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 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:

 

1

2

3

4



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.

 

References:


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