CLOSING ENTRIES

Lesson Objective
Understand the objectives of closing entries
Prepare the closing entries
Accumulation of information on the details of operations entails
maintaining separate revenue and expense accounts. At the end
of the period, this information is reported in the income
statement. The revenue and expense accounts are then closed
to the owner’s equity. This process also shows the results of
operation. The closing entries update the owner’s capital
account at the end of the period. They also eliminate the
balances of the nominal accounts to ready them for the next
accounting period.

To close a temporary account, an entry is made to make its

balance become zero. Closing transfers the balances of the
temporary accounts to the capital account. The Income
Summary, considered to be a summary account, is used to close
the income and expense accounts.
 ANIME WORLD GALLERY
TRIAL BALANCE
May 31, 2016

Cash ₱373,660
Accounts Receivable 70,000
Allowance for Bad Debts 1,500
Art Supplies 5,400
Prepaid Rent 6,000
Prepaid Insurance 8,100
Office Equipment 180,000
Accumulated Depreciation - Office Equipment 5,000
Furniture and Fixture 40,000
Accumulated Depreciation - Furniture and Fixture 1,000
Accounts Payable 32,200
Notes Payable 100,000
Utilities Payable 4,500
Unearned Painting Revenue 80,000
Ong, Capital 300,000
Ong, Drawing 18,000
Painting Revenue 210,000
Salaries Expense 4,000
Utilities Expense 5,040
Insurance Expense 2,700
Rent Expense 12,000
Art Supplies Expense 1,800
Depreciation Expense 6,000
Bad Debts Expense 1,500
₱734,200 ₱734,200
STEPS IN CLOSING THE ACCOUNTS
1. Close the income accounts
Since income accounts have normal credit balances, each revenue
account will have to be debited in the amount of its balance to bring
their balances to zero. The credit is made to the income summary
account.
2016
May 31 Painting Revenue 210,000
Income Summary 210,000
2. Close the expense accounts
Expense account have normal debit balances, each of these will have to be credited
to close the account. Thus, a compound entry is needed considering the umber of
expense accounts. The total of all expense accounts is then debited to income
summary. The entry to close the expense accounts of Anime World Gallery:
May 31 Income Summary 33,040
Salaries Expense 4,000
Utilities Expense 5,040
Insurance Expense 2,700
Rent Expense 12,000
Art Supplies Expense 1,800
Depreciation Expense 6,000
Bad Debts Expense 1,500
To close expense accounts
3. Close the income summary capital
Notice that after posting the entries involving the income and expense accounts, the
balance of the income summary account is exactly the net income or net loss for the
period. A credit balance indicates a net income and a debit balance indicates a net
loss. Regardless of whether the business yields a net income or a net loss, the income
summary account must be closed to the capital account. For the Anime World Gallery,
the entry is:
May 31
Income Summary 176,960
Ong, Capital 176,960
To close income summary to capital

Note: The balancing figure of the income summary account to be closed to capital is
the net income or net loss of the business. In the case of Anime World Gallery,
P176,960 is the amount of net income.
4. Close the drawing account
The drawing account represents the amount withdrawn by the owner either in cash
and non-cash assets for personal use. It is for this reason that the debit balance of the
drawing account should be closed to capital. The following entry is an illustration
using Anime World Gallery:

May 31 Ong, Capital 18,000

Ong, Drawing 18,000
THE POST-CLOSING
TRIAL BALANCE
Lesson Objective
Know the importance of trial balance
Prepare the post-closing trial balance
The post-closing trial balance is prepared from the general
ledger accounts after the closing entries have been posted. This
is necessary to ensure that these entries have been correctly
posted. This will also test the equality of the accounts.

The post-closing trial balance confirms the equality of the debits

and credits. It contains only balance sheet items such as assets,
liabilities, and ending capital because all the income an expense
accounts as well as the drawing account all have zero balances
as a result of the closing entries.
 ANIME WORLD GALLERY
POST-CLOSING TRIAL BALANCE
May 31, 2016

Cash ₱373,660
Accounts Receivable 70,000
Allowance for Bad Debts 1,500
Art Supplies 5,400
Prepaid Rent 6,000
Prepaid Insurance 8,100
Office Equipment 180,000
Accumulated Depreciation - Office Equipment 5,000
Furniture and Fixture 40,000

Accumulated Depreciation - Furniture and Fixture 1,000

Accounts Payable 32,200
Notes Payable 100,000
Utilities Payab;e 4,500
Unearned Painting Revenue 80,000
Ong, Capital 458,960
₱683,160 ₱683,160
 ONG, CAPITAL
5/31 18,000 5/2 300,000
5/31 176,960
18,000 476,960
bal. 458,960

Explanation:
1. The May 2, credit of P300,000 is the beginning capital.
2. The May 31 credit of P176,960 is closing entry no. 3 on the last example where the
income summary was closed to capital.
3. The May 31 credit of P18,000 is closing entry no. 4 on the last example where the
drawing account was closed to capital
4. The ending balance of P458,960 is the balance of Ong, Capital in the post closing
trial balance after the income summary and the drawing account were closed to
capital