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Closing Process

Closing Process

Author: Evan McLaughlin

Determine the accounts affected in a closing entry and calculate the amounts for the closing general journal entry.

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Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons,

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Hey everyone, and welcome to our video today on the closing process. So what are today's topics? Well, we're going to walk through the closing process, the last phase in our accounting cycle.

We're going to walk through it by going through a trial balance worksheet and how we organize the closing entries that we need to make. And then were do those entries get entered? Well, they get entered into our general journal and then posted to our general ledger. And then after we've done that, we're going to look at preparing a post-closing trial balance.

So let's start with the closing process. We're going to start with looking at our trial balance worksheet. And we're going to start with our adjusted trial balance, because we've already prepared our financial statements. We've already done reporting.

So now we go through closing, so we're going to start with our adjusted trial balance. So we're going to take a look at our trial balance worksheet. So let's go. Let's take a look at that.

OK. So what we have here is our trial balance worksheet. So you see we've already worked through our trial balance, our adjustments. And we made our adjusted trial balance, created our financial statements. And now we need to close it out.

So what we need to do is we need to look at that adjusted trial balance and clear out our temporary accounts. Now, what are our temporary accounts? Those are our revenues and expenses. So if we populate our closing entries here, you'll see that we need to zero out the balances in all of our temporary accounts.

So if you look at Owner Drawings, we have a $2,000 debit balance in our adjusted trial balance. So we need to clear that out with a closing entry of $2,000 to the credit side. And if you also take a look at Sales, we have a balance in our, again, adjusted trial balance of $150,000 credit. So we need to enter a $150,000 debit as a closing entry.

So we do that for all of our revenue and expense accounts, as well as our drawing account. And any difference gets put to Income Summary. And then we also have to close out the Income Summary account. So if we close out the Income Summary account, we now see that there's a debit and a credit, so there's going to be no balance in that account. And the difference gets put to our Retained Earnings for the end of the year.

So let's take a look at journalizing those transactions. Now that we've gone through organizing our closing entries on our trial balance worksheet, let's look at getting them into our general journal and ultimately posted to the ledger. So now our closing entries into our general journal.

Now remember, this is what the general journal looks like. And we're going to have to enter all of the entries that we identified on our trial balance worksheet, starting with our Revenue. And so we're closing out our Revenue account to Income Summary. Since Revenue has a credit balance, we're going to debit it for the $150,000 to zero out our revenue account.

Then we're going to do the same thing with all of our expenses. And now all of our expenses are going to be credit entries in the closing process, because they have debit balances on our adjusted trial balance. So that's our Revenue closing entry and our Expense closing entry.

Now we also have to close out our Owner Drawings. So we also have to zero that account out, because that's also an activity-based account. So after we've zeroed all those accounts out, identified our closing entries here in the general journal, we have one more entry to make. And that's to close that Income Summary account to our Cumulative Equity or Retained Earnings.

So this is the order of all of our general journal entries for our closing entries. So we've listed those. And now we need to post them to our general ledger.

So each individual account is going to have its own ledger. So like I said, with Revenue, we had a $150,000 balance. We made our closing entry a debit of $150,000 to bring the balance in Revenue to zero.

And now we're also going to look at our Owner Drawings. They had a balance of $2,000. And we made our closing entry for $2,000, a credit, to zero out the Owner Drawings account.

And now we're going to look at our Income Summary. But before we talk about that, just like we did with Revenue and Owner Drawings, each of those expense accounts that we had cleared out that we had on our adjusted trial balance is going to have this same general ledger. It's going to have a debit balance. A closing entry would be a credit, bringing the balance in that expense account to zero.

But let's look at the Income Summary. So the Income Summary, closing entry for our Revenue gave us $150,000 balance. And you notice we had no balance in the Income Summary account, because that's only used in the closing process.

Then we closed our expenses with a debit, bringing the balance in that income summary to $13,500. And then our last closing entry was our Drawing account. And we also closed that to Income Summary, bringing the balance to $11,500.

And now we have to clear that balance in our Income Summary account by closing it to Retained Earnings. And that brings the balance in that Income Summary account to zero. So again, Income Summary is only used in this closing process.

And then finally, our Retained Earnings. We started with $12,000. And through all of our closing entries in the closing process we identified an additional $11,500 credit to Retained Earnings, bringing the balance to $23,500.

So those are all of our general ledger entries that have been posted. Now, once those entries have been posted to the general ledger, then we can move to our post-closing trial balance, which is another tool and a checkpoint for us in the accounting department to make sure that everything went OK in the closing process. So let's take a look at the post-closing trial balance in our trial balance worksheet.

OK. Back to our trial balance worksheet. So now we've taken our adjusted trial balance, identified our closing entries, journalized them, posted them to our general ledger. So now it's time to prepare our post-closing trial balance.

So if we look at the post-closing trial balance and all of the accounts that have balances remaining after we've entered our closing entries, you'll see that it's only our permanent accounts. So it's all of our assets, it's all of our liabilities, and all of our equity. All of our temporary accounts, drawings, revenues, and expenses, now have no balances in them. So it's only our permanent accounts that carry forward to the next period.

And now that we've prepared our post-closing trial balance, we can summarize what we've talked about today. In a nutshell, we looked at the closing process. That's what we talked about today.

We looked at the trial balance worksheet. Our adjusted trial balance was our starting point. We looked at the post-closing trial balance. And then in order to get there, we had to identify the entries that we need to make, put them in our general journal, post them to our general ledger. Then once they're posted, we can look at that post-closing trial balance.

I hope everybody enjoyed this video. And I hope to see you next time.