Closing Entries
When do we do closing entries?
At the end of the accounting period.
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What is the main purpose of the Income Statement?
To show the business’s revenues and expenses for a specific period, and to calculate net income or net loss.
What does the Statement of Owner’s Equity show?
It shows the changes in the owner’s capital account during the period.
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What type of accounts are closed during the closing process: temporary or permanent? Give an example.
Temporary accounts are closed. Examples include Revenue, Expense, and Drawing accounts.
What is the purpose of the post-closing trial balance, and what type of accounts should appear on it?
Its purpose is to verify that total debits equal total credits after closing entries are made. Only permanent accounts (Assets, Liabilities, and Owner’s Capital) should appear on it.
What is the formula for calculating net income on the income statement?
Net Income = Revenues – Expenses
What are the components needed to prepare the Statement of Owner’s Equity?
Beginning Capital, Add: Net Income (or subtract Net Loss), Less: Owner’s Drawings, Equals: Ending Capital.
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Why do we close the Owner’s Drawing account, and which account is it closed to?
We close the Drawing account to reset it for the next period, and it is closed to the Owner’s Capital account.
What is the normal balance of income summary?
No normal balance
Where do the figures for revenues and expenses on the income statement come from?
The income statement section of the worksheet
Where does the ending capital amount from the Statement of Owner’s Equity appear on another financial statement?
In the Owner’s Equity section of the Balance Sheet.
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What is the purpose of the Income Summary account during the closing process in a sole proprietorship?
It temporarily holds the net income or net loss for the period before transferring it to the Owner’s Capital account.
When closing the Income Summary account, what does a credit balance in Income Summary indicate?
It indicates a net income, which is transferred to the Owner’s Capital account.
If a business has multiple revenue accounts, how are they presented on the income statement?
Each revenue account is listed individually and then totaled to show total revenues.
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What is the full sequence of accounts that must be closed at the end of the accounting period for a sole proprietorship, and in what order are they closed?
Revenues are closed to Income Summary, Expenses are closed to Income Summary, Income Summary is closed to Owner’s Capital, and Owner’s Drawings (or Withdrawals) is closed to Owner’s Capital.
What happens if a revenue account is not closed properly at the end of the period?
It will incorrectly carry over into the next period, overstating income and leading to inaccurate financial statements.
If the total expenses are greater than total revenues on the income statement, how is that reported, and how does it affect the Capital balance on the Statement of Owner’s Equity?
It is reported as a net loss, and it decreases the Owner’s Capital on the Statement of Owner’s Equity.
Explain why the Income Statement and Statement of Owner’s Equity are considered “period reports,” while the Balance Sheet is a “point-in-time” report.
The Income Statement and Statement of Owner’s Equity report financial performance over a specific time period (e.g., month, quarter, year), whereas the Balance Sheet shows financial position at a single moment in time (the end date of the reporting period).
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