journal, enter Income Summary and make a credit entry for $7,200.00 in the general Credit column
of the journal. That's all there is to the first closing entry.

Next, you will be closing out Purchases and all the expense accounts. Look at the worksheet and make a credit entry in
the journal for the balance in Purchases, which is $4,875.00. Now you need to close out all the expense account
balances. Look at column 5 of the worksheet. You can see that Children's Capers has a total of 9 expense accounts,
starting with Advertising Expense and ending with Utilities Expense. In the journal, make credit entries for each of these
expense accounts for the balance that is showing on the worksheet. This will take up nine lines in the journal, as there
are nine expense accounts and each one has to be listed separately. Now you need a debit entry to match these 10
credit entries. Total up the 10 credit entries to Purchases and all the expense accounts. Make one debit entry on the
next line in the journal for the total of all 10 credit entries. This debit entry will go to Income Summary (you guessed it!).

Now, you have two more closing entries. The first, will close out the drawing accounts of both partners. Remember that
the drawing account balance represents the dollar amount that the owner has withdrawn from the business during the
year. This amount will decrease the owner's net worth in the business, which is shown in the capital account.

Therefore, we are going to credit the drawing account for the balance showing on the worksheet and debit the owner's
capital account for the same amount. This will close out the drawing account and will decrease the owner's capital
account balance. This will take only two lines in the journal, but you need to close out both partners' drawing accounts.
You will, in fact, have two identical transactions, both with a debit and credit entry. One will be to close out Joan
Caldwell's drawing and the other will be to close out Stacy Hall's drawing.

Last, but not least, you need to get the partners' share of the net income into their individual capital accounts. The
capital account is increased with a credit, so make a journal entry to credit Joan Caldwell's capital account for her share
of the net income, which is $713.50. The debit-half of this transaction will be to Income Summary.

Again, you will need to make this entry in both partners' Capital accounts. Once again, please refer to the illustration
above. I am confident that you will understand the concept of closing entries better by looking at that example.

This will conclude the closing entries. Please post these journal entries to the General Ledger. Remember, these journal
entries will close out drawing, Sales, Purchases, plus all expense accounts.

The ledger accounts that should have balances remaining after you have posted these closing entries are: assets,
liabilities, and the two capital accounts.

Chapter 4

Post Closing Trial Balance

You're really crowding that finish line now. Just one more report to complete and you'll be done!

On the Post Closing Trial Balance sheet you printed out, enter Children's Capers on the first line in the heading. Put
Post Closing Trial Balance on the second line and December 31, 2001 on the third line of the heading.

Now, go through your General Ledger one account at a time. If an account has a balance, list the account name and the
balance in that account in either the Debit or Credit column, depending on whether the balance is a debit balance or a
credit balance.

When you have gone through the entire General Ledger, add both columns of the Post Closing Trial Balance report. If
they agree, you're done. If not, you need to once again find your error and correct it.

Double-rule the column totals to show that they are in agreement. Don't forget—the solutions to this lesson are in the
Supplementary Material section.

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Chapter 5

Conclusion

Wow! It's hard to believe that it's over, isn't it? I'm very proud of each of you for the hard work you've put into this
course. Give yourself a huge pat on the back!

As usual, when you're comfortable with the concepts in this lesson, please take the multiple-choice quiz for Lesson 12.

The skills and knowledge you've acquired in this course will serve you well in your life, both personally and
professionally. You can use this knowledge to better control your finances and/or you may wish to continue with further
accounting courses. In either case, you're now a more informed individual and have a good foundation of basic
accounting skills.

I hope you've enjoyed learning the basics of accounting principles in Accounting Fundamentals! If this course has
spurred your desire for more accounting, I hope you'll come back and join me for the next level, Accounting
Fundamentals II.

In the sequel to this course, you'll learn all about corporate accounting, including such topics as dividends, retained
earnings, notes payable and receivable, uncollectible accounts receivables, depreciation, accrued income and
expenses, and much more. You'll also gain valuable knowledge in the area of payroll tax requirements and the quarterly
payroll reports required by the federal government. Please check the school's course catalog for more information. I
hope to "see" you there!

Finally, I'd like to take this opportunity to tell all of you how very much I've enjoyed creating this course and helping you
become proficient in general accounting procedures. It's been an extremely rewarding experience for me. Good luck,
and keep those debits and credits equal!

Supplementary Material

Post Closing Trial Balance

/crs/pix/fun/L12-PCT_Balance.pdf
This form proves the equality of debits and credits in the general
ledger at the end of the fiscal period.

Lesson 12 Solutions
/crs/pix/fun/L12-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper!

Note: Only those forms and accounts with new entries in them will
appear in each lesson's solutions. If you're curious about a
transaction in a previous lesson, you'll have to go back to that
lesson's Solutions link.

FAQs

Q: Why are closing entries necessary?

A: Closing entries are necessary so that certain account balances are zeroed out at the end
of the fiscal period. If there were no closing entries, all accounts would have balances that
would be carried forward into the next year. If this were to happen, the owners would not

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have a clear picture of how the business progressed during the new year.

Q: Which accounts are closed out?

A: The Drawing account, all expense accounts, Sales, and Purchases are closed out.

Q: Which accounts have balances that are carried into the next fiscal period?

A: The Capital account, all assets, and all liabilities will have balances that will be brought
into the next fiscal period.

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