ACC20 5 Week 2 Discusssion Forum 2

docx

School

University Of Arizona *

*We aren’t endorsed by this school

Course

205

Subject

Accounting

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by MegaKuduPerson789

Describe the year-end closing process. The accounting cycle consists of analyzing and capturing transaction-level information in journals, posting account-level activity in account ledgers, and making appropriate adjustment entries to create an adjusted trial balance which is then used to produce financial statements for the period. Once financial statements have been prepared, one final process takes place referred to as the closing process, or “closing the books”. Dr. Larry Walther of PrinciplesofAccounting.com explains the closing process has two objectives : to update retained earnings , and to “zero out”, or reset temporary accounts (2021, Ch. 4). Said differently, the closing the books is the process of transferring balances from temporary accounts (revenues, expenses, and withdrawals/dividends) to permanent accounts (assets, liabilities, or equity), and resetting the account balances to zero for the next accounting cycle. Milner et al. (2021) describe four steps in the closing process: the Revenue and Expense accounts are closed to the Income Summary account in steps 1 and 2, respectively, and then the Income Summary and Owner Withdrawals accounts are closed to the Owner, Capital account in steps 3 and 4, respectively. Journal entries for each step would appear as such: Step 1. Close Revenue Accounts: Zero out revenue accounts to the Income Summary account. Closing journal entry will be a debit to total revenues and a credit in the same amount to the Income Summary account. Date Account and Explanation Debit Credit Dec. 31 Service Revenue 20,000 Income Summary 20,00 0 To close revenue. Step 2. Close Expense Accounts: Zero out expense accounts to the Income Summary account. Closing journal entry will be a debit to the Income Summary account equal to the sum of all credits to individual expense accounts. Date Account and Explanation Debit Credit Dec. 31 Income Summary 7500 Rent Expense Salaries Expense Supplies Expense Utilities Expense Depreciation Expense - Building Depreciation Expense - Furniture 2,500 3,500 400 500 300 300 To close expenses. Step 3 Close Income Summary: Zero out the Income Summary account to the Owner, Capital account. Closing entry would be a debit to the Income Summary and credit to the Owner, Capital account. Date Account and Explanation Debit Credit Dec. 31 Income Summary 12,500 Jeffries, Capital 12,50

0 To close Income Summary. Step 4 Close Dividends: Zero out the Owner, Withdrawals account to the Owner, Capital account. Closing entry would be a debit to Owner, Capital account, and a credit to Owner, Withdrawals/Dividends. Date Account and Explanation Debit Credit Dec. 31 Jeffries, Capital 7,000 Jeffries, Withdrawals 7000 To close withdrawals. What is the difference between temporary and permanent accounts? Temporary accounts in the general ledger are used to record transactions during a specific period of time therefore the balances of temporary accounts must be closed or “zeroed out” so they do not carry forward into the next accounting cycle. Temporary accounts include revenues, expenses, and withdrawals/dividends. In contrast, permanent accounts, also known as real accounts (assets, liabilities, and owner, capital are not closed at the end of the cycle and get carried forward into the next cycle. All accounts that appear on the balance sheet are permanent accounts. References Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Pearson. Retrieved from: https://plus.pearson.com/courses/13655eee91f94847850d579877b147e7_canvas_bridge/ products/113673/pages/147?locale=&platformId=1030&isTpi=Y&lms=Y Walther, L. (2021). The Accounting Cycle and Closing Process - principlesofaccounting.com. principlesofaccounting.com. https://www.principlesofaccounting.com/chapter-4/the- accounting-cycle-and-closing-process/

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version