Closing Entries


Module 2:
Completing the Accounting Cycle

Duration:
45-60 minutes

Level:
Beginner to Diploma-Level


Lesson Objectives

➛ Understand the purpose of closing entries

➛ Identify temporary and permanent accounts

➛ Prepare closing entries for revenues, expenses, and drawings

➛ Transfer net income or net loss to capital

➛ Explain the importance of closing entries in the accounting cycle


Key Vocabulary

➛ Closing Entries
➛ Temporary Accounts
➛ Permanent Accounts
➛ Income Summary
➛ Net Income
➛ Net Loss


What Are Closing Entries?

Closing entries are prepared at the end of an accounting period to

➛ Reset revenues and expenses to zero
➛ Transfer profit or loss to capital
➛ Prepare accounts for the next period

Closing entries do not affect cash.


Accounts Involved in Closing

Temporary Accounts | Closed
➛ Revenue accounts
➛ Expense accounts
➛ Drawings

Permanent Accounts | Not Closed
➛ Assets
➛ Liabilities
➛ Capital


Steps in Closing Entries

1. Close revenues to Income Summary
2. Close expenses to Income Summary
3. Close Income Summary to Capital
4. Close Drawings to Capital


Position in the Accounting Cycle

Adjusted Trial Balance
➛ Financial Statements
➛ Closing Entries
➛ Post-Closing Trial Balance


Identify Accounts to Close

Which of the following accounts must be closed at period-end?

➛ Service Revenue
➛ Cash
➛ Rent Expense
➛ Capital
➛ Salaries Expense
➛ Drawings

Select all that apply


Closing Entry – Revenue

Service Revenue balance at year-end = 18,000

Task
Prepare the closing entry for revenue.


Closing Entry – Expenses

Expenses at year-end

Rent Expense
Sales Expense
Utilities Expense

4,000
6,000
1,000


Task
Prepare the closing entry for expenses.


Closing Income Summary

After closing revenues and expenses, Income Summary shows a credit balance of 7,000.

Task
Prepare the closing entry to Capital.


Closing Drawings

Drawings account balance = 3,500

Task
Prepare the closing entry.


Mini Case Study

A business completed its financial statements and is now ready to start a new accounting year.

Questions

➛ Why are closing entries necessary?

➛ Which accounts are reset to zero?

➛ What happens if closing entries are skipped?

➛ Does closing affect assets or liabilities?

➛ What comes immediately after closing entries?


Quick Quiz

➛ What is the purpose of closing entries?

➛ Name two temporary accounts.

➛ True or False | Capital is a temporary account.

➛ Which account is used to close revenues and expenses?

➛ When are closing entries prepared?
Answers ➧ Here
Post-Closing Trial Balance ➧ Here