INSTRUCTIONS FOR UNIT #10



UNIT # 10 - CLOSING ENTRIES

TUTORIAL - INITIAL

TUTORIAL - COMPLETEDa

TUTORIAL - COMPLETEDb

INSTRUCTIONS FOR UNIT #10

~ In Unit #9 you prepared an adjusted trial balance to assure the equality of debit and credit balances. Having established that transactions are recorded and balances are correct, we can now measure profit or loss and the change in equity for the time period.

~ Given that all revenue and expense transactions are recorded, the net of those transactions will be profit or loss and either increase or decrease the equity of the corporation. The term "Closing" is given to this process, and the formal recording is called closing entries.

~ There are four categories of closing entries:

~ The first entry closes revenue. Revenue accounts are set up to record the revenue from sale of product or service. They have account titles such as sales, fees income, fees earned, interest income, etc. Since revenue increases equity, revenue accounts have credit balances. Therefore, in order to close revenue accounts you need a debit for each revenue account. The total of all debits becomes a credit to a new account called income summary. Think of income summary as a clearing account. The credit side of that account will show the total revenue. Therefore, at this point all revenue balances have been transferred to income summary and their respective account balances have been reduced to -0-.

~ The second entry closes expense. Expense accounts are set up to record the expenses of running the business. They have account titles such as wage expense, salary expense, utilities expense, depreciation expense, etc. Since expenses decrease equity, expense accounts have debit balances. Therefore, in order to close expense accounts you need a credit to each revenue account. The total of all credits becomes a debit to income summary. At this point, all revenue balances are recorded as credits and all expenses are recorded as debits.

~ The third entry closes the difference between revenue (credit) and expenses(debit). If revenue exceeds expense, the balance is a credit and requires a debit to close. The credit goes to retained earnings, thereby increasing equity. If expense exceeds revenue, the balance is a debit and requires a credit to close. The debit goes to retained earnings, thereby decreasing equity.

~ The fourth entry is used if the corporation declared a dividend. Dividends are a distribution of profit to the stockholder, usually in the form of cash. Since they are a distribution of profit, they reduce equity. Accordingly, the closing entry will debit retained earnings, and credit dividends.

~ The tutorial titled Initial has the four categories of closing entries in the first column on the left. Given the following accounts and balances, record the revenues and expense accounts and balances in the correct cells. Write-in the revenue, expense, and income summary account in the first column. REMEMBER TO INDENT THREE SPACES WHEN RECORDING CREDIT ACCOUNTS. Enter these as entries one and two.

INSTRUCTIONS FOR UNIT #10

~ After recording the account name, enter the amount to the related debit or credit cell. Notice the total for income summary is computed as you enter the revenue and expense amounts.

~ Enter the accounts and their balances in the following order:

~ Fees earned $ 25,000

Rent income 5,000

~ Wages expense 15,500

Salary expense 6,000

Rent expense 2,000

Utilities expense 2,000

Supplies expense 500

Insurance expense 2,500

These accounts and amounts complete closing entries 1 and 2.

~ Closing entry three is calculated from the above data.

~ Entry four is calculated from entry three. It is based on the company having a profit

and management distributing 50% of the profit as a dividend. Enter the correct accounts and amounts to close dividends. REMEMBER TO INDENT THREE SPACES WHEN RECORDING THE CREDIT ACCOUNT.

~ These four closing entries complete the closing process for a profit. The tutorial Completed a has the correct account and amounts. The two columns on the right will indicate "Correct" or "Not correct". Note carefully for entry #3 a response of "A profit" is indicated if done correctly.

~ You will now do a tutorial for a loss. Return to tutorial Initial. Reduce revenue and expense balances to -0-. Eliminate the accounts for closing entry #3. You will reenter the correct accounts after closing entries #1 . The new amounts for closing entries #1 and #2 are:

~ Fees earned $ 20,000

Rent income 5,000

~ Wages expense 15,500

Salary expense 6,000

Rent expense 2,000

Utilities expense 2,000

Supplies expense 500

Insurance expense 2,500

~ Closing entry #3 is calculated from the above data.

INSTRUCTIONS FOR UNIT #10

~ Entry four is calculated from entry three. It is based on a loss, and no dividend. Again, if amounts are correct, a response "Correct" will appear; if not correct, then "Not correct" will appear.

~ These four closing entries complete the closing process for a loss. The tutorial Completed b has the correct accounts and amounts. Note carefully, the response "a loss" appears for entry three.

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