Closing Entries | Answers
Identify Accounts to Close
Which of the following accounts must be closed at period-end?
✓ Service Revenue
✗ Cash
✓ Rent Expense
✗ Capital
✓ Salaries Expense
✓ Drawings
Closing Entry – Revenue
Service Revenue balance at year-end = 18,000
Closing Entry
Service Revenue
Income Summary
Income Summary
18,000
18,000
18,000
Revenue accounts are debited to bring their balances to zero.
Closing Entry – Expenses
Expenses at year-end
Rent Expense
Sales Expense
Utilities Expense
Sales Expense
Utilities Expense
4,000
6,000
1,000
6,000
1,000
Closing Entry
Income Summary
Rent Expense
Sales Expense
Utilities Expense
Rent Expense
Sales Expense
Utilities Expense
11,000
4,000
6,000
1,000
4,000
6,000
1,000
Expense accounts are credited to close them.
Closing Income Summary
After closing revenues and expenses, Income Summary shows a credit balance of 7,000.
Income Summary credit balance = 7,000 (Net Income)
Closing Entry
Income Summary
Capital
Capital
7,000
7,000
7,000
Net income increases owner’s capital.
Closing Drawings
Drawings account balance = 3,500
Closing Entry
Capital
Drawings
Drawings
3,500
3,500
3,500
Drawings reduce capital.
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?
➛ To reset temporary accounts and transfer profit or loss to capital.
Which accounts are reset to zero?
➛ Revenues, expenses, and drawings.
What happens if closing entries are skipped?
➛ Income and expenses will carry forward incorrectly into the next period.
Does closing affect assets or liabilities?
➛ No - only temporary accounts and capital are affected.
What comes immediately after closing entries?
➛ Post-Closing Trial Balance
Quick Quiz
What is the purpose of closing entries?
➛ To close temporary accounts and prepare for a new accounting period.
Name two temporary accounts.
➛ Revenue and Expense
Capital is a temporary account.
➛ False
Which account is used to close revenues and expenses?
➛ Income Summary
When are closing entries prepared?
➛ At the end of the accounting period, after financial statements.
Post-Closing Trial Balance ➧ Here