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4 - The Accounting Cycle and Closing Process - YouTube
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I'm Larry Walter and this is
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calm chapter 4 in this module
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Michael as well as look at the closing
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process to review the accounting cycle
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consider that the accounting cycle
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simply is a way of describing how we
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capture transaction event data and move
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it through the accounting system to the
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ultimate preparation of financial
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statements
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there are various steps in the
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accounting cycle ordinarily we think
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about the first step being the
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examination of transactions and events
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and the preparation of a journal entry
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those journal entries are periodically
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posted to appropriate ledger accounts
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from those ledger accounts a trial
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balance can be constructed and examining
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that trial balance may provide
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additional reason to consider the need
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for adjusting entries so that income is
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properly measured for the particular
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accounting period those adjusting
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entries would be prepared recorded in
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the journal and posted to the ledger the
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ledger then provides a basis for
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preparing an adjusted trial balance from
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which financial statements may be
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prepared those financial statements may
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be prepared directly from the adjusted
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trial balance or a worksheet might be
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used to facilitate the process such as
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was illustrated in a previous module
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moving on to the closing process as we
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consider the closing process and
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consider why is this necessary it's
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important to recall that accounting
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information is for periods of time
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income statements operating statements
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reflect revenues and expenses for a
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particular period of time and so what we
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have in the ledger are accounts that
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reflect revenues for the period expenses
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for the period and so forth that
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information needs to be closed out
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before you begin another accounting
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period in other words the revenue
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accounts and expense accounts need to be
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reset to zero so that what will be
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captured in the ledger going forward is
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information about revenues and expenses
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for the next accounting periods so I say
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on the slide that we need to update the
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retained earnings account in the general
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ledger to equal the into period balance
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we do that by periodically closing our
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revenue and expense and dividend
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accounts that is we zero those out the
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revenue and expense and dividend
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accounts are called temporary or nominal
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accounts in contrast to the balance
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sheet accounts that are referred to as
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real accounts
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so let's look at the closing process you
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could think of this in steps we could
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first think of closing the revenue
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account we might in the closing process
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introduce another account called income
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summary essentially that's a Corral
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where we're going to gather up all the
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information about all revenues and
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expenses it's not a financial statement
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account at all it's just an account that
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is used temporarily in the closing
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process similarly we would close the
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expense accounts to income summary and
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once that's done the balance of income
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summary would reflect the amount of net
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income for the period that's then closed
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to retained earnings additionally we
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would need to close the dividend
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accounts so let's look at this in
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journal entry form here on the screen is
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an example of the first entry closing
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revenues revenues have a credit balance
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to close them will debit revenues and
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credit income summary at this point
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we'll have 30 $2,800 in the income
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summary account reflective of the total
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revenues the next journal entry reflects
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the closing of the expense accounts
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because the expense accounts have debit
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balances we need to credit them to close
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them or zero them out and in turn debit
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income summary for the total of the
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expenses thirty thousand two hundred now
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comparing you see there's thirty two
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thousand eight hundred that's been
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credited to income summary for all of
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the revenues and thirty thousand two
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hundred that's been debited to income
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summary for all of the expenses that
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gives us a net balance of twenty six
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hundred dollars in the income summary
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account that corresponds to the net
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income of the business and that is what
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is closed out then to retained earnings
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so here I'm debiting income summary
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twenty six hundred and crediting
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retained earnings in this particular
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entry and notice now that would cause
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the income summary account to have a
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zero balance that would cause the
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expense accounts to all have zero
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balances that would cause the revenue
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accounts all have zero balances and the
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retained earnings account has been
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brought forward to its then current
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balance reflecting the end of your
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condition
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we also need to consider the dividends
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which are closed to retained earnings
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retained earnings over time is the
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undistributed earnings of the company so
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here I'm crediting dividends to close
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that temporary account and debiting
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retained earnings so to review the
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process then this slide may prove how
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here's our revenue accounts that I'm
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debiting thirty two thousand eight
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hundred and crediting income summary
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thirty two thousand eight hundred I in
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turn credit all of the expense accounts
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and debit income summary then in turn I
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close the income summary account to
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retained earnings
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lastly I'll close my dividends to
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retained earnings that information then
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gives me a basis for preparing a
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post-closing trial balance now the only
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accounts that remain would be assets
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liabilities and the equity accounts the
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end of period equity account balances so
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a post-closing trial balance reveals the
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balance of accounts after the closing
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process all the revenue expense of
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dividend accounts have been swept away
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or zeroed out
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this assembly demonstrates that the
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accounts are in balance it's not a
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formal financial statements here's an
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example for England tours company after
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the closing process
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note that each of those accounts is a
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balance sheet account total debits are
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65,000 total credits are sixty-five
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thousand I'm fairly confident I've
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successfully completed the closing
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process lastly I would like to close
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this module by asking you to consider
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computerization first of all
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computerization can do away with the
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need for the closing process I've just
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described a number of accounting
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software programs are based on database
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logic that will maintain revenue and
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expense information indefinitely and so
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rather than needing to close and restart
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revenue and expense accounts it's
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sufficient to simply query the database
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for the period of time of interest so
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one could say give me the information
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about revenues and expenses for the
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period January 1 year 1 through December
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31 year 1 or January 1 year 3 through
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December 31 year 3 it's not necessary
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that you restart the accounts at each
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particular period given the robust
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character of a sound computer-based
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accounting system financial results for
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almost any period of time can be created
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and the closing account becomes far less
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relevant
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you
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