Closing Entries - Financial Accounting | Robert Steele | Skillshare

Playback Speed


  • 0.5x
  • 1x (Normal)
  • 1.25x
  • 1.5x
  • 2x

Closing Entries - Financial Accounting

teacher avatar Robert Steele

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

4 Lessons (1h)
    • 1. Closing Entries

      0:41
    • 2. 10 Worksheet Single Step Closing Process

      18:11
    • 3. 20 Two Step Closing Process

      16:57
    • 4. 30 Four Step Closing Process

      24:34
  • --
  • Beginner level
  • Intermediate level
  • Advanced level
  • All levels
  • Beg/Int level
  • Int/Adv level

Community Generated

The level is determined by a majority opinion of students who have reviewed this class. The teacher's recommendation is shown until at least 5 student responses are collected.

19

Students

--

Projects

About This Class

In this accounting project-based course we will learn to enter closing entries using multiple methods.

We will provide Excel worksheets with at least two tabs, one having the completed work, the other having a preformatted Excel worksheet where you can enter data along with step by step instructional videos.

Meet Your Teacher

Class Ratings

Expectations Met?
  • Exceeded!
    0%
  • Yes
    0%
  • Somewhat
    0%
  • Not really
    0%
Reviews Archive

In October 2018, we updated our review system to improve the way we collect feedback. Below are the reviews written before that update.

Why Join Skillshare?

Take award-winning Skillshare Original Classes

Each class has short lessons, hands-on projects

Your membership supports Skillshare teachers

Learn From Anywhere

Take classes on the go with the Skillshare app. Stream or download to watch on the plane, the subway, or wherever you learn best.

Transcripts

1. Closing Entries: within the closing entries. Financial accounting. Of course, we will have a project based course which will go through the process of entering closing entries using multiple different methods. Include in a single step, method to step method four step method. We have the files that can be downloaded down below. There gonna be these three files. These will be Excel files the Excel files having at least two tabs of one tab with the completed problem within it. So you can see how the whole thing is. Put together the second tab with a pre formatted worksheet that you can do in a step by step format along with the instructional videos as you do. So once you complete those, that will be your completed project. 2. 10 Worksheet Single Step Closing Process: Lo. In this presentation, we will enter the closing process into our worksheet with one journal entry. In order to do this, we want to take a look at what we have so far in terms of the process. In terms of the worksheet, what we have here is our worksheet it starting with the adjusted trial balance. Remember where that came from? That means that we have done the financial statements from the adjusted trial balance. Everything has been entered for the month or year. And now we need to set ourselves up for the next month or year and therefore, change this from the adjusted trial balance to a post closing trial. Balance will do this with a similar worksheet, as we've seen with the adjusted trial balance, where in this case, we start with the adjusted trial balance. We will post are close in journal entries in this case, one journal entry, one big journal entry, and then we'll have our post closing trial bounce. Once this has been completed. We also see our accounting equation up top, which is just picking up the information In each section, we see that assets equal liabilities as in and equity, and that will be the case as we go through this process scrolling down, we see the, uh, format of this without the asset accounts and green liabilities in orange and in the equity of light blue. And then the income statement accounts, revenue and expenses. In the dark blue, we see net income at 5 77,000 That is the 800,000 minus the 1 20 minus 48 minus 12.7 minus that 36 summed up here, meaning the credit in revenue minus all the deputies in the expenses gives us the net income. So these are gonna be the temporary accounts that we want to close out. All that revenue accounts and the draws we're gonna close those out to the capital account are ending Gold Bean To have all these accounts zero after this process and the capital account is the account that will be used to make up the difference. So just to see what's gonna happen, and if we could see this very easily without doing a journal entry, what this number needs to be eso don't do this. I'm just is just a demonstration. We're going to say if we just delete all these numbers will be out of balance by 5 68,000 That means that the assets, if we add all these up minus the 70 Contra asset is 5 87,100 minus the liabilities debits of assets minus liabilities of credits. And the contra account of a credit gives us the 5 68,000 That's what we need to be in balance here. So that means that this capital account, if we make all these zero, this capital account needs to be a credit of 5 68,000 and that will put us back in balance . So this, in essence, is our post closing trial bounce. That's what we want to do. But we want to do it by not just deleting everything and put it in a number there. We want to do that by doing adjusting entries or closing entries. So I'm gonna undo this. We're gonna get back, Teoh this process, that's where we want to be. So in order to do this, we're gonna do this with a one step process. The one step process is really nice because it's the quickest way to get to where we want to be and you can see to do that all we have to do is just change all these accounts to get to where we want to be. It's also useful because when you're thinking about different processes, you got to know what's gonna you know what the closing process does. And this is the quickest way to kind of just visualize in your mind what's happening. The four step process, which will go over later and it's in most textbooks will give ah, good understanding and has its purposes and its reasons which will discuss. But the one step process can give you that quick visual ization as you work more complex problems that are going over time periods over more than just one time period. So you can know what's happening with that closing process. So I'm gonna post this. We're gonna we're just gonna build this journal entry. We're gonna post it here, but I'm actually gonna post it down down here right about we'll post it right here starting just so we're close to the accounts that will be dealing with which will be these revenue accounts. And since we only have one journal entry. We should have plenty of room. So we're gonna start with this revenue we're gonna start. Sorry. Withdraws. Everything from the draws on down will be closed out. All of the income statement accounts and this temporary account of draws. So we'll start withdraws. Its got a debit balance. Draws is kind of the most confusing account most the time, because it's not part of the income statement. You can see it's not included in the income statement of the net income calculation, but it's still temporary. And we need to know that draws is bringing down equity. We need just know that draws has a debit balance. How do we make it go down? Then? We do the opposite thing to it, Which in this case, is a credit someone a copy Droz. We'll right click and copy the draws. Gonna put that up Top and Selby 11 of and Selby 11 right click. And I'm gonna pace just the formatting pasting. 123 Now I'm gonna use some formatting to show the indentation. You don't have to do this, but I'm gonna go to the home tab alignment, increase the indentation and you could do that. If there blocking the formatting because of a safe, you know, protected worksheet. You can double click and just space for three times. Teoh indented a bit, and we're gonna put a credit here and and sell d 11. We're gonna represent our credit both in the outer column and with a negative of 10,000. That's what we're gonna need to make this zero. Now I'm starting with a credit note. We're kind of violating the rule of putting the debits on top and the credits on the bottom . And that's going to be the case, because it's gonna be easier for us to build it on and ease of building and ease of going back and seeing what you did. Really kind of Trump's that rule a lot of the time, but we can go back and then adjust it after we have built it to put the debits on top and the credits on the bottom. So we're gonna post this now. So we are in cell h 16 were in cell H 16. We're going to say equals and then point to that 10,000 and that will bring this balance. It's a debit down by the 10,002 0 That puts us out of balance here. We've achieved our first goal of making the draws account zero. We're just going to continue with that goal as we go down the rest of the statement. So next we have the income statement accounts, starting with revenue revenue has a credit of 800,000 in it. We need to make it to go down. We're gonna do the opposite thing to it. Therefore, So we're gonna dead it. Revenue, Someone a copy revenue, Right click and copy of revenue. We're gonna put that in Selby 12. So we're B 12 right? Click Gonna paste that 123 values on Lee. So we will pace that there, and I'm gonna put the amount. It's a credit here, so we're gonna do the opposite debit in order to make it to go down 800,000. Now, we're not in balance. We're just building this journal entry, But I'm gonna post it as we dio because that'll give us a new idea of what we're doing as we go. Why we're doing it as we go. We're just building a journal entry doing whatever we need to do in order to make all these accounts go to zero, and then we're gonna have to do whatever we have to do with the balance to make our journal entry in balance. We'll discuss that when we get there. We are in. So h 17 we're gonna post this. So we're going to say this equals and point to that 800,000 that bringing this credit balance down by that debit to zero. So we've achieved the goal bringing that down to zero. Now we have all the expenses, note all the expenses or debit balance accounts, all then needing credits in order to make them go down. So we'll have some repetition in our process. Here. We've got wages. Expense has a debit. We need to credit it to make it to go down someone, a copy, wages, expense. We're gonna bring this up top and be 13 right? Click and paste. 123 I'm gonna indent by going to the home tab Alignment group, increase indentation. And we're gonna put this in the credit column in d 13. D 13. There's a debit here. We need to make it go down with a credit represented in the Outer column as well as in our worksheet with a negative number. So negative 120000 and enter Excel formats it for us, which is nice. Then we're gonna go down to h 18 were in cell H 18 equals, and we're gonna point to that 120. That's a credit. This is a debit, those air opposites. It's gonna make it go down to zero. So we're brought that 1 to 0. Gonna do the same thing for the utility's now note that we could use some ah, copying and pasting in Excel to make this go faster. But we're learning the process here, not just a pixel of, but of posting this. So we're gonna go through the tedium of each account and do this each time. So we're going to say that we got the 40 and by the way, I will show you how to do it a bit quicker once we have completed this process. All right, so this one's gonna be 48,000 debit. We need to do the opposite thing to it. Credit. So we're gonna copy utility's expense gonna put that in Selby 14. Right click and paste. 123 Gonna go up to the home tab. Alignment group, increased the indentation, Then we're gonna go in the outer column D 14 and we're gonna put negative 48 1000. Then we're gonna post that. So we're gonna be over here in h 19 equals in h 19 and just point to that 48,000. That's a credit. This is a debit. Those opposites making this account go down to zero. Next, we'll do the same for insurance, which is building our journal entry over here. Step by step. Doing what we need to do to make thes go down 20 So insurance has a debit of 12,000. We need to credit it to make it go down. So we're gonna copy the insurance expense. Put that in Selby 15 next area in our journal entry paste it, and we're gonna put that in the credit column and also represented with a negative number of 12,000. Then we'll post that we're gonna go over here to H 20. We're gonna say equals and then scroll over here to the 12,000. That's a credit. This is a debit. Those air opposites making the account go from 12,000 debit down by 12,000 credits to zero two more times. We got the supplies here. Supplies as a debit balance of 7000. We need to make it go down. We're gonna do the opposite thing to it. A credit. Gonna copy the supplies. Right. Clicking on supplies. Copy those supplies. Putting them in the next spot in our journal entry be 16 right Click and paste. 123 values only Most are gonna indent thes two sales. I'm gonna highlight these two home tab alignment increase and in Dent because they are credits. You could do that by double clicking and hitting the space bar three times. Gonna put our cursor in d 16. Negative. 7000. We're gonna post that out then. Although enter here's the 7000 formatted and will be over here in H 21 within age 21. We will say equals point to that 7000 bringing the debit balance down by the credit of 7002 01 more time will do the four depreciation. So here's depreciation 36,000 debit balance. We're gonna bring it down by doing the opposite thing to it. Credit copying depreciation expense. Right click and copy Pasting that in the next available space, which isn't B 17 right click and paste. 123 Then we're gonna go to the home tab alignment increase in Dent. Then we're gonna go to D 17 and put the amount of a credit represented in the outer column and with a negative 36,000 then we'll post that out. So we're gonna post that to H 22. We are in age 22 equals and point to that 36,000. This is a debit. That's a credit that's gonna make this go down to zero. So now we have achieved the goal we've made All of these go down to zero. However, we are out of balance by the 5 67,000 That's what we need to do to put this back in balance . You don't have to do this, but I'm gonna just show you that in one other format we're going to sum up the debits. We're going to sum up the credits. We're going to see what the difference is, what we need to do to make this in balance. So I'm just gonna some the credits here and some the debits. You don't have to do this. I'm doing this very quickly. I understand. But we're just going to some those up and notice. They're obviously not in balance. And we can also see that very quickly by just highlighting these cells. And excel will highlight and sum up everything in that highlighted area or the selected area. And that's 57 67,000. So if we subtract this out, we get the same thing the eight minus the negative, plus the negative numbers subtracting the to the difference between the 802 33 is that 5 67,000 So that's what we need to make us in balance. That's our 5 67 We need to put this journal entry in balance. So we're just gonna I'm called out the plug. We're just gonna plug that in here, and that's going to go right here. And I'm gonna do that with ah formula. I could just type in negative 5 67 but I'm gonna use a formula to do that and what I want to do. Its sum this up. If I sum this up, it'll give me a positive 5 67 We want a negative 5 67 So instead of hitting equals, I'm gonna select negative and then type in s, um, that's to some function and select the some function. And then we want this whole two columns we want from here. See 11 all the way down to D 17 C 11 2 D 17 and Inter. And there it is. There's the 5 67 Now we just need to know where it should go, and we're gonna put that to the capital account. So I'm gonna copy the capital. Gonna put that in B 18 right? Click and paste. 123 that I'm gonna increase the indentation home tab alignment, increased indentation. And then we're gonna post that to the capital accounts that were here in h 15. We're going to say equals and they're gonna point to that 5 67 This is a credit. That's a credit. Those are the same things. It's gonna make this capital account to go up to 5 68,000 So here's at the end of the day, now that we've achieved our goal. We've made all of these zero yet we're still in balance. How? Because we entered all of that information into the owner capital account. So here it is, in the capital account. So note this process is you wanna be able to visualize this process very easily or very quickly, because when you're working with different problems and you're seeing how reports air relating, you gotta know that from one time period to the next time period of these temporary accounts will close and then start over again. And so even if you're using software, you need to be able to do that pretty quickly and be able to say, Oh, that's because these temporary accounts are only being represented for this certain time period. And the single step process is the quickest way to visualize that. Or put that into a worksheet for for understanding or working through problems. Eso note Here, though, the capital account went up buy and you can compare this to the calculation of the statement of Owners Equity. This is basically the beginning balance and then it went up by net income, which is this minus this or 5 77,005 77,000 And it went down by the draws. So we just did it all at one lump sum rather than breaking out income and draws, as is done in the statement of Owners Equity. And then So we went. We took that and we increased it by the net income decreased it by the draws to get to our ending equity balance. Now, last thing to consider is that notice. Our journal entry, of course, is not quite in the perfect format, meaning we don't have the debits on top in the credits On the bottom. We have this one debit down here. We could reform at this. I could move this up to the top and put the credits on the bottom. If we so choose. I'm not gonna do it at this time because I do think that if we're doing a long journal entry like this, and if we're doing it by hand or outside of a system, the system will always put the debits on top in the credits on the bottom as basically a computer system rule. If we're creating the financial statements, however, if it's a complex journal entry, we might want to leave it in. Whatever format helps us to better go back later and see what we did. Ah, and to me, this basically kind of shows exactly what we did because it starts here at the first account and go straight down. If we format it so that the revenue is on top because of the debit, then you could. It's could start to get more confusing on what we did in order to put the proper formatting . And so it's up to you on to make that kind of judgment call when you're doing these types of transactions. 3. 20 Two Step Closing Process: hello. In this presentation, we will perform the closing process using a two step method, so we're gonna close out the temporary accounts. However, we are going to do that with two journal entries rather than one rather than four. There's pros and cons to each type of format. The two step process is pretty easy to t memorize or visualize, even though it has more than just the single step. It's got to journal entries, and it's not as complex, obviously as the four step process. But it also kind of mirrors what we'll see in the statement of equity, meaning we'll see net income being closed out. Teoh the capital account and then we'll see draws in a similar format. As that statement of equity does an A plus and minus format, we will do it with journal entries with debits and credits. For that reason, it's the format that to me, I visualize easiest, and it's important to be able to visualize some method so that we can interpret financial statements and be able to read them from time to time period. Know what the temporary accounts are doing, even if we are reading them within accounting software. So what we have here is our worksheet. We've got the, uh, assets and then the liabilities and orange than the equity and light blue and the revenue and expenses in the dark blue, we have the adjusted trial balance. That, of course, is within the system after we've made the adjusting entries. So where are we in the process at this time? We have entered the normal day to day journal entries. We generated the unadjusted trial balance. We then adjusted the adjust the undigested trial balance to the adjusted trial balance with the adjusting journal entries. Now we're using a similar worksheet, as we saw with the adjusting journal entries. However, we're starting with the adjusting journal entries adjusted trial balance this time, rather than ending with it. And then we're gonna post are closing journal entries to get to the post closing trial balance. We also see our our accounting equation appear, which is just something these up. And we could see that we are in balance in that format as well, just to see that the accounting equation is the same thing. What we're gonna do is we're gonna close out all the temporary accounts which are everything below the capital account to give a quick demonstration of where we want to be. Don't do this. I'm just gonna show this artist to see where we are going. Note, We want all these to be zero, and we want this to still help us to remain in balance. So, in other words, if I was just to do this without a journal entry, if I was just to highlight all these and delete it, then they would all be zero in essence. But we would be out of balance by the 5 67,000 If I delete capital, then we're on a balanced by 5 68,000 Now, I'm just gonna put in whatever in capital we need in order to be in balance a negative 5 68,000 In other words, it's also calculated as the the assets minus to contrast it minus the liabilities which is 5 68,000 So the post closing trial balance will be the same down to the liability. It will then have a different owner capital, that owner capital, representing everything that is done here, all that just being crammed in there and so we're gonna do that. Of course. Rather than just, you know, plugging in the number. We're going to do that with journal entries. So I'm gonna undo all this. We're gonna undo, undo, undo. And then we'll do this process with a two step process. The first step is to close out the income statement accounts. So we're gonna close this entire thing out. We're gonna close all this out to the capital account in a similar way, as we do with the statement of equity where we have the beginning balance and then we typically are. Next increase is net income. So, in essence, we're gonna take net income. All of this, which makes net income 5 77,000 Close it out to the capital account. So to do that, we're going to scroll up. I'm gonna put this up a little bit. I'm not gonna go all the way to the top. Here s so we can be somewhat close, but we won't have enough room, so I'm gonna make it right here. So we're in b nine for going to start the journal entry. Now we'll skip draws even though draws is gonna have to go down to zero to because it's temporary. We're going to start with the revenue income or sales account. Now it's got a credit of 800,000. We need to make it to go down. We're gonna do the opposite thing to it in order to do that, which is a debit. So I'm gonna copy that revenue income or sales account. Copy that. We're gonna put that in B nine, right click paste. 123 Then we're gonna put the amount 800,000 right here. 800,000. And I'm gonna post this as we go. Obviously, we are not in balance. We only have one account but were posted as we go because that will give us an idea of what we're doing, Why we're doing it. What we're doing is making all of these accounts zero Ah, and so we're going to see that as we go. If we post it as we dio So we'll be in H 17 here with NH 17. We're gonna say this equals and point to that 800,000. That's a debit. This is a credit. Those air opposites bringing the balance down to zero. So that's what our goal was we have achieved it there. Rest of the accounts, all expense type accounts all have debit balances. Therefore, they all need to be credited. We're gonna do this one step at a time. However, just so we can practice this and see this full process rather than just copying the whole thing over there. So we're gonna say wages expense has a debit of 120,000. It needs to go down. We're gonna do the opposite thing to it, Which in this case, is a credit. So we're gonna put our cursor in F 18 right? Click and copy. Well, pace that to be 10 right? Click and paste. 123 Then the amounts gonna go in the outer column and be represented with a negative number to represent a credit. 120,000. Also gonna indent this number, clicking on it and go into the home tab alignment and increased the indentation. Now we're gonna post this as we go, so here it is. Here it's debit. Working of the H 18 equals and point to that 120,000 bringing the debit balance down by that credit to zero. Next item. We've got the utilities at 48,000. It's a debit. We need to make it to go down with a credit. So we will copy the utility's expense. Right? Click and copy. We're gonna put that NB 11 right click and paste. 123 Also gonna indent. Go into the home tab alignment, increased the indentation, then we'll go to the outer column D 11 and we're gonna put in a negative 48,000. Now we're gonna post this. We're gonna go down here to H 19. We are in age 19 equals and point to that to 48,000. Bringing that debit balance down by the credit to zero. Now, we're gonna do the same thing for the insurance expense. It has 12,000 in it. We need to bring it down. So we're gonna do the opposite thing to it. A credit. So we're gonna put our cruiser in insurance F 20 right? Click and copy. Then go over here to be 12 right? Click and paste. 123 Gonna go to the home tab. Alignment increased Thean denting Note. You can increase the indented by just double clicking and space, barring three times. If there's some type of block because of ah, formatting of the worksheet and then we're gonna put our cursor in d 12. Negative. 12,000. Now we're gonna post that as we go, so well, scroll down here to H 20. We will say equals point to that 12,000. This is a debit vats of credit bringing the bounce down to zero. Two more times. Here. We got two more expenses. 1st 1 supplies it too has a debit balance of in this case 7000. We're gonna copy the supplies. Were gonna credit supplies. Copy. We'll put that in B 13 right Click and paste. 123 values only. Then we'll go to the Home Tab Alignment Group and increased the indentation in the outer column as well as represented with a negative number Will type in negative 7000 for the credit. Now we're gonna post that. So we're gonna post that to H 21 were in H 21 equals and we're just posting this as we go. We're just building this journal entry as we go, achieving the goal of making these zero point into that 7000. That's a credit. This is a debit. Those air opposite Making the balance go down, Teoh zero last one depreciation expense. So we're gonna copy depreciation expense. We're gonna pace that over there. And credit depreciation expense to make it go down. Right? Click and coffee scrolling over to be 14 right Click and paste. 123 Home tab, alignment, Increase indentation. Then we'll be over here in D 14. Negative. Uh, 36,000. Now we're gonna post this to this area here. So we are in age 22 equals and pointing to that 36,000 bringing his debit bounds down. By that credit to zero, we have now achieved our goal of having all zeros in the revenue accounts. However, we are out of balance by the 5 77,000 that being net income. So we're out of balance by net income. We can see that over here too, if we highlight this whole thing or let's sum it up, I'm going to sum up the debits and credits so you don't have to do this. I'm just gonna sum this up, for example, equals some. It's gonna do this quickly for the examples and then we'll some of the debits meaning the some of this column is 800,000 and the some of this column is 102 123,000. If we take the difference there, the A 800 plus the negative. The difference between the 2 800 minus 2 to 23 we have the 5 77,000 net, which is what we're out of balance by and is net income. So that's what we need in order to put this balance in balance to put this journal entry in balance. No. We can also see that by highlighting the 800 down to the 36 Excel will then calculate that here as well, taking the debits minus two credits, the positive minus and negative. So I'm gonna delete this. We're gonna put that amount here. This is gonna be the credit. This is what we need to be imbalanced at 5 77 instead of just typing it in there as we could Dio, I'm gonna do it with a formula a some function. But if we just summit, if I just add these up, it will be a positive number we want it as a negative. Therefore rather than equals. I'm going to start with a negative sign, then s, um, double clicking the some function highlighting the 800,000 down to the 36,000 and enter. And that gives us at 5 77 That's what we need to be in balance. Where is it going to go to the capital. So it's going to go to the capital account here. This is the equity account. So we're gonna copy the capital. We're gonna put that in B 15 right click and paste. 123 Home tab alignment. Increased indentation. Now we'll go ahead and record it. So we are in age 15. We're going to say equals and point to that 5 77,000 bringing this credit up in the credit direction to 578,000. So know what we did? It's similar to when we do the statement of Owners Equity. We started with beginning equity because it doesn't include all the activity, and then we increase it first by net income. So that's what we do. Typically on the statement of owners equity, increase it by net income, then it's gonna go down by draws because we're so proprietor. In this case, if it was a corporation, dividends. So that's what we're gonna have here. This is this is this is the last piece we need to take out. This is Step one of the two step process that we just did. We completed. Now we are in Step two, and Step two is nice and short compared to Step one. We just need to close out the draws account, so that draws account has 10,000. It's a credit, but I mean, it's a debit balance, which is often the most confusing thing. It's good to have the fund the trial balance in front of us so we can see that it's a debit balance and see what we need to dio credit opposite to make it go down. Um, if you don't have it in front of you, many people get confused on whether the draws is it debit or credit note. Uh, when you think of draws, it's not part of the income statements, not part of net income calculation. However, it is temporary. It's on the statement of Owners Equity, and therefore it needs to go down and be closed out to the capital account. So it has a debit. We need to make it go down. We're going to do the opposite thing to it then, which is the credit? So we're gonna copy the drawers, right? Click and copy. We're gonna put that underneath. I'm gonna put this on the bottom. Since there's only two accounts, it's easy for us to follow that convention of debits on tops credits on the bottom. This will be on the bottom. It's a credit, right? Click and paste. 123 We're gonna go up to the home tab alignment, increased the indentation, and then we'll be in the outer column D 18. We're gonna put that negative 10 1000. Then we'll debit the 10,000 as well. So there's the debit to the 10,000. You could just type it in there, but I like to put a negative of this number. Meaning, Take that and flip. The sign is what that means. And there is that. And now we're gonna go ahead and post post that too. Where's that second account gonna go? It's going to go to capital as well. So we're closing this out to capital as well. Right? Click capital copying. Pasting it in B 17 right? Clicking and pacing it. 123 So there we have it. Now we're gonna push this out and I'm gonna post the draws first, even though it's on the bottom, just to show that it will close out and imposed to capital. So we are in a church. 16. I'm going to say equals and point to the credit to the draws. That's a debit. This is a credit. This will make this account go down to zero. Now we're out of bounds. By the 10,000 now, we're gonna go to the capital now. Note it went up before by net income. Now we're bringing it down by draws. The second step that we typically see in a statement of owners Equity. We got basically the beginning balance plus income in this case, a credit in a credit increasing minus the debit, which will decrease by the draws. So it's because there's something in this we need to double click on it. I'm gonna go to the end of it, and then we're gonna say, plus, and then point Teoh, this capital number that 10,000 bringing this balance down. And that'll put this back in balance here. So there we have it back in balance on the zeros. Here we have this. So we have now achieved our goal. That gold being all temporary accounts, including draws revenue and all expense accounts zero and then making the capital account what it needs to be in order to put us back in balance. So we were and balance before were in balance. Still, even though we zeroed out all these numbers by closing everything out to the equity account , the owners capital account in a similar way. As we see on a statement of owners equity, meaning we have the beginning balance. We increased it by net income, which is net income, because we closed out revenue and expenses to it. And then we decreased it by the draws, decreased it by the draws, given us that ending balance. This is where we stand as a point in time. This is the assets minus the liabilities 5 60 68,000 As of this point time, the post closing trap, bounce and essence representing the balance sheet accounts, the permanent accounts 4. 30 Four Step Closing Process: So in this presentation we will perform the closing process using a four step method. In other words, we will close out the temporary accounts using four journal entries. Our worksheet will be this. We're gonna have the adjusted trial balance, which we will close out to the post to closing trial bounds by entering our close in journal entries. It's good to remember where we are at within the process where at the end of the process of the accounting cycle, that cycle, starting with the normal day to day transactions. That would happen during the month of the main portion of what happens during the accounting process that entering bills, entering invoices, writing checks. Then at the end of the period, we will have the unadjusted trial balance created from the system put into the adjusting worksheet, which then will be including the adjusted entries, which will result in the adjusted trial balance that then used to create the financial statements. So at this point, financial statements have already been created. We're gonna use a similar worksheet as we used in the adjusted trial bounce type of worksheet. However, this time, instead of starting with the unadjusted trial balance. We start with the adjusted trial balance. We will record our adjusting entries to get the post closing trial balance format of the trial balances that we have assets up here in green. We got the liabilities in orange equity in light blue revenue and expense account income statement accounts In the dark blue we have credits represented by brackets debits without brackets on the tribe balance in order to make this a more condensed format and in to help us with formulas with we see that the total debits are equal to the dub total credit by the zero here, net income adding up Teoh the 800,000 minus all the expenses of 577,000. We also see the accounting equation up top so we can see it in this format to so that assets equal liabilities plus equity. Our goal here is to close out owl temporary accounts to the capital account. If we're going to see that, I'm going to just do a shortcut to do that to see the end process here. Then we'll go through the four steps in order to get there within those four steps. No, what we want to do is we just want to make all these go down to zero and then put that balance in the capital account. We can see that if don't do this. I'm just gonna just just a demonstration. If we just delete this account, we'd see that. Okay, Now we're out of balance. By 5 68,000 We want to be in balance. We want the debits to equal the credits. If we just put that amount, then in the capital account this credit 5 68,000 That's what we want. 1/2. We wanna have a trial bounce which needs to be in balance. We want to have all the temporary accounts going. We want to have the owner and the equity account to be equal to whatever needs to be in order for the debits to equal the credits or in other words, in order for the assets here. If I highlight thes minus the liabilities to add up to excels given me 5 636,000 So we're gonna be left with just the balance sheets accounts in other words, less with just the permanent accounts, removing all the income statement accounts and temporary accounts, including revenue and expenses and the draws account. So I'm gonna undo that, and we'll start this process. Note that the four step process is the traditional process used within textbooks. It has its pros and cons. The pros are that we get to see smaller chunks of journal entries, and we get to basically really check to see if we are in balance before we finalize the process by post into the owners capital account. The cons are that it's a longer process, of course, and we could do this basically in one journal entry. And the four journal entries can be a little bit difficult toe remember, But once we have it a few a few times, it's not too difficult. We're also adding a bit of complexity with the income summary account. The goal of the income summer account is that we can put this information into the income summary accounts and check if we're OK and and balance, and that everything is is correct at that point before closing it out to the capital account. So there is a purpose to it. It's called a clearing account because it's gonna be zero before this process and zero right after this process. So it's really not gonna have any balance in it for any given point in time because we're just gonna use it, put something into it and take out just basically in the same point in time. So the four step process is going to first close out revenues and step one Teoh the income summary. Then it's going to close out the expenses to the income summary achieving then the goal of creating all income statement accounts to be zero, leaving us within the income stemming accounts net income. So net income will then be moved to the income summary account. Well, then close out the income summer account, which will have net income in it to the capital account, increasing the capital accounts by net income. Then we'll finally close out draws. And that will be the same process as the two step method of the quick journal entry. Just that close out the draws for the final step for step of the closing process. So we'll start off with journal everyone. We're gonna go all the way to the top this time because we do have. We're gonna need more room. We're gonna call this step one of the four step process. We're gonna close out the revenue account. Here's revenue has a credit balance in it. We need to do the opposite thing to it. Which in this case, will be a debit. Someone to copy this account, right. Clicking and copying. Scrolling up. We're gonna put that in B five B five, right click. I'm gonna paste it. 123 Values on Lee. Then within the debit section because this is a credit. We need a debit to make it go down. We're gonna put the amount that we need to make it go down to zero by which is 800,000. So within cell C five, we're gonna put 100 1000 and I'm just gonna post this as we go. That's gonna be how I'm gonna do all these just to show that we want to show that this is going to zero. That's the whole point of us and how we determine what to put in that journal entry. So we're gonna say equals scroll back up and point to that 800 and enter. So we just posted that out there. So this is going right there. And so that makes us go to zero. That's what we want. Now, the other side is a little bit confusing here because we ultimately wanted to go to the capital account. But before we go to the capital account, were first gonna put it into this clearing account called the income Summary account. And once we close revenue and then expenses to it and journal entry to we close the expenses to it, we will have net income in it and can double check that account before closing to the capital account. So we're gonna close the other side to the income summary, so I'm gonna put my cursor in F 17 right click and copy Scrolling back up. We're gonna put that underneath in B six, right click and paste. 123 Gonna indent that by going to the home tab Alignments Group increased Thean denting. If you can't do that because of the form INGE formatting just double click in it and space bar will work. We're gonna put a credit. I could put a negative of 800,000. We will be representing the credits in the credit column here and with negative numbers. Although over here we will only be using negative numbers in order. Teoh, optimize our worksheet. I'm gonna do that, have ever with a formula. So I want to take this number but flipped the sign, make it a negative. So instead of hidden equals and point in that cell, I'm just gonna put negative and point to that cell and that will take that cell and say I want that number And yet flipping the sign So it is a negative 800. We're gonna post this now, the second piece of this journal entry to the income summary, which is right there. So we are in age 17 h 17. We're gonna say that equals point to that 800,000 and enter. So know what we have done here. All we have done is move this 800,000 closing it out of the revenue making revenue zero, that being our goal and putting it not into the capital yet, but into the income summary temporary account. It's gonna be held there until we close out the expenses to it as well, At which point we will have net income in it, and then we'll close it out to the capital account. Let's do that. Now. Now, the expenses we have here on expense of wages, expense the next thing we want to go down, all these expenses have debit balances. We need to make them all go down to zero. So we're gonna be crediting all of them and we'll start with the wages expense. It has 120 debit. We're gonna do the opposite thing to it. Credit Gonna copied rages expense. Right click and copy Scrolling back up. We're gonna make our second journal entry here. We're gonna take these lines out, and I'm gonna put this on the bottom because the top is gonna be something different. It will be the income summary account, but I'm gonna put this on the bottom so we could put the credits on the bottom, but that there were gonna have a credit and the amount will be that 1 20 That's what we need represented in the credit side and with a negative number for the journal entries section. So I'm gonna post this as we go. This will be a bit longer of a journal entry than the 1st 1 If we post as we go, we can see that we are achieving our goal as we construct the journal entry. So I'm gonna post this in cell H 19. Even though we're not done with it equals and point to that 1 20 That's a credit. This is a debate that will make this amount or account go down to zero. So there we have that. We're gonna do the same thing for the utility's expense. Here we have the debit balance of 48,000. We need to make it go down. We're gonna do the opposite thing to it, which is a credit we're gonna copy F 20 right quick and copy. We're gonna put that in B 10 right Click and paste. 123 Gonna highlight those two cells. Home tab alignment increased Thean Dentyne. Then we're gonna go to D 10. We're gonna put negative 48,000 and enter. So there it is. We're gonna post that now to H 20. So we're now in age 20 were going to say that that equals and pointed Teoh that 48,000 bringing this balance down by 48,002 0 I'm gonna do this a couple more times. We got the insurance expense. Also having a debit. It being a expense, all expenses having debits. We're gonna copy that. We're gonna do the opposite thing to it, crediting it right Click copy. Gonna put that underneath. Next section in our journal entry be 11. The cell, right click and paste. 123 Gonna increase the indented. You could do that once again by double clicking here and hitting the space bar, or I'm gonna go off the cell back on it. Going to the home tab. Alignment increasing, denting. Now we're in d 11. We're gonna put the amount of 12,000. It will be a credit represented in the credit column and with a negative negative 12,000. We're gonna post this as we go. This is a longer journal entry. We're obviously not done with it. The debits not equal in the credits at this point. But we will be posting as we go to see that we are achieving our goal. Achieving our goal of having zeros in the expense accounts. So in age 20 were going to say equals and point to that 12,000. These air opposites, debit credit, opposites making this count. Go down to zero. Next, we have the supplies. It has a debit balance. We need to make it go down. So we're gonna do the opposite thing to it. Ah, credit. So I'm gonna copy the supplies. Right? Click and copy. Scrolling back up to B 12. Right Click and paste. 123 We will indent going to the home tab Alignment increased the Indian Dacian and then in D 12. We need to take that 7000 and put that indeed, 12. So it's gonna be a negative 7000. They were gonna post that as we go. So we're gonna scroll back down here to H 12 h 12 equals pointing to that 7000 bringing this balance down from 7000 down by 7002 0 We only get to do this one more time and then we have to stop. We have the depreciation at the bottom last expense. It being 36,000 in the debit. We got to do the opposite to make it go down. That's a credit. We're gonna copy the depreciation expense scrolling up to be 13 Right click and paste. 123 We're thinking indent going to the home tab Alignment Group and increased the indentation. And we're gonna put the amount in D 13. That amount of 36,000. It's a debit. Here. We need a credit there. Therefore, we're gonna put a negative 36,000. We're gonna post this last one as we go. So we are in age 23. We're going to say equals and point to that 36,000. This is a debit vats accredits. Gonna bring this account down to zero. So we have done our goal. Achieved our goal of making all these accounts go down to zero. However, we are not in balance. Were out of bounds by 223,000. And we have to put that number somewhere where we're gonna put it. Not to the capital yet. It's going to get there eventually. But first, we're gonna make it go to the income summary account. It's gonna go to the income summary as we did with the revenue revenue went to the income. Some money now expenses. What's gonna be in the income summary after we record the expenses here. It should be equal to net income, so net income should be amount in income Summary after we did this. So what we're gonna do is the debit. Now, the debit, we need to make this imbalance. Meaning if we highlight all these, it has up to 223,000. What were out of bounds by? That's what we need here in order to have the debits equal the credits. Now, we're gonna do this with a formula. I'm gonna do it with a formula. We could just type in the number, but I'm gonna do with formula, and I'm gonna type in instead of equals on negative toe flip. The sign s, um, double click the some function. And then if this is in your way, we can move this so I could move this up here, and I usually highlight the whole thing. Meaning both columns. We could just highlight the outer column. But if we change anything, just note that you can highlight both columns. Just don't include the column we are in or the cell were in because that will cause a problem. We can't sum up the cell that we're in, and then we're gonna say enter. And so there's that. So now if I highlight thes, it adds up to 223,000. That debit is 223,000. If we add up the debits and credits highlighting all then or selecting all them, it sums up to zero. The debits minus the credits equals zero debits equaling the credits. That account. Then what's it gonna be? Income summary. So we're gonna copy that income summary account copy. We're gonna pace that NB eight right Click and Paste. 123 And then we're gonna record that right here, to the income summary accounts. That's gonna put us back in balance. Now, there's also there's something in it already. Therefore, we're gonna double click on it. We're gonna go to the end of it. We're gonna say, plus and then point to that 223,000 Indian Come summary journal entry that will bring this balance down the 800 down to 577. Number should look familiar. What should that member be once again? What is that number? Net income. We have net income in the income summary This is important because a lot of textbooks will reference the income summary account when they're when they're talking about how to work a particular problem. For example, a partnership. If we're trying to allocate the income to the partners, they may say something like, Ah, textbook problem often says something like, The income summer account has this amount in it before it's allocated to the partners, and we need to know that we're doing a four step process. And that's just what that basically means, that we have allocated net income to it. And now and so they may not say net income. They may say the income summary account before we close out to the capital accounts, and therefore it's important just for us to know this terminology just more more phrases and definitions. We just need to know in order to go to work some problems and know what's what's going on. So we get the income summary account here. Now we're gonna close this account out. Teoh the Capital accounts and this was Step two. We're now on step three, so note that this account you may think, Hey, this account has no function. We just put it in that we could have put it right into the capital account. Why didn't Why didn't we do that would be done now. It would be a three step process. We wouldn't need this step for, but the income summary has a function. Basically, the function now is we can save him. You know, it looks like net income ties out to what we have here ties out to the income statement that we had created from the adjusted trial balance before this. A closing process. And now we have all these accounts at zero. So that's what we want. We can kind of double check it before we then make the final journal entry closing the income summary to where we ultimately wanted to be, which is the capital account. So now we're gonna close this out. This has a credit. We're gonna do the opposite thing to it. A debit. So we're gonna copy the income summary. Right? Click and copy. We're gonna pace that in B 15 right? Click and paste. 123 And the amount is gonna be 577 1000. Then we're gonna credit something for that same amount will be a much smaller journal entry . And I mean, I'm still just typing it in there. I'm gonna put negative of this number. We could just type it in there. But this will say instead of equal that number, I want a negative. That number meaning I want that number and then flipped the sign so that will give us that . And then we're gonna put that wear to the capital account. So we're gonna right click and copy of the capital account. Put that in B 16 right Click and paste. 123 Then we're gonna increase Thean denting, going to the hometown alignment, increase the indentation, and now we can post this out. So I'm gonna go to the income summary, which should be zero after this. There's something in h 17 already, so we're gonna double click on it. Go to the end of it, se plus and point to that income summary which should bring this back down to zero other side, go into the capital counts that were up here in h 15. We're going to say equals point to the capital. That's gonna bring that 1000 up by the 5 77 to 5 78 Now note. This is similar to the equity section in the statement of Owners Equity, where we have the beginning balance, which in this case would be 1000. It then increases by net income. In our case, we have a credit and a credit increasing in the credit direction 25 78. And then it's gonna go down by draws our next journal entry, our last journal entry journal entry. Four of the four step process so draws often a bit of a confusing account. It's very useful to have a trial balance in front of you when working problems, even if there are multiple choice questions that looking account like draws and say, Is it a debit or credit balance? What I need to do to it? Here we can see it's a debit because it has no brackets. We can also know what's a debit because it's decreasing the capital account. It kind of represents the owner taking money out of the capital account, therefore decreasing the amount owed it to the owner given by the total capital accounts. So we're decreasing. We're gonna decrease capital when we post this out So it has a debit. We're gonna make it go down by doing the opposite. Which is a credit. This, by the way, is the same journal entry. We have a two step process closing out the draws, so I'm gonna right click and copy. We're gonna put that on the bottom. So here's the four. I'm gonna put that in B 19 right Click and paste. 123 Gonna indent. Going to the home tab. Alignment increased the inventing. We're gonna put that in the credit side Note. I put it on the bottom just for formatting purposes that this is a smaller journal entry. We can put the credit on the bottom. That's only gonna be two accounts affected here. We're gonna put that negative 10,000 and then they debit. What? The debit is gonna be here. I'm just gonna put negative of that number. Meaning? Take that number and flip the sign to it. Positive There is that. And what account will that be going to the capital account. So we're gonna post that to the capital account, so I'm gonna go ahead and copy, right click and copy of the capital. Put that in B 18 right click and paste. 123 Then we're gonna post this out. So here's the capital account and I was supposed to draws first, even though it's on the bottom, and then we'll discuss the capital account. So here's the draws. We're gonna post that out here to H 16 within H 16 we're gonna say equals and point to that 10,000 bringing the 10,000 down by 10,000 to zero. Then we have the other side going to the capital now. Know what the capital has now similar to the statement of owners Equity? It started with the beginning capital before we close that all the activity to it, which would give us the ending capital. And then we closed out much of that activity that being all this, that adding up to net income. So we closed out net income to it, and now we're gonna decrease it by draws. So we credited it, credited it to increase it by the net income. Now we're gonna decrease it with a debit for the draws. Something's in it already, so we're gonna double click on it. We're gonna say, Plus, if we're at the end of it here when we're at the end of it and go over here to the capital account and that will bring this balance down. So there's our end goal. Once again, we have all of these accounts being zero everything below the income summary. Had something in it, closed it out. That's why it's a clearing account. It really has nothing in it at any really given time because it's not even in there for a day. We just put it in there and take it out of there as part of the same process. So that's gonna be back down to zero. And the capital account now includes all of this information. All these accounts six at 5 68,000 scrunched into one number there the capital account representing the permanent account permanent number of all capital accounts. In one account, the post closing trial balance now representing basically balance sheet, account all the permanent accounts, eliminating all income statement accounts, all temporary accounts and draws the other temporary account so that we can start the new process counting up from zero within the new month or new year.