ACC 201 Milestone 2 Closing Entries: A Comprehensive Guide to End-of-Period Accounting. In this guide, we will delve into the intricacies of closing entries, exploring their significance, types, and step-by-step procedures. We will also examine the impact of closing entries on financial statements and provide best practices for ensuring accuracy and efficiency in the closing process.
Overview of ACC 201 Milestone 2 Closing Entries
Closing entries are a crucial step in the accounting cycle, marking the end of an accounting period and preparing the books for the next. They aim to:
- Transfer temporary account balances to permanent accounts
- Zero out temporary accounts
- Provide an accurate snapshot of the company’s financial position
Specific Requirements and Procedures for ACC 201 Milestone 2
In ACC 201 Milestone 2, specific closing entries are required to ensure proper accounting practices:
- Close revenue and expense accounts to Income Summary
- Close Income Summary to Retained Earnings
- Close Dividends to Retained Earnings
- Update the permanent accounts (Assets, Liabilities, and Owner’s Equity)
Types of Closing Entries
Closing entries are the final adjustments made to the accounts at the end of an accounting period to ensure that all revenues, expenses, and other transactions are properly recorded and summarized. In ACC 201 Milestone 2, several types of closing entries are typically performed.
The primary purpose of closing entries is to:
- Close temporary accounts (revenue, expense, and drawing accounts) to the retained earnings account.
- Update permanent accounts (assets, liabilities, and owner’s equity) to reflect the ending balances.
The following are the common types of closing entries performed in ACC 201 Milestone 2:
Closing Revenue Accounts
Revenue accounts are closed to the income summary account. This process transfers the balances of all revenue accounts to the income summary account, which provides a summary of the total revenues earned during the period.
Closing Expense Accounts
Expense accounts are closed to the income summary account. Similar to revenue accounts, this process transfers the balances of all expense accounts to the income summary account, which provides a summary of the total expenses incurred during the period.
Closing Income Summary Account
The income summary account is closed to the retained earnings account. This process transfers the net income or loss for the period to the retained earnings account, which represents the cumulative earnings of the business.
Closing Drawing Account
The drawing account is closed to the capital account. This process transfers the amount of withdrawals made by the owner during the period from the drawing account to the capital account, which represents the owner’s investment in the business.
Step-by-Step Guide to Closing Entries
Closing entries are essential for completing the accounting cycle and preparing financial statements. Here’s a step-by-step guide to help you perform closing entries in ACC 201 Milestone 2:
1. Review Trial Balance
Start by reviewing the trial balance to ensure all transactions have been recorded and posted correctly. This will help identify any errors or omissions before closing entries are made.
2. Close Revenue and Expense Accounts
Close all revenue and expense accounts to Income Summary. This will zero out these accounts and transfer their balances to Income Summary.
- Debit: Revenue Accounts
- Credit: Income Summary
- Debit: Income Summary
- Credit: Expense Accounts
3. Close Income Summary
Close Income Summary to Retained Earnings. This will transfer the net income or loss to Retained Earnings.
- Debit: Income Summary
- Credit: Retained Earnings
4. Close Dividend Account
Close the Dividends account to Retained Earnings. This will reduce Retained Earnings by the amount of dividends paid during the period.
- Debit: Dividends
- Credit: Retained Earnings
5. Post Closing Trial Balance
Prepare a post-closing trial balance to ensure that the debits equal the credits. This will verify the accuracy of the closing entries.
Journalizing and Posting Closing Entries
Journalizing and posting closing entries are crucial steps in the accounting cycle, allowing businesses to reset their temporary accounts and prepare for the next accounting period.
Journalizing Closing Entries, Acc 201 milestone 2 closing entries
Closing entries involve transferring balances from temporary accounts (such as revenue, expense, and drawing accounts) to permanent accounts (such as retained earnings and capital accounts). The following table demonstrates the journalizing of closing entries in ACC 201 Milestone 2:
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Income Summary | $50,000 | |
| Dec 31 | Sales Revenue | $50,000 | |
| Dec 31 | Expense Summary | $30,000 | |
| Dec 31 | Salaries Expense | $30,000 | |
| Dec 31 | Rent Expense | $10,000 | |
| Dec 31 | Utilities Expense | $5,000 | |
| Dec 31 | Retained Earnings | $20,000 | |
| Dec 31 | Income Summary | $20,000 |
Posting Closing Entries to the General Ledger
Once journalized, closing entries are posted to the general ledger. This involves updating the balances of the affected accounts. The following steps provide guidance on posting closing entries to the general ledger:
- Review the journal entries and identify the accounts affected by the closing entries.
- Locate the corresponding general ledger accounts and update their balances according to the journal entries.
- Ensure that the debits equal the credits for each closing entry.
- Double-check the accuracy of the postings by comparing the general ledger balances to the trial balance.
By accurately journalizing and posting closing entries, businesses can effectively reset their temporary accounts, ensure the integrity of their financial records, and prepare for the commencement of a new accounting period.
Adjusting Trial Balance after Closing Entries: Acc 201 Milestone 2 Closing Entries
Preparing an adjusted trial balance after closing entries serves a crucial purpose in the accounting process. It provides a comprehensive overview of all accounts after the closing entries have been recorded, ensuring the accuracy and completeness of the financial statements.
The adjusted trial balance differs from the unadjusted trial balance prepared before closing entries in that it reflects the updated account balances after adjustments and closing entries. These adjustments include:
- Adjustments for accrued and deferred revenues and expenses
- Adjustments for depreciation and amortization
- Adjustments for bad debts
Adjusted Trial Balance in ACC 201 Milestone 2
The following table presents an adjusted trial balance for ACC 201 Milestone 2:
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,000 | |
| Accounts Receivable | $20,000 | |
| Inventory | $30,000 | |
| Prepaid Insurance | $4,000 | |
| Supplies | $2,000 | |
| Land | $50,000 | |
| Building | $100,000 | |
Accumulated Depreciation
|
$20,000 | |
| Accounts Payable | $15,000 | |
| Salaries Payable | $5,000 | |
| Interest Payable | $2,000 | |
| Unearned Revenue | $10,000 | |
| Common Stock | $100,000 | |
| Retained Earnings | $40,000 | |
| Service Revenue | $150,000 | |
| Salaries Expense | $70,000 | |
| Rent Expense | $20,000 | |
| Utilities Expense | $10,000 | |
| Interest Expense | $5,000 | |
Depreciation Expense
|
$10,000 | |
| Total | $321,000 | $321,000 |
The adjusted trial balance demonstrates that the total debits and credits are equal, indicating the completeness of the accounting records.
Impact of Closing Entries on Financial Statements
Closing entries significantly impact the financial statements, leading to the preparation of the post-closing trial balance and the creation of financial statements. These entries affect the income statement, balance sheet, and statement of cash flows.
Income Statement
Closing entries zero out all temporary accounts related to revenues, expenses, and gains and losses. After closing, the income statement accounts have zero balances, reflecting the fact that the income and expense transactions for the period have been summarized and closed.
Balance Sheet
Closing entries transfer the net income or loss to the retained earnings account, which is a permanent account on the balance sheet. This adjustment updates the retained earnings balance, reflecting the company’s cumulative earnings or losses to date. Additionally, closing entries close the temporary revenue and expense accounts, resulting in zero balances for these accounts.
Statement of Cash Flows
Closing entries do not directly impact the statement of cash flows. However, the changes in the balance sheet accounts resulting from closing entries, such as the increase in retained earnings, can provide insights into the company’s cash flow activities.
Best Practices for Closing Entries
Closing entries are crucial for ensuring the accuracy and reliability of financial statements. Here are some best practices to follow in ACC 201 Milestone 2 to ensure accuracy and efficiency in performing closing entries:
Documentation:Maintain proper documentation of all closing entries, including the date, reason for the entry, and the accounts affected. This documentation serves as an audit trail and helps ensure the accuracy of the entries.
Review and Reconciliation
Thoroughly review closing entries before posting them to the general ledger. Check for errors in calculations, account numbers, and amounts. Reconcile the closing entries to the trial balance to ensure that the debits and credits balance.
FAQ
What is the purpose of closing entries?
Closing entries are performed at the end of an accounting period to transfer balances from temporary accounts (such as revenue and expense accounts) to permanent accounts (such as retained earnings).
What are the different types of closing entries?
Common types of closing entries include revenue closing entries, expense closing entries, and income summary closing entries.
How do closing entries affect financial statements?
Closing entries reset temporary account balances to zero and update permanent account balances, which are then used to create financial statements.
