1. Introduction to the Closing ProcessThe final step of the accounting cycle is the closing process. The main goal of this stage of the cycle is to ensure that the balance of each temporary account is returned to zero and that net income is transferred to the owner’s capital account. The first step in successfully undertaking the closing process is to understand the difference between a temporary account and a permanent account.Is an Account Temporary or Permanent?If a temporary account has an ending balance of $59,000, what is its beginning balance for the following accounting period? If the answer is zero, enter “0”.
   $
   
   
   
   If a permanent account has an ending balance of $59,000, what is its beginning balance for the following accounting period? If the answer is zero, enter “0”.
   $
   
   
   
   Income Summary and Owner’s DrawingRevenues and expenses are reported on the
   
   
   
   and are considered
   
   
   
   accounts. When the balance of any of these accounts is reduced to zero, the balances are closed to a temporary account called Income Summary. This is where expenses are deducted from revenues to arrive at
   
   
   
   so that it can be closed into owner’s capital. Because Income Summary is a temporary account, it also begins each accounting period with a
   
   
   
   balance.Revenue accounts have a normal
   
   
   
   balance and are closed (reduced to zero) with a
   
   
   
   entry. Expense accounts have a normal
   
   
   
   balance and are closed with a
   
   
   
   entry. Drawing is the one
   
   
   
   account that is not closed to Income Summary. This is because Drawing represents the
   
   
   
   withdrawal of cash and other assets from the company, thereby directly reducing the
   
   
   
   account.

   + Revenue and Expense Accounts Revenue – + Normal balance Expense + – Normal balance

   APPLY THE CONCEPTS: Closing entries with T accountsThe closing process is illustrated in the following diagram with the use of T accounts. As you can see, Drawing is not closed to Income Summary but closed directly into Capital. This is because Drawing is not an expense and does not reduce net income.Using the adjusted trial balance provided below, complete the closing entries in the following T accounts.

   	Owner’s Capital
   				20,000
   			Bal.

   	Income Summary
   			Bal.

   Owner’s Drawing
   5,000
   Selling Expense
   164,000
   Fees Earned
   			176,000
   Depreciation Expense
   48,000
   Rent Revenue
   			138,000

   APPLY THE CONCEPTS: Journalizing closing entries for the year ending December 31, 20–Using the Adjusted Trial Balance, prepare the journal entry to close the revenue accounts. For grading purposes, close the revenue accounts in the order listed on the Adjusted Trial Balance.If an amount box does not require an entry, leave it blank or enter “0”.

   + Adjusted Trial Balance Adjusted Trial Balance For December 31, 20– Cash 70,000 Accounts Receivable 29,000 Prepaid Insurance 16,000 Equipment 60,000 Accumulated Depreciation 40,000 Accounts Payable 10,000 Salaries Payable 8,000 Owner’s Capital 20,000 Owner’s Drawing 5,000 Fees Earned 176,000 Rent Revenue 138,000 Selling Expense 164,000 Depreciation Expense 48,000 392,000 392,000

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   	DATE	DESCRIPTION		POST. REF.	DEBIT	CREDIT
   1	Dec. 31						1
   2							2
   3							3

   Close the expense accounts. For grading purposes, close the expense accounts in the order listed in the Adjusted Trial Balance.If an amount box does not require an entry, leave it blank or enter “0”.

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   	DATE	DESCRIPTION		POST. REF.	DEBIT	CREDIT
   1	Dec. 31						1
   2							2
   3							3

   Close the (a) Income Summary and (b) Drawing accounts.If an amount box does not require an entry, leave it blank or enter “0”.

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   	ITEM	DESCRIPTION		POST. REF.	DEBIT	CREDIT
   1	a.						1
   2							2
   3							3
   4	b.						4
   5							5

   After posting the closing entries, a post-closing trial balance. should be prepared to prove the equality of the debit and credit balances in the general ledger accounts. The ending balance of each general ledger account that remains open at the end of the year is listed. Remember: Only the permanent accounts remain open after the closing process is completed.

   Complete the post-closing trial balance below.If an amount box does not require an entry, leave it blank or enter “0”. Be sure to list the items in order of their liquidity.

   + Adjusted Trial Balance Adjusted Trial Balance For the Year Ending December 31, 20– Cash 70,000 Accounts Receivable 29,000 Prepaid Insurance 16,000 Equipment 60,000 Accumulated Depreciation 40,000 Accounts Payable 10,000 Salaries Payable 8,000 Owner’s Capital 20,000 Owner’s Drawing 5,000 Fees Earned 176000 Rent Revenue 138000 Selling Expense 164000 Depreciation Expense 48000 392000 392000

   Post-Closing Trial Balance December 31, 20–
   	Debit Balance	Credit Balance

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