Accounting Fundamentals II: Lesson 10 Page 1 of 5

Accounting Fundamentals II: Lesson 10 (printer-friendly version)

Your Instructor: Charlene Messier

INSTRUCTIONS:

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Chapter 1

Introduction

Congratulations! You've almost made it to the finish line for the fiscal period for Teammates Inc. In this
lesson, you will journalize and post adjusting and closing entries.

The adjusting entries that you made on the worksheet must first be journalized and then posted to the
General Ledger in order to bring those accounts up to date for the closing of the fiscal period.

We'll need to close out certain accounts so that their balances will not be carried forward into the next
fiscal period. You'll also be journalizing and posting these entries.

And finally, you'll prepare a Post Closing Trial Balance,

which proves the equality of debits and credits for
accounts with remaining balances in the General Ledger
by simply listing the account titles and their respective
balances.

There's a lot to do, so let's get started on the last leg of

our journey with Teammates Inc.

Chapter 2

Journalizing and Posting Adjusting Entries

Looking at the worksheet for Teammates Inc., you will see that we have four adjusting entries in
columns 3 and 4 that collectively affect a total of eight accounts. You now need to enter these into the
General Journal, page 13, which is the page you previously used for journalizing adjusting entries.

Looking at column 3, Adjustments Debit, you will see that the

first entry is a $12,290.00 debit to Merchandise Inventory. This is
Adjustment "a."

On the next available line in your General Journal, page 13,

enter the date, December 31, and write Merchandise Inventory
in the Account Title column. In the Debit column, enter
$12,290.00. On the line below, enter the same amount in the
Credit column and write Income Summary in the Account Title column. You've now finished
journalizing this adjusting entry.

Continue to journalize the remaining three adjustments from columns 3 and 4 of the worksheet.

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Journalize both the debit and credit parts of adjustment "b," then do the same for adjustments "c" and
"d." You will use a total of eight lines in the General Journal to journalize all of your adjusting entries.

Posting Adjusting Entries to the General Ledger

Now it's time to post the adjusting entries from the General Journal to the General Ledger accounts.
You will post these adjusting entries in exactly the same way that you posted other transactions
throughout this course.

Go to the Merchandise Inventory account in the General Ledger and enter that amount in the Debit
column. Add this debit entry to the debit balance already showing in Merchandise Inventory. The new
debit balance should be $227,450.00. Notice that this is the balance appearing in Merchandise
Inventory in column 7 (the Balance Sheet section) of the worksheet. This is the amount in Merchandise
Inventory for the start of the new fiscal period.

Next, post the credit part of this adjustment, which is $12,290.00, to Income Summary. Enter that
amount as a credit in that account in the General Ledger, and that account will now have a credit
balance of $12,290.00.

Don't forget to enter your Post Ref. numbers in both the General Ledger and the General Ledger
accounts as you post!

Continue posting the three remaining transactions (to six accounts) in the General Ledger.

As you post, notice that the new balances in the Merchandise Inventory, Supplies, and Prepaid
Insurance accounts are the same figures that are shown on the worksheet in the Balance Sheet Debit
column. By posting the adjustments to the General Ledger, you have brought these accounts up to
date for the beginning of the next fiscal period.

Chapter 3

Closing Entries

At the end of the fiscal period, certain accounts in the General Ledger
must be closed out to begin the new fiscal period. We'll need to do this
so that the Revenue, Expense, Purchases, Drawing, and other various
account balances aren't carried forward into the new year. Each fiscal
period is a new beginning, and these accounts must be zeroed out
before the new year's entries are made.

To close out General Ledger account balances, you have to enter a

transaction in the General Journal and then post it to the appropriate
General Ledger account. This entry is for the account balance, but it is
an opposite entry.

For example, if the account balance in the Sales account on the

worksheet is $50,000.00 and it is a credit balance, you would need to make a debit closing entry to that
account to zero out the balance. You will need to do this for each account—you'll make an opposite
entry for the exact amount of the account balance.

Another example is an expense account. Let's say that Advertising Expense has a debit balance of
$500.00 on the worksheet. You would need to make a journal credit entry for that amount so that when
it is posted to Advertising Expense in the General Ledger, it will zero out the account balance.

Let's get started! The first group of accounts that you will close out consists of Sales, Purchases
Discount, Purchases Returns and Allowances, and Gain on Plant Assets. These all show credit

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Accounting Fundamentals II: Lesson 10 Page 3 of 5

balances on the worksheet. Using one line each in the General Journal, page 14, list all of these
account titles and enter the account balances for each in the Debit column.

Now add up all of these debit entries. On the next line, write Income Summary in the Account Title
column and enter the total of all of the debits as one credit to Income Summary in the Credit column.

The next group of accounts that you will close out consists of Sales Discount, Sales Returns and
Allowances, Purchases, all of your expenses, Cash Short and Over, Interest Expense, Loss on Plant
Assets, and Federal Income Tax Expense. These accounts all show debit balances on the worksheet,
so you will make credit entries in the General Journal.

List all of the account titles listed above (plus all of the expense accounts), one per line. Then add their
corresponding account balances to the Credit column of the General Journal, page 14. On the next
line, write Income Summary in the Account Title column and find the sum of all of the credit entries that
you just made. Enter that sum as a debit to Income Summary.

Next, you need to transfer the amount of the net income from the worksheet to the Retained Earnings
account in the General Ledger. The amount of the net income on the worksheet is $105,741.33.

In the General Journal, write Income Summary and put in a debit entry for that amount. On the next
line, write Retained Earnings and enter a credit entry for the same amount. This transaction, when
posted to the General Ledger, will increase the balance in the Retained Earnings account.

Last, you need to close out the Dividends account balance. The dividends that the corporation has paid
out during the year will decrease the Retained Earnings account balance because that money is no
longer available to Teammates Inc.

To close out this account, write Retained Earnings on the next line in the General Journal on the
closing entries page. In the Debit column, enter the balance that appears on the worksheet,
$90,000.00. On the next line, write Dividends in the Account Title column and enter the same amount
in the Credit column.

This closes out the Dividends account and decreases the Retained Earnings account by the amount
that was paid out to stockholders during the year, or is to be paid out early in the next year.

Now that you have journalized all of the closing entries for Teammates Inc., you need to post all of the
entries from General Journal page 14 to the General Ledger. You may now also post the first entry we
made on this page of the journal back in Lesson 6, which was a debit to Interest Income and a credit to
Income Summary in the amount of $273.75. Don't forget to enter your Post Ref. numbers in the
General Ledger accounts, and also in the Post Ref. column of the journal as you post.

Chapter 4

Post Closing Trial Balance Report

You are now ready to prepare the Post Closing Trial Balance Report, which proves the equality of the
debits and credits in the accounts that have remaining balances in the General Ledger. This report
ensures that the General Ledger is in balance and ready to start the new fiscal period.

Print one copy of the Post Closing Trial Balance Report form from the Supplementary Material. On the
first line of the heading, enter the corporation's name, Teammates Inc. On the second line, enter Post
Closing Trial Balance, and on the third line, write December 31.

Next, list each and every account in the General Ledger that has
a balance remaining. Put the account title in the Account Title
column and the balance in either the Debit column or Credit
column, depending on what the balance is. Last, add up the

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Debit and Credit columns on the report. Enter Totals in the

Account Title column on the same line as your totals. These two figures must equal! If they do, double
rule the two totals to show equality. If they don't, go back and check your work. There must be an error
somewhere.

That's all there is to it. Your General Ledger is now complete, up to date, and ready for the new fiscal
period.

Chapter 5

Conclusion

This lesson has been the conclusion for the accounting cycle for Teammates Inc. You now know the
basics of accounting for a corporation and how to prepare the various financial reports at the end of the
fiscal period.

In this lesson, you have journalized and posted the adjusting entries from the worksheet and
journalized and posted the closing entries for Teammates Inc. You also prepared a Post Closing Trial
Balance to be certain that the General Ledger is in good order for the next accounting cycle. Take a
minute to pat yourself on the back for a job well done—you certainly deserve it!

We won't be working with Teammates Inc. any more in this course. Instead, our last two lessons will
focus on payroll procedures and year-end tax reports. We will cover basic payroll, W-2s, W-4s,
quarterly 941 reports, unemployment tax reports, and more. Get ready for the finishing touches!

Supplementary Material

Lesson 10 Form
/crs/pix/af2/L10-Form.pdf
Here's the Post Closing Trial Balance form that you'll need to print
out to complete this lesson's work.

Lesson 10 Solutions
/crs/pix/af2/L10-Solutions.pdf
All finished? Click here to check your work against this lesson's
solution forms. You can either print them or check the amounts
online. Unfortunately, some of the wider forms can only appear
sideways, so printing may be your better option. If you don't mind
tilting your head, you'll be able to see what you need to see on the
screen while saving some printer ink and paper! Note: Only those
forms and accounts with new entries in them will appear in each
lesson's solutions. If you're curious about a transaction in a
previous lesson, you'll have to go back to that lesson's Solution
link.

Explanation and Examples of Closing and Adjusting Entries

http://www.gbodnar.com/problems/Tutorial.html
Here is an excellent site that explains closing and adjusting entries
and shows the debit and credit parts of these journal entries. Scroll
down until you come to the sections titled Adjusting Entries and
Closing Entries.

Summary of Adjusting and Closing Entries

http://www.csun.edu/~hfact004/220adjustingrules.doc
The site provides great information on why and how a business
needs to enter adjusting and closing entries.

FAQs

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Q: Why are closing entries necessary?

A: Closing entries are necessary at the end of the fiscal period so that various accounts
are closed out and show no balance at the beginning of the next fiscal period. If accounts
aren't closed out and all balances are carried into the next fiscal period, the corporation
wouldn't have a true picture of each year's financial condition because the account
balances would always include carry-over from previous years.

Q: How do you determine the amount of federal income tax?

A: By the corporation's net income for the year. The IRS publishes a tax table for
corporations to use in calculating the correct amount of tax due.

Q: Why are liability accounts not closed out at the end of the fiscal period?

A: Liability accounts aren't closed out at the end of the fiscal period simply because the
company still owes those vendors money. If they were closed out, the account balances
would be zero. These balances have to be carried into the new fiscal period so that the
corporation can pay its vendors and continue to use them for charge purchases.

Q: What does the balance in Retained Earnings represent?

A: The amount of money that the corporation has retained from its earnings. This money
can be used for expansion or any other business need deemed necessary by the board
of directors.

Q: Is there ever a year when the stockholders do not receive dividends?

A: Yes. If the business does poorly or if the board of directors votes not to distribute a
dividend, the stockholders won't receive dividend checks. This could simply mean that
the corporation wants to expand, needs more room or updated equipment, or any
number of other reasons.

Course content © 1997-2007 by Charlene Messier. All rights reserved. Reproduction or redistribution
of any course material without prior written permission is prohibited.

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