{"id":100,"date":"2015-03-18T23:19:29","date_gmt":"2015-03-18T23:19:29","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=100"},"modified":"2017-08-22T19:47:24","modified_gmt":"2017-08-22T19:47:24","slug":"journalizing-adjusting-and-closing-entries-for-a-merchandising-enterprise","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/journalizing-adjusting-and-closing-entries-for-a-merchandising-enterprise\/","title":{"raw":"Journalizing Closing Entries for a Merchandising Enterprise","rendered":"Journalizing Closing Entries for a Merchandising Enterprise"},"content":{"raw":"At this point in the accounting cycle, we have prepared the financial statements.\u00a0 Now we do the last part, the closing entries.\u00a0 The videos in the adjusting entry section gave you a preview into this process but we will discuss it in more detail.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Accounting Cycle\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
1.\u00a0 Analyze Transactions<\/td>\r\n5.\u00a0 Prepare Adjusting Journal Entries<\/td>\r\n9.\u00a0 Prepare Closing Entries<\/strong><\/td>\r\n<\/tr>\r\n
2.\u00a0 Prepare Journal Entries<\/td>\r\n6.\u00a0 Post Adjusting Journal Entries<\/td>\r\n10.\u00a0 Post Closing Entries<\/strong><\/td>\r\n<\/tr>\r\n
3.\u00a0 Post journal Entries<\/td>\r\n7.\u00a0 Prepare Adjusted Trial Balance<\/td>\r\n11. Prepare Post-Closing Trial Balance<\/strong><\/td>\r\n<\/tr>\r\n
4.\u00a0 Prepare Unadjusted Trial Balance<\/td>\r\n8.\u00a0 Prepare Financial Statements<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe closing entries will be\u00a0a review as the\u00a0process for closing does not change\u00a0for a merchandising company.\u00a0 Do you remember why we do closing entries?\u00a0 They are the journal entry version of the statement of retained earnings to ensure the balance we report on the statement of retained earnings and the balance sheet matches the ending balance of retained earnings in our general ledger.\u00a0 Closing entries also set the balances of all temporary accounts (revenues, expenses, dividends) to zero for the next period.\r\n\r\nIf the process is the same, why do we need to review it?\u00a0 We have many new accounts learned for a merchandiser and we want to see how they fit into the closing process.\u00a0 The new accounts remaining for a merchandiser after adjusting entries are:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Account<\/strong><\/td>\r\nAccount Type<\/strong><\/td>\r\n<\/tr>\r\n
Sales Revenue<\/td>\r\nRevenue<\/td>\r\n<\/tr>\r\n
Sales Discount*<\/td>\r\nRevenue<\/td>\r\n<\/tr>\r\n
Sales Returns and Allowances*<\/td>\r\nRevenue<\/td>\r\n<\/tr>\r\n
Cost of Goods Sold<\/td>\r\nExpense<\/td>\r\n<\/tr>\r\n
Delivery Expense<\/td>\r\nExpense<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nRevenue accounts typically have normal credit balances (credit to increase, debit to decrease) but Sales Discounts and Sales Returns and Allowances are contra-accounts because they are revenue accounts but have normal debit balances (debit to increase, credit to decrease).\u00a0 Expenses have normal debit balances.\r\n\r\nThe four basic steps in the closing process are modified slightly:\r\n
    \r\n \t
  • Closing the revenue accounts with credit balances<\/strong>\u2014transferring the credit balances in the revenue accounts to a clearing account called Income Summary.<\/li>\r\n \t
  • Closing the expense accounts and contra-revenue accounts<\/strong>\u2014transferring the debit balances in the expense accounts and contra-revenue accounts to a clearing account called Income Summary.<\/li>\r\n \t
  • Closing the Income Summary account<\/strong>\u2014transferring the balance of the Income Summary account to the Retained Earnings account (this should always equal net income or loss from the income statement).<\/li>\r\n \t
  • Closing the Dividends account<\/strong>\u2014transferring the debit balance of the Dividends account to the Retained Earnings account.<\/li>\r\n<\/ul>\r\n

    \u00a0To illustrate, let's look at the adjusted trial balance from Hanlon from the previous section:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Adjusted Trial Balance<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Retained Earnings<\/td>\r\n25,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Dividends*<\/td>\r\n8,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Sales Revenue<\/td>\r\n<\/td>\r\n275,000<\/td>\r\n<\/tr>\r\n
    Sales discounts*<\/td>\r\n2,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Sales returns and allowances*<\/td>\r\n1,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Interest revenue<\/td>\r\n<\/td>\r\n150<\/td>\r\n<\/tr>\r\n
    Cost of goods sold<\/td>\r\n159,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Commissions expense<\/td>\r\n10,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Advertising expense<\/td>\r\n7,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Sales Salaries expense<\/td>\r\n20,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Rent expense - sales<\/td>\r\n12,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Rent expense - office<\/td>\r\n12,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Office Salaries expense<\/td>\r\n40,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Utilities expense<\/td>\r\n5,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Interest expense<\/td>\r\n50<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n*Contra-accounts\r\n\r\nWe will prepare the closing entries for Hanlon.\u00a0 Remember to close means to make the balance zero.\u00a0 To do this, we will do the opposite of the balance in the adjusted trial balance in a journal entry and use Income Summary to balance the entry.\r\n\r\n1.\u00a0 Close the revenue accounts with credit balances.\u00a0 <\/strong>We have 2 revenue accounts with a credit balance, Sales Revenue (or Sales) and Interest Revenue.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Sales Revenue<\/td>\r\n275,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    Interest Revenue<\/td>\r\n150<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 Income Summary<\/td>\r\n<\/td>\r\n275,150<\/td>\r\n<\/tr>\r\n
    To close revenue accounts with credit balances.<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n2.\u00a0 Close contra-revenue accounts and expense accounts with debit balances<\/strong>.\u00a0 We will close sales discounts, sales returns and allowances, cost of goods sold, and all other operating and nonoperating expenses.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\n\u00a0 Debit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Income Summary<\/td>\r\n\u00a0 268,050<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 Sales Discounts<\/td>\r\n<\/td>\r\n2,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Sales Returns and Allowances<\/td>\r\n<\/td>\r\n1,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Cost of Goods Sold<\/td>\r\n<\/td>\r\n\u00a0 159,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Commissions Expense<\/td>\r\n<\/td>\r\n10,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Advertising Expense<\/td>\r\n<\/td>\r\n7,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Sales Salaries Expense<\/td>\r\n<\/td>\r\n20,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Rent Expense - Sales<\/td>\r\n<\/td>\r\n12,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Rent Expense - Office<\/td>\r\n<\/td>\r\n12,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Office Salaries Expense<\/td>\r\n<\/td>\r\n40,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Utilities Expense<\/td>\r\n<\/td>\r\n5,000<\/td>\r\n<\/tr>\r\n
    \u00a0 Interest Expense<\/td>\r\n<\/td>\r\n50<\/td>\r\n<\/tr>\r\n
    To close contra-revenue and expense accounts.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n3.\u00a0 Close income summary into retained earnings.\u00a0<\/strong> We will take the difference between income summary in step 1 $275,150 and subtract the income summary balance in step 2 $268,050 to get the adjustment amount of $7,100.\u00a0 This should always match net income calculated on the income statement.<\/em>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\n\u00a0 Debit\u00a0 <\/strong><\/td>\r\n\u00a0 Credit\u00a0 <\/strong><\/td>\r\n<\/tr>\r\n
    Income Summary (275,150 - 268,050)<\/td>\r\n7,100<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Retained Earnings<\/td>\r\n<\/td>\r\n7,100<\/td>\r\n<\/tr>\r\n
    To close net income into retained earnings.\u00a0\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n4.\u00a0 Close the debit balance of dividends into retained earnings.<\/strong>\u00a0 Remember, dividends are earnings of the company given back to the owner and will reduce retained earnings.\u00a0 Retained earnings is an equity account and is decreased with a debit.\u00a0 Dividends is a contra-account because it is an equity account but has a normal debit balance.\u00a0 Do not use the retained earnings balance in this entry!<\/em>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account<\/strong><\/td>\r\nDebit<\/strong><\/td>\r\nCredit<\/strong><\/td>\r\n<\/tr>\r\n
    Retained Earnings<\/td>\r\n8,000<\/td>\r\n<\/td>\r\n<\/tr>\r\n
    \u00a0 \u00a0 Dividends<\/td>\r\n<\/td>\r\n8,000<\/td>\r\n<\/tr>\r\n
    To close dividends into retained earnings.<\/em>\u00a0<\/em>\u00a0<\/em><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nTo check our work, the Statement of Retained Earnings would look like this:\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Hanlon Food Store\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    Statement of Retained Earnings\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    For Year Ended December 31\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
    Retained Earnings, January 1<\/td>\r\n\u00a025,000<\/td>\r\n<\/tr>\r\n
    Add: Net Income<\/td>\r\n\u00a0 7,100<\/td>\r\n<\/tr>\r\n
    Less: Dividends<\/td>\r\n\u00a0\u00a0 (8,000)<\/span><\/td>\r\n<\/tr>\r\n
    Retained Earnings, December 31\u00a0\u00a0 <\/strong><\/td>\r\n24,100<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nWhen we post the closing entries to the general ledger, the revenues, expenses and dividends accounts are all zero.\u00a0 The retained earnings ledger card would look like:\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Account: Retained Earnings\u00a0 <\/strong><\/td>\r\n\u00a0 Debit\u00a0 <\/strong><\/td>\r\n\u00a0 Credit\u00a0 <\/strong><\/td>\r\n\u00a0 Balance<\/strong><\/td>\r\n<\/tr>\r\n
    Beginning Balance<\/td>\r\n<\/td>\r\n<\/td>\r\n25,000<\/td>\r\n<\/tr>\r\n
    (3) Close income summary<\/td>\r\n<\/td>\r\n7,100<\/td>\r\n32,100<\/td>\r\n<\/tr>\r\n
    (4) Close dividends<\/td>\r\n8,000<\/td>\r\n<\/td>\r\n24,100<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe final step in the merchandising accounting cycle would be to prepare a post-closing trial balance.\u00a0 The post closing trial balance will contain assets, liabilities, common stock and the new ending\u00a0balance calculated for retained earnings.","rendered":"

    At this point in the accounting cycle, we have prepared the financial statements.\u00a0 Now we do the last part, the closing entries.\u00a0 The videos in the adjusting entry section gave you a preview into this process but we will discuss it in more detail.<\/p>\n\n\n\n\n\n\n\n
    Accounting Cycle\u00a0\u00a0<\/strong><\/td>\n<\/tr>\n
    1.\u00a0 Analyze Transactions<\/td>\n5.\u00a0 Prepare Adjusting Journal Entries<\/td>\n9.\u00a0 Prepare Closing Entries<\/strong><\/td>\n<\/tr>\n
    2.\u00a0 Prepare Journal Entries<\/td>\n6.\u00a0 Post Adjusting Journal Entries<\/td>\n10.\u00a0 Post Closing Entries<\/strong><\/td>\n<\/tr>\n
    3.\u00a0 Post journal Entries<\/td>\n7.\u00a0 Prepare Adjusted Trial Balance<\/td>\n11. Prepare Post-Closing Trial Balance<\/strong><\/td>\n<\/tr>\n
    4.\u00a0 Prepare Unadjusted Trial Balance<\/td>\n8.\u00a0 Prepare Financial Statements<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    The closing entries will be\u00a0a review as the\u00a0process for closing does not change\u00a0for a merchandising company.\u00a0 Do you remember why we do closing entries?\u00a0 They are the journal entry version of the statement of retained earnings to ensure the balance we report on the statement of retained earnings and the balance sheet matches the ending balance of retained earnings in our general ledger.\u00a0 Closing entries also set the balances of all temporary accounts (revenues, expenses, dividends) to zero for the next period.<\/p>\n

    If the process is the same, why do we need to review it?\u00a0 We have many new accounts learned for a merchandiser and we want to see how they fit into the closing process.\u00a0 The new accounts remaining for a merchandiser after adjusting entries are:<\/p>\n\n\n\n\n\n\n\n\n
    Account<\/strong><\/td>\nAccount Type<\/strong><\/td>\n<\/tr>\n
    Sales Revenue<\/td>\nRevenue<\/td>\n<\/tr>\n
    Sales Discount*<\/td>\nRevenue<\/td>\n<\/tr>\n
    Sales Returns and Allowances*<\/td>\nRevenue<\/td>\n<\/tr>\n
    Cost of Goods Sold<\/td>\nExpense<\/td>\n<\/tr>\n
    Delivery Expense<\/td>\nExpense<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

    Revenue accounts typically have normal credit balances (credit to increase, debit to decrease) but Sales Discounts and Sales Returns and Allowances are contra-accounts because they are revenue accounts but have normal debit balances (debit to increase, credit to decrease).\u00a0 Expenses have normal debit balances.<\/p>\n

    The four basic steps in the closing process are modified slightly:<\/p>\n