Closing Process
How many steps does the closing process have?
Four!
What are the 3 temporary accounts?
Income statement, Dividends, Income summary
What are the 3 permanent accounts?
Assets, Liabilities, and Equity
What are the first two journal entries necessary for the closing process?
1. Close credit balances in Revenue accounts to Income Summary account
2. Close debit balances in Expense accounts to Income Summary account
Is a post-closing trial balance often the last step in the accounting process?
Yes
Does the closing process happen before or after the financial statements have been prepared?
After!
What is the ending balance of temporary accounts always equal?
Zero!
Does the closing process apply to permanent accounts?
No!
What are the second two journal entries necessary for the closing process?
3. Close Income Summary account to Retained Earnings account
4. Close Dividends account to Retained Earnings account
What financial statement accounts are included on the post-closing trial balance?
Only balance sheet accounts
What accounts are reset to zero during the closing process?
Revenues, Expenses, Dividends
Do temporary accounts carry a balance of anything other than zero into the next accounting period?
No
Do permanent accounts carry their balance into the next accounting period?
Yes
DOUBLE JEOPARDY
How do you close out the Revenue and Expense accounts?
Using the Income Summary account transfer in the balances then "counter" them.
Why do Revenue and Expense accounts need to be zeroed for the Balance Sheet?
Because of the Revenue and Expense Recognition principles. These are accounts that only need to be recorded during one time period.
What does it mean to "close" accounts at the end of a time period?
Reset the accounts to zero
How are temporary accounts different from permanent accounts?
Temporary accounts are only used for that time period then "closed" (zeroed out)
What is a post-closing trial balance?
A list of the balances of all permanent accounts
Why is the Income Summary account used?
To represent the closing balance of the Revenue and Expense accounts
What is verified about temporary accounts on the post-closing trial balance?
All temporary account balances are now zero
What does the Retained Earnings account represent?
The prior period's Revenue, Expense, and Dividend balances
Where are the closing balances of Revenue, Expense, and Dividend accounts transferred to?
The Retained Earnings account
What Financial Statement includes the permanent account balances?
The Balance Sheet
What does the Retained Earnings account represent?
The balance of the Income Summary and Dividends accounts
DOUBLE JEOPARDY
How do you use the Income Summary balance and the Dividends to arrive at the Retained Earnings balance?
The Income Summary Balance is closed and the Dividends account is closed. The net amount of the two balances is the Retained Earnings balance.