ACC1701: Accounting for Decision Makers - 3) The Accounting Cycle: Mechanics of Accounting / Closing Entries

3-1: Accounting Cycle Overview

1. Journal Entry every time transaction occurs 

2. Summarize Journal Entry to General Ledger - Every End of the Month

3. Create Unadjusted Trial Balance - Every End of Accounting Year 

4. Adjusting Entries to Create Adjusted Trial Balance 

5. Closing Entries 

6. Create Financial Statements  

3-2: Temporary vs Permanent Accounts

Temporary accounts are used to record transactions that impact the profit and loss of the business within a reporting period. Permanent accounts record cumulative financial activity that is carried over from one cycle to the next.

Permanent Accounts

• Balance Sheet Accounts

  • Assets

  • Liabilities

  • Stockholders' Equity

    • Share Capital

    • Retained Earnings

• Accounts NOT closed

• Ending balance carried to the next accounting period

Temporary Accounts

• Income Statement Accounts

  • Revenues

  • Expenses

  • Gains/ Losses

  • Income Summary

• Accounts closed at the end of the accounting period to Retained Earnings

• The next accounting period's balance will be zero 

3-3: Preparing Closing Entries

Closing entries reset revenue, expense, and dividend amount balances to 0 at the end of the period which helps to summarize a period's revenues and expenses in the Income Summary account

Procedures

1. Close Revenue Account to Income Summary Account 

2. Close Expense Account to Income Summary Account

3. Close Income Summary to Retained Earnings