Chapter 8
Recording Adjusting and Closing
Entries for a Service Business
Accounting
January 2016
Warm Up
The Walt Disney Company
What do you think of when you hear the word DISNEY?
How many of you think of the environment when you hear
the word Disney?
Warm Up
The Walt Disney Company
In 1990, the WDC introduced an
Initiative called “Environmentality.”
Definition-A fundamental ethic that
blends business growth with the
conservation of natural resources.
Warm Up
The Walt Disney Company
Environmentality goes beyond just
complying with laws. It includes
purchasing recycled products,
waste minimization , resource
conservation, research and
development, community
involvement and education.
Warm Up
The Walt Disney Company
It’s a success!!! A 2011 report on
the water usage at the Animal
Kingdom stated that 145,000,000
gallons of water were saved just by
having employees monitor their
usage.
So here is my question for
you!
Warm Up
The Walt Disney Company
List at least two reasons why you
think the WDC would be interested
in such environmental measures?
If the WDC purchased equipment
to help measure water usage,
would that equipment be classified
as an asset, liability, or owner’s
equity on the balance sheet?
Why?
Warm Up
The Walt Disney Company
List at least two reasons why you
think the WDC would be interested
in such environmental measures?
WDC could generally be concerned
about the environment and believe
that business has a responsibility
to do what it can to conserve
natural resources.
Warm Up
The Walt Disney Company
List at least two reasons why you
think the WDC would be interested
in such environmental measures?
Could be that good use of natural
resources can result in cost
savings for the company. A
company also might think that its
customers expect the company to
protect the environment.
Warm Up
The Walt Disney Company
If the WDC purchased equipment
to help measure water usage,
would that equipment be classified
as an asset, liability, or owner’s
equity on the balance sheet?
Why?
Equipment to help measure water
usage would be classified as an
asset because it is something of
value owned by the company
Internet Research Activity
Go to the homepage for a company or
corporation of your choice. Search the site for
the most recent annual report. Go to the income
statement.
Looking at the categories of
Revenues on the income statement,
List the accounts that may be
Included in the company’s entry to
close the revenue accounts.
Internet Research Activity
Answers should vary here, but all
answers should include the Income
Summary account along with a
variety of appropriate revenue
accounts.
• Chapter 8 presents journalizing
adjusting entries for a service
business organized as a
proprietorship.
• Adjusting entries play an important
role in the accounting cycle.
• Journalizing closing entries is also
covered in this chapter.
Preview Chapter
8.1 Objectives
Objectives for Chapter 8.1
Define Accounting Terms related to adjusting
entries for a service business organized as a
proprietorship.
Identify accounting concepts and practices related
to adjusting entries for a service business
organized as a proprietorship.
Record adjusting entries for a service business
organized as a proprietorship.
REMEMBER…
The balance in an account is changed by
journalizing a transaction and posting the entry to
the account.
When we prepared the worksheet, we only
planned the adjusting entries.
NO account balances have been changed.
Terminology 8.1
Adjusting Entries- journal entries
recorded to update general ledger
accounts at the end of a fiscal period.
(p. 202)
Let me Explain…
• You do not have to decide the debit and
credit parts of the entry. The analysis was
done when the worksheet was completed.
• All that needs to be done at this point is to
record the entry in the journal. T accounts
are given so that you can visualize the
effect of the entry on accounts.
Let me Explain…
There are no documents associated with
adjusting entries, therefore the doc No.
column is left blank.
The entry must be posted to the general
Ledger accounts before the account balance
changes.
Once the entry is posted, the supplies account
balance will reflect the amount of supplies on
hand at the end of the period.
19
ADJUSTING ENTRY FOR SUPPLIES
page 202
1. Write the heading.
2. Write the date.
3. Write the title of
the account
debited. Record
the debit amount.
1 4. Write the title of
the account
3 credited. Record
2 the credit amount.
4
LESSON 8-1
Adjusting Entry for Prepaid Insurance
page 204
1. Write the date.
2. Write the title of
the account
debited. Record
the debit amount.
3. Write the title of
the account
credited. Record
the credit amount.
2
1
3
20 LESSON 8-1
21
page 205
TERM REVIEW
Adjusting entries- journal entries recorded to
update general ledger accounts at the end of a
fiscal period. (p. 202)
Try Aplia 8-1:Work Together & On Your Own
Application Problem 8-1
LESSON 8-1
Exit Ticket
1. Why are Adjusting Entries Journalized?
2. Where is the information obtained to
journalize adjusting entries?
3. What account are increased from zero
balances after adjusting entries for
supplies and prepaid insurance are
journalized and posted?
Recording
Closing Entries
Accounting
Today in Accounting
We will learn about Closing Entries
Complete in Aplia 8-2 Work together, On Your
Own and Application
Next Class (Snow?) 8-3!
Objectives
• Define Accounting Terms related to adjusting entries for a
service business organized as a
proprietorship.
• Identify accounting concepts and practices related
to adjusting entries for a service business organized
as a proprietorship.
• Record adjusting entries for a service business
organized as a proprietorship.
Terminology
Permanent accounts (real accounts)-accounts used
to accumulate information from one fiscal period to the
next. (p. 206)ex-asset and liability & owner’s equity
accounts.
The Ending Account Balances are carried over to the
next fiscal period.
Terminology
Temporary accounts-accounts used to accumulate
information until it is transferred to the owner’s capital
account. (p. 206) EX-revenue, expense, income
summary and Owner’s drawing account.
These accounts show changes in the owner’s capital
for a single fiscal period
Atthe end of a fiscal period the balances are
Summarized and transferred to the owner’s Capital
account.
Begin a new fiscal period at a zero balance.
Need for Closing Temporary Accounts
Closingentries-journal entries used to prepare
temporary accounts for a new fiscal period.
Example- If an account has a credit balance of $3,565,
a debit of $3,565 is recorded to close the account.
Closing Entries
Necessary because it transfers the balance of
one account to another account.
The procedure for closing an account includes
entering an amount equal
to the account balance on the side opposite
its balance.
Analogy
The reasons for recording closing entries can be
compared to a trip odometer. Closing entries are
recorded to prepare the temporary accounts for
the next fiscal period by reducing their balances
to zero.
Likewise, a trip odometer must be reset to zero
to begin recording the miles for the next trip.
Here we go…
• There are four closing entries taken from the
income Statement and balance Sheet columns of
the work sheet.
1. Close Income Statement accounts with credit
balances
2. Close income statement accounts with debit balances
3. Record net income or loss in the owner’s
capital account and close Income Summary
4. Close the owner’s drawing account
NEED FOR THE INCOME
SUMMARY ACCOUNT
CLOSING ENTRY FOR AN INCOME STATEMENT
ACCOUNT WITH A CREDIT BALANCE
page 208
1
2 3
1. Write the heading. 4
2. Write the date.
3. Write the title of the account debited.
Record the debit amount.
4. Write the title of the account credited. Record the credit LESSON 8-2
amount.
CLOSING ENTRY FOR INCOME STATEMENT
34
ACCOUNTS WITH DEBIT BALANCES page 209
1. Date
2. Income Summary
3. Credit
4. Debit amount
1 2 4
3
LESSON 8-2
35
CLOSING ENTRY TO RECORD NET INCOME OR LOSS
AND CLOSE THE INCOME SUMMARY ACCOUNT page 210
1. DATE - 2. DEBIT- 3. Credit
2. Debit
3. Credit
1 2
3 LESSON 8-2
36
page 211
CLOSING ENTRY FOR THE
OWNER’S DRAWING ACCOUNT
2. Debit
3. Credit
1 2
3
[Link] LESSON 8-2
[Link]
3. CREDIT
TERM REVIEW
permanent accounts
temporary accounts
closing entries
Case
General Study
Bakken forgot to journalize and
post the adjusting entry for prepaid
insurance at the end of the June fiscal
period. What effect will this ommision have
on the records of Ms. Bakken’s business as
of June 30th?”
Explain your answer…..
ANSWER
The amount of reported net income will be
overstated because Ms. Bakken did not
record the amount of the insurance
expense.
In addition, the value of the total assets will
be overstated.
The prepaid insurance account balance
will be larger than it should be because
the insurance used has not been deducted
from the account.
WhatExit Ticket
do the ending balances of permanent
accounts for one fiscal period represent at
the beginning of the next fiscal period?
What do the balances of temporary
accounts show?
List the Four Closing entries.
LESSON 8-3
Preparing a Post-Closing Trial
Balance
42
page 219
TERMS
post-closing trial balance-a trial balance prepared
after the closing entries are posted. (p. 216)
accounting cycle-the series of accounting
activities included in recording financial
information for a fiscal period. (p. 217)
LESSON 8-3
43
page 217
ACCOUNTING CYCLE FOR A
SERVICE
1 BUSINESS 1. Analyzes transactions
2. Journalize
2
3. Post
8
4. Prepare work sheet
5. Prepare financial
3 statements
6. Journalize adjusting
7 4
and closing entries
7. Post adjusting and
closing entries
8. Prepare post-closing
6 5 trial balance
LESSON 8-3
Reminder!
After closing entries are recorded and posted, the
business is almost ready to start recording
transactions for the new accounting period.
Before this is done, it is important to check if
debits still equal credits
Take a look at Page 213
The illustration which continues through page 215,
shows all the general ledger accounts and the
entries posted to them.
When posting, if an account has a zero balance,
lines are drawn in both the Balance Debit and
Balance Credit columns to assure the reader that a
balance has not been omitted.
Take a look at Page 213
Itis important to check for the equality of debits
and credits before beginning a new accounting
period.
Analyzing the Ledger Accounts
Refer to the illustrations of the ledger accounts
after adjusting and closing entries are posted……
Look at each account to determine if it has a
balance or not.
48
GENERAL LEDGER ACCOUNTS AFTER ADJUSTING
AND CLOSING ENTRIES ARE POSTED page 213
LESSON 8-3
Quick
PAGE 214 Review
PAGE 215
Post Closing Trial Balance
The word “post” means “after”. Therefore, a post-
closing trial balance is prepared after the closing
entries.
There are eight steps for preparing a post-closing
trial balance.
51
page 216
POST-CLOSING
4
TRIAL
1
BALANCE
1. Heading
2. Account titles
3. Account
balances
4. Single rule
5. Compare
2 3 totals
6. Totals
7. Record totals
6 8. Double rule
5
7
8 LESSON 8-3
Remember
Only General ledger accounts with balances are
included on a post-closing trial balance.
Why is it important to prove that debits equal
credits at the close of the fiscal period?
Answer: To prove that the work is correct
before starting a new fiscal period so errors are
not carried forward.
53
page 217
ACCOUNTING CYCLE FOR A
SERVICE
1 BUSINESS 1. Analyzes transactions
2. Journalize
2
3. Post
8
4. Prepare work sheet
5. Prepare financial
3 statements
6. Journalize adjusting
7 4
and closing entries
7. Post adjusting and
closing entries
8. Prepare post-closing
6 5 trial balance
LESSON 8-3
54
page 219
TERMS REVIEW
post-closing trial balance-a trial balance prepared
after the closing entries are posted. (p. 216)
accounting cycle-the series of accounting
activities included in recording financial
information for a fiscal period. (p. 217)
LESSON 8-3
To do list…
Try the Aplia problems for 8.3
Aplia Chapter Study guide chapter 8
Tutorial Quiz on c21accounting web-site
Xtra study tools
Workplace Competency (page 224)
We will go over the answers together.