Accounting - Lesson Plan, Copyright © 1998 Art Lightstone

Lesson: 34

Topic: Closing Entries - A General Ledger Perspective

Objectives:

By the end of this class, the student should understand the process involved in closing the revenue, expense, and drawings accounts in order to update the owner's capital account.

Students will learn to record the closing entries in both the General Journal and the General Ledger.

In addition, students will learn to differentiate between:

permanent (real) accounts and temporary (nominal) accounts,
the Trial Balance and the Post-Closing Trial Balance, as well as
the Income Summary (or Revenue and Expense Summary) account and other Owner's Equity accounts.

Permanent Account: an account which carries its balance into the next accounting period.

Temporary Account: an account which transfers its balance into the capital account at the end of an accounting period. Thus, it will begin a new accounting period with a zero balance.

Because the balance of revenue, expense, and drawings accounts continually cumulate, they must be closed at the end of the fiscal year. Because these accounts do not continue into the next fiscal period, they are called "nominal" accounts.

Closing these accounts allows us to plainly observe the previous year's effect on our revenue, expense, and drawings accounts. You can well imagine that if we did not close these accounts, their balances would build to outrageous amounts.

Exploring the Closing Process

Closing accounts is a fundamentally a four-step process:

Step 1

Transfer the balance of any revenue account(s) to the Income Summary.

Date	Account	Debit	Credit
Dec. 31	Lawncare Fees Earned	100,000.00
	Income Summary		100,000.00

Step 2

Transfer the balance of the expense account(s) to the Income Summary.

Date	Account	Debit	Credit
Dec. 31	Income Summary	65,000.00
	Rent Expense		20,000.00
	Wages Expense		40,000.00
	Hydro Expense		5,000.00

Step 3

Transfer the balance of the Income Summary to the Capital account:

Date	Account	Debit	Credit
Dec. 31	Income Summary	35,000.00
	Capital		35,000.00

Step 4

Transfer the balance of the Drawings account to the Capital account.

Date	Account	Debit	Credit
Dec. 31	Capital	5,000.00
	Drawings		5,000.00

Method of Instruction and Evaluation:

After a Socratic lecture on the topics outlined above, students will complete exercise 1, on page 334 of the text (page 237 of the workbook).

Expectations Addressed:

The "Fundamental Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

Introduction to Accounting as a Discipline:
- explain the purpose of accounting;
- explain the difference between accounting and bookkeeping;
- identify the users and uses of accounting;
- identify the Generally Accepted Accounting Principles (GAAP) and explain their importance.
Business Structures:
- describe the characteristics of different forms of business organization, including sole proprietorship, partnership, and corporation;
- describe the advantages and disadvantages of different forms of business organization, including sole proprietorship, partnership, and corporation;
- explain the differences among the equity sections of different forms of business organization, including sole proprietorship, partnership, and corporation (e.g., capital account in a sole proprietorship versus common stock in shareholders’ equity in a corporation).
The Accounting Cycle for a Service Business:
- assess the effects that transactions have on the accounts and financial statements of a service business;
- record transactions using the journals and ledgers of a service business;
- prepare a trial balance and the financial statements for a service business;
- record adjusting and closing entries for a service business (e.g., prepaid expenses, amortization, accruals);
- describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a service business;
- apply the Generally Accepted Accounting Principles (GAAP) at each stage of the accounting cycle for a service business.

References:

Text, chapter #9; pages 321 - 333.
PowerPoint: Journalizing the Closing Entries

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