Video Transcript: The Closing Process

Hello and welcome back Today, we're going to talk about the closing process.  Earlier. You learned that revenue, expenses and dividend accounts are nominal  accounts. They're temporary and they're merely a sub classification of an  account called retained earnings. You also learn that we prepare financial  statements for certain accounting periods. The closing process transfers the  balances in the revenue and expense accounts to a clearing account called  income summary, and then to retained earnings and the balance in the dividend  account to the retained earnings account. The closing process reduces revenue, expense, dividend accounts balances to zero so that they are ready to receive  data for the next accounting period. Accountants may perform the closing  process monthly or annually. The income summary account is a clearing  account used only at the end of an accounting period to summarize revenue  expenses for that particular period, after transferring all revenue and expense  account balances to income summary the balance in the income summary  account represents the Net Income, or the net loss for that period. So closing or  transferring the balance in the income summary account to the retained  earnings account results in a zero balance in the income summary also closed  at the end of the accounting period is a dividends account containing the  dividends declared by the board of directors to stockholders. We close the  dividend account directly to the retained earnings account and not to the income summary, because dividends have no effect on income or loss for the period. In  accounting, we often refer to the process of closing as closing the books.  Remember that only revenue, expense and dividend accounts are closed, not  assets, liabilities, capital, stock or retained earning accounts. The four basic  steps in the closing process are as follows, closing the revenue account, you will transfer the balances in the revenue account to a clearing account called  income summary, and then when you close the expense. Doing the same thing,  you're closing that into the income summary, and then the income summary  then gets closed into the retained earnings account, closing the dividend  account. You're just transferring the balance of the dividends into the retained  earnings account. Revenues appear in the income statement credit column of  the worksheet, the two revenue accounts in the income summary credit column  for Microtrain company are service revenue of $13,200 and interest revenue of  $600 because revenue accounts have a credit balance, you must debit them for  an amount equal to the balance to bring them to a zero balance when you debit  service, revenue and interest, revenue, credit, Income Summary, which is your  account number, 600 enter the account numbers in the posting reference  column when the journal entry has been posted to The Ledger. Do this for all  other closing journal entries. So here's an example. So you see, this is your  journal, your journal entry. You are going to you have your service revenue for  13,200 your interest revenue for 600 and you're going to close that into the  income summary. So what you're doing you have a balance in your credit and to

close it out, to make it zero, you're just going to debit them on the debit side, and then that closes your balance to zero. And then you're closing your simply just  transferring those numbers into an income summary account, which we call  closing Okay, after the closing entries have been posted, the service revenue  and interest revenue accounts of Microtrain appear as follows. Note that the  accounts now have zero balances as a result of the previous entry. You would  credit the income summary for $13,800 expenses appear in the income  statement Debit column of the worksheet. Microtrain Company has eight  expenses in the income statement Debit column, as shown by the column  subtotal, these expenses add up to $6,510 since expense accounts have debit  balances, credit each account to bring it to zero balance, then make the debit in  the closing entry to the income summary for $6,510 thus to close the entry  accounts, Microtrain makes the following entry, and again you are going to  reverse. We call it reverse as well Re. Reversing. You have it set as a debit, so  you're going to reverse it into a credit all your expenses. And then the total is  $6,510 which you're going to debit into the income account. And then there it's  closing. It's zeroing out the expense account, just like it did for the revenue  account. The debit of 6510 to the income summary account agrees with the  income statement, debit column subtotal in the worksheet. This comparison with the worksheet serves as a check that all revenue and expense items have been  listed and closed. If the debit in the preceding entry was made for a different  amount than the column subtotal, the company would have an error in the  closing entry for expenses after they have been closed. Microtrain expense  accounts appear as follows. Note that each account has a zero balance after  closing. So as you can see, you have your your advertising expense, and you  have zeroed it out, and then your gas and oil. These are just all your expense  accounts. As you can see, the closing, the closing balance, the balance after  closing is zero, okay, and they've all been, have been closed into the income  summary account. And you can see further, the expense accounts have been  closed before the revenue accounts. The end result is the same as the result of  closing the revenues and expenses in Microtrain, the total revenues and  expenses have been transferred to the income summary account. Okay, so for  your total expenses. If total expenses exceed total revenues, the account has a  debit balance, which is the net loss for the period. So what you're hoping for is to have a credit balance of the income summary there, which represents a net  income. We don't want no losses. So on the total revenues, if your total  revenues exceed total expenses, the account has a credit balance, which is  your net income for the period. Microtrain's income summary account now has a credit balance of $7,290 the company's net income for December. So as you  can see, you've closed into the you've closed your your income in I'm sorry,  excuse me, the expenses into the income summary and your revenue into the  income summary for the grand total of 7290, and which is, again, your income 

summary, or your income, your net income for the month. Next close  Microtrain's income summary account into its retained earnings account. The  journal entry to do this is as follows, okay, so you have your income summary,  we had a credit balance. We want to close that account and make it zero. So  you're going to debit it into the retained earnings account, and then the retained  earnings is going to receive the credit for the net income after its income  summary account is closed. The company's income summary and retained  earnings account appear as follows. So as you can see, you have your income  summary, which is finally balanced out to zero because it's a nominal account,  okay, and it's closed into your retained earnings account, which is a permanent  account, okay, the last closing entry closes Microtrain's Dividends account. This  account has a debit balance before closing, to close the account, credit, the  debit, the dividends account and debit the retained earnings account. The  dividends account is not closed into the income summary because it's not an  expense and does not enter into the income determination. The journal entry to  close the dividend account is as follows, so you have your retained earnings  debit for 3000 and then you're going to close your dividends by crediting it to  3000 Okay, after this closing entry is posted, the company's dividends and  retained earnings account appear as follows. And again, you can see that you've closed out your your zeroed out your dividend account, and then you take  because you've paid that money out to your stockholders, it's going to reduce  your retained earnings, okay? And that's where you see you have you can see  the 3000 posted as a debit, and it's going to reduce your income down to $4,290 for the month after you have completed the closing process. The only accounts  in the general ledger that have not been closed are your permanent balance  sheet accounts, because these accounts contain the opening balances for the  coming accounting period, debit balance totals must equal credit balance totals  again. Make sure your equation is always in balance. Always equal each other.  The preparation of a post closing trial balance serves as a check on the  accuracy of the closing process and ensures that the books are in balance at  the start of the new accounting period. The post closing trial balance differs from the adjusted trial balance in only two important respects. It exceeds all  temporary I'm sorry. It excludes all temporary accounts since they have been  closed, and it updates the retained earnings account to its proper ending  balance. A post closing trial balance is a trial balance taken after the closing  entries have been posted, the only accounts that should be opened are assets,  liabilities, stock or capital stock and the retained earning accounts. List all the  account balances in the debit and credit columns and total them to make sure  debits and credits are equal. Look at exhibit 24 a post closing trial balance for  Microtrain company as of December 31 2010, the amounts in the post closing  trial balance are from the ledger after the closing entries have been posted.