Completing the Accounting Cycle: Closing Entries, The Accounting Cycle, and the Classified Statement of Financial Position

Foundations of the Accounting Cycle Completion

• Completing the accounting cycle synthesizes the cumulative recording, adjusting, and reporting processes of financial accounting into a cohesive sequence.
• The accounting sequence consists of nine distinct steps across the accounting period:
  • Step 1: Analyze business transactions (Chapters 1–2).
  • Step 2: Journalize the transactions (Chapter 2).
  • Step 3: Post to ledger accounts (Chapter 2).
  • Step 4: Prepare a trial balance (Chapter 2).
  • Step 5: Journalize and post adjusting entries (Chapter 3).
  • Step 6: Prepare an adjusted trial balance (Chapter 3).
  • Step 7: Prepare financial statements (Chapter 3).
  • Step 8: Journalize and post closing entries (Chapter 4, Learning Objective 1).
  • Step 9: Prepare a post-closing trial balance (Chapter 4, Learning Objective 1).
• Primary learning objectives for completing the accounting cycle:
  • Learning Objective 1 (LO 1): Closing entries and a post-closing trial balance (Steps 8 and 9).
  • Learning Objective 2 (LO 2): The entire accounting cycle from Steps 1 through 9 presented as an integrated whole.
  • Learning Objective 3 (LO 3): Preparation and analysis of a classified statement of financial position.
• Financial statements serve as the transition point from Chapter 3 to Chapter 4, as illustrated by the October 31, 2025 financial statements of Yazici Advertising:
  • Income Statement (for the month ended October 31, 2025):
  • Revenues: $10{,}600$
  • Expenses: $(7{,}740)$
  • Net Income: $2{,}860$
  • Retained Earnings Statement (for the month ended October 31, 2025):
  • Beginning Retained Earnings: $0$
  • Add Net Income: $2{,}860$
  • Less Dividends: $(500)$
  • Ending Retained Earnings: $2{,}360$
  • Statement of Financial Position (at October 31, 2025):
  • Total Assets: $21{,}910$
  • Equity: $12{,}360$
  • Liabilities: $9{,}550$
  • Total Equity and Liabilities: $21{,}910$
• Transition between accounting periods:
  • Once October ends, the company must prepare its accounts for November.
  • Analogous to a classroom environment where the room is cleaned and organized at the end of a session to prepare for the subsequent class, accounting records must undergo end-of-period closing procedures.

Temporary Versus Permanent Accounts

• Temporary Accounts:
  • Definition: Accounts that relate to one accounting period only.
  • Composition: Encompasses all income statement accounts (all revenues and all expenses) as well as the Dividends account.
  • Closing requirement: All temporary accounts are closed at the end of the period, reducing their balances to zero ($\text{Closed} \rightarrow 0$).
  • Conceptual metaphor: Analogous to starting a new level in a video game where the score resets to zero at the beginning of the new stage.
• Permanent Accounts:
  • Definition: Accounts that carry over cumulative balances into future accounting periods.
  • Composition: Encompasses all statement of financial position accounts, specifically all assets, liabilities, and equity accounts.
  • Non-closing status: Permanent accounts are not closed; the ending balance of the current period becomes the opening balance of the subsequent period ($\text{Ending balance} = \text{Next beginning balance}$).
• Behavioral comparison using Yazici Advertising balances:
  • Service Revenue: October 31 balance of $10{,}600 \rightarrow$ November 1 balance of $0$.
  • Cash: October 31 balance of $15{,}200 \rightarrow$ November 1 balance of $15{,}200$.
• Decision rule for account classification:
  • Evaluative inquiry: "Is the account located on the income statement, or is it Dividends?"
  • If yes: The account is temporary ($\text{T}$).
  • If no: The account is permanent ($\text{P}$).
• Specific classifications of standard accounts:
  • Cash: Permanent ($\text{P}$) — Asset.
  • Service Revenue: Temporary ($\text{T}$) — Income statement revenue account.
  • Dividends: Temporary ($\text{T}$) — Closed directly to Retained Earnings, bypassing Income Summary.
  • Retained Earnings: Permanent ($\text{P}$) — Core equity account; receives transfers but is never closed.
  • Accumulated Depreciation: Permanent ($\text{P}$) — Contra-asset account offsetting property, plant, and equipment.
  • Depreciation Expense: Temporary ($\text{T}$) — Income statement expense account.
  • Unearned Service Revenue: Permanent ($\text{P}$) — Liability account representing an obligation to provide future services.
  • Supplies Expense: Temporary ($\text{T}$) — Income statement expense account.

The Mechanics and Steps of Closing Entries

• Fundamental purposes of closing entries:
  • Transfer: Closing entries formally transfer net income (or net loss) and dividends to the permanent Retained Earnings account.
  • Reset: Closing entries reset the balance of every temporary account to zero, establishing a clean slate for accumulating transactions in the next operating period.
  • Timing: Closing entries are generally executed only at the conclusion of an annual accounting period.
  • Ledger synchronicity: Closing entries take the mathematical results shown on the retained earnings statement ($\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}$, such as Yazici Advertising\'s $0 + 2{,}860 - 500 = 2{,}360$) and record them formally within the general ledger.
• The Income Summary Account:
  • A specialized temporary clearing account utilized exclusively during the closing process.
  • Lifecycle description: "Born in Step 1 \cdot dies in Step 3."
  • Income Summary does not possess a normal balance; its balance depends entirely on whether revenues exceed expenses or vice versa.
  • Critical procedural caveat: Dividends skip Income Summary completely and close directly to Retained Earnings.
• The Four Sequential Closing Steps:
  • Step 1: Close Revenue Accounts to Income Summary:
  • Revenues normally carry credit balances.
  • To close a revenue account, debit the revenue account for its balance and credit Income Summary for the aggregate revenue total.
  • Yazici Advertising execution at October 31: Service Revenue has a credit balance of $10{,}600$.
    • Journal entry:
    • Debit: Service Revenue $10{,}600$
    • Credit: Income Summary $10{,}600$
    • Result: Service Revenue balance becomes $0$; Income Summary is created with a credit balance of $10{,}600$.
  • Step 2: Close Expense Accounts to Income Summary:
  • Expenses normally carry debit balances.
  • To close expense accounts, credit each individual expense account for its balance and debit Income Summary for the total sum of all expenses.
  • Yazici Advertising execution at October 31: Total expenses equal $7{,}740$, comprising Supplies Expense ($1{,}500$), Depreciation Expense ($40$), Insurance Expense ($50$), Salaries and Wages Expense ($5{,}200$), Rent Expense ($900$), and Interest Expense ($50$).
    • Journal entry:
    • Debit: Income Summary $7{,}740$
    • Credit: Supplies Expense $1{,}500$
    • Credit: Depreciation Expense $40$
    • Credit: Insurance Expense $50$
    • Credit: Salaries and Wages Expense $5{,}200$
    • Credit: Rent Expense $900$
    • Credit: Interest Expense $50$
    • Computation check: $1{,}500 + 40 + 50 + 5{,}200 + 900 + 50 = 7{,}740$.
    • Result: Each of the six expense accounts is reduced to a zero balance; Income Summary receives a debit of $7{,}740$, leaving an interim credit balance of $10{,}600 - 7{,}740 = 2{,}860$, which reflects net income.
  • Step 3: Close Income Summary to Retained Earnings:
  • Closes the net balance of Income Summary into Retained Earnings.
  • Net Income scenario (Revenues $>$ Expenses):
    • Income Summary holds a credit balance.
    • Debit Income Summary to reduce it to zero; credit Retained Earnings to record the increase in equity.
    • Yazici Advertising journal entry at October 31:
    • Debit: Income Summary $2{,}860$
    • Credit: Retained Earnings $2{,}860$
  • Net Loss scenario (Expenses $>$ Revenues):
    • Income Summary holds a debit balance.
    • Debit Retained Earnings to record the decrease in equity; credit Income Summary to reduce it to zero.
  • Result: Income Summary is closed to a zero balance; Retained Earnings reflects net income or net loss.
  • Ledger notation tip: During the closing process, write the offsetting account title in every T-account ledger entry rather than only inside the Income Summary T-account.
  • Step 4: Close Dividends to Retained Earnings:
  • Dividends normally carry a debit balance.
  • Dividends represent a distribution of earnings, not an operating expense; therefore, they bypass Income Summary completely.
  • Debit Retained Earnings to reduce equity; credit Dividends to reduce its balance to zero.
  • Yazici Advertising execution at October 31: Dividends balance of $500$.
    • Journal entry:
    • Debit: Retained Earnings $500$
    • Credit: Dividends $500$
    • Result: Dividends account balance becomes $0$; Retained Earnings reflects the deduction of dividends distributed.
• Comprehensive Journal Entry Record for Yazici Advertising (October 31, 2025; Illustration 4.10):
  • Entry 1 (Close Revenues):
  • Date: Oct. 31 | Service Revenue (Account Ref. 400) | Debit: $10{,}600$
  • Date: Oct. 31 | Income Summary (Account Ref. 350) | Credit: $10{,}600$
  • Entry 2 (Close Expenses):
  • Date: Oct. 31 | Income Summary (Account Ref. 350) | Debit: $7{,}740$
  • Date: Oct. 31 | Supplies Expense (Account Ref. 631) | Credit: $1{,}500$
  • Date: Oct. 31 | Depreciation Expense (Account Ref. 711) | Credit: $40$
  • Date: Oct. 31 | Insurance Expense (Account Ref. 722) | Credit: $50$
  • Date: Oct. 31 | Salaries and Wages Expense (Account Ref. 726) | Credit: $5{,}200$
  • Date: Oct. 31 | Rent Expense (Account Ref. 729) | Credit: $900$
  • Date: Oct. 31 | Interest Expense (Account Ref. 905) | Credit: $50$
  • Entry 3 (Close Net Income):
  • Date: Oct. 31 | Income Summary (Account Ref. 350) | Debit: $2{,}860$
  • Date: Oct. 31 | Retained Earnings (Account Ref. 320) | Credit: $2{,}860$
  • Entry 4 (Close Dividends):
  • Date: Oct. 31 | Retained Earnings (Account Ref. 320) | Debit: $500$
  • Date: Oct. 31 | Dividends (Account Ref. 332) | Credit: $500$
• General Ledger Status Following Posting (Illustration 4.11):
  • Service Revenue: Ending Balance = $0$
  • Supplies Expense: Ending Balance = $0$
  • Depreciation Expense: Ending Balance = $0$
  • Insurance Expense: Ending Balance = $0$
  • Salaries and Wages Expense: Ending Balance = $0$
  • Rent Expense: Ending Balance = $0$
  • Interest Expense: Ending Balance = $0$
  • Dividends: Ending Balance = $0$
  • Income Summary: Total Debits $7{,}740 + 2{,}860 = 10{,}600$; Total Credits $10{,}600$; Ending Balance = $0$
  • Retained Earnings: Beginning Balance $0$; Add Credit from Income Summary $2{,}860$; Less Debit from Dividends $500$; Ending Balance = $2{,}360$
  • Verification: Ending Retained Earnings of $2{,}360$ perfectly reconciles with the retained earnings statement prepared in Chapter 3.

The Post-Closing Trial Balance

• Nature and Definition:
  • Step 9 in the accounting cycle.
  • A listing of all permanent accounts and their balances compiled immediately following the journalizing and posting of all closing entries.
• Purpose:
  • To verify and prove the mathematical equality of total debit balances and total credit balances before opening the books for transactions in the subsequent accounting period ($\sum \text{Debits} = \sum \text{Credits}$).
• Balance Comparison with Adjusted Trial Balance:
  • Yazici Advertising Adjusted Trial Balance Total: $30{,}190$
  • Yazici Advertising Post-Closing Trial Balance Total: $21{,}950$
  • Reason for discrepancy: All temporary accounts (revenues, expenses, and dividends) have been cleared to zero and are completely omitted from the post-closing trial balance.
• Yazici Advertising Post-Closing Trial Balance Schedule (October 31, 2025; Illustration 4.12):
  • Cash: Debit $15{,}200$
  • Accounts Receivable: Debit $200$
  • Supplies: Debit $1{,}000$
  • Prepaid Insurance: Debit $550$
  • Equipment: Debit $5{,}000$
  • Accumulated Depreciation—Equipment: Credit $40$
  • Notes Payable: Credit $5{,}000$
  • Accounts Payable: Credit $2{,}500$
  • Unearned Service Revenue: Credit $800$
  • Salaries and Wages Payable: Credit $1{,}200$
  • Interest Payable: Credit $50$
  • Share Capital—Ordinary: Credit $10{,}000$
  • Retained Earnings: Credit $2{,}360$
  • Totals: Debit Total $= 21{,}950$; Credit Total $= 21{,}950$
• Common Student Errors and Correct Accounting Treatments:
  • Crediting revenue accounts to close them:
  • Error: Because revenue has a credit balance, attempting to credit it.
  • Correction: Always execute the opposing entry (debit revenues, credit expenses).
  • Closing Dividends to Income Summary:
  • Error: Treating dividends as an operating expense.
  • Correction: Dividends are distributions of profit; close them directly to Retained Earnings.
  • Using identical entries for net loss as net income:
  • Error: Debiting Income Summary and crediting Retained Earnings during a loss.
  • Correction: For a net loss, debit Retained Earnings and credit Income Summary.
  • Closing permanent balance sheet accounts:
  • Error: Attempting to close Cash, Accounts Payable, or Retained Earnings.
  • Correction: Close exclusively temporary accounts; permanent accounts maintain continuing balances.

The Complete Nine-Step Accounting Cycle

• Complete Structural Sequence (Illustration 4.15):
  • Step 1: Analyze business transactions.
  • Step 2: Journalize the transactions.
  • Step 3: Post to ledger accounts.
  • Step 4: Prepare a trial balance.
  • Step 5: Journalize and post adjusting entries.
  • Step 6: Prepare an adjusted trial balance.
  • Step 7: Prepare financial statements.
  • Step 8: Journalize and post closing entries.
  • Step 9: Prepare a post-closing trial balance.
• Operational Timeline and Frequency:
  • Steps performed during the period (daily routine): Steps 1, 2, and 3.
  • Steps performed at the end of each accounting period (monthly or quarterly): Steps 4, 5, 6, and 7.
  • Steps performed exclusively at the end of the annual accounting period: Steps 8 and 9.
• Cyclical Workflow Formula:
  • Record $\rightarrow$ Check $\rightarrow$ Adjust $\rightarrow$ Check $\rightarrow$ Report $\rightarrow$ Close $\rightarrow$ Check.
  • Following Step 9, the cycle restarts anew for the succeeding accounting period.

The Classified Statement of Financial Position

• Core Definition and Organizational Concept:
  • A classified statement of financial position organizes and aggregates similar assets and similar liabilities into informative subcategories.
  • Analytical utility: Enhances decision usefulness by enabling financial statement users to assess liquidity (the capacity to settle short-term obligations due within the coming year).
• International Financial Reporting Standards (IFRS) Guidelines:
  • IFRS mandates the explicit presentation and separation of current and non-current items.
  • IFRS does not mandate a rigid order of presentation:
  • Certain textbook formats list non-current assets and non-current liabilities first.
  • Other jurisdictions (such as Korea) customarily report current assets (beginning with cash) first.
  • The overarching regulatory requirement is the categorical segregation between current and non-current groupings.
• Time Dimension: The Operating Cycle Criterion:
  • Standard temporal boundary: One year ($1\text{ year}$).
  • Classification rule: An item is classified as current if it is realized or settled within one year or the operating cycle, whichever is longer.
  • Operating cycle definition: The average span of time required to spend cash to purchase goods or raw materials, produce and sell products, and collect cash from customer receivables ($\text{Cash} \rightarrow \text{Buy Goods/Materials} \rightarrow \text{Make \& Sell} \rightarrow \text{Collect Cash from Customers}$).
  • Operational application:
  • Most commercial enterprises possess operating cycles significantly shorter than one year; thus, the one-year cutoff prevails.
  • Specialized manufacturing enterprises (e.g., shipbuilding) operate on extended cycles of approximately $18\text{ months}$; in such instances, the longer operating cycle establishes the boundary for current classification.
• Standard Asset Classifications (Four Subcategories):
  • Intangible Assets:
  • Definition: Long-lived assets lacking physical substance that provide economic rights or competitive benefits.
  • Examples: Patents, copyrights, trademarks and trade names, and goodwill.
  • Corporate example: Nokia capitalizes development costs, goodwill, and other intangible assets.
  • Property, Plant, and Equipment (PPE):
  • Definition: Tangible assets with long useful lives currently utilized in business operations and not held for sale to customers.
  • Examples: Land, buildings, machinery, equipment, and furniture.
  • Valuation mechanics: Reported at acquisition cost less accumulated depreciation to arrive at net book value.
  • Critical exception: Land has an indefinite useful life and is never depreciated.
  • Depreciation schedule tracking over time for equipment acquired for $5{,}000$ depreciated at $1{,}000$ annually:
    • December 31, 2025: Equipment Cost = $5{,}000$ | Accumulated Depreciation = $1{,}000$ | Book Value = $4{,}000$
    • December 31, 2026: Equipment Cost = $5{,}000$ | Accumulated Depreciation = $2{,}000$ | Book Value = $3{,}000$
    • December 31, 2027: Equipment Cost = $5{,}000$ | Accumulated Depreciation = $3{,}000$ | Book Value = $2{,}000$
    • December 31, 2028: Equipment Cost = $5{,}000$ | Accumulated Depreciation = $4{,}000$ | Book Value = $1{,}000$
    • December 31, 2029: Equipment Cost = $5{,}000$ | Accumulated Depreciation = $5{,}000$ | Book Value = $0$
  • Long-Term Investments:
  • Definition: Investments that management intends to hold for a duration exceeding one year.
  • Examples:
    • Share and bond investments in other corporate entities held for multi-year horizons.
    • Real estate or land held for speculation or future development and not currently deployed in day-to-day operations.
    • Long-term notes receivable collectible after one year.
  • Note receivable distinction: A formal written promise stipulating that a debtor will pay a specific sum on a defined future date along with interest.
  • Current Assets:
  • Definition: Cash and other assets that an enterprise expects to convert to cash, sell, or consume within one year or its operating cycle, whichever is longer.
  • Examples: Cash, short-term investments, accounts receivable, notes receivable, inventory, supplies, and prepaid insurance.
  • Relative liquidity ordering (from most liquid to least liquid):
    • Cash (most liquid asset).
    • Short-term investments / Accounts receivable.
    • Inventory.
    • Prepaid expenses (least liquid, because they are consumed rather than directly converted into cash).
• Standard Equity and Liability Classifications (Three Subcategories):
  • Equity:
  • Corporate equity consists of two fundamental components: Share capital—ordinary and Retained earnings.
  • Share capital—ordinary: Reflects capital contributed directly by shareholders through stock investments.
  • Retained earnings: Reflects cumulative undistributed net income retained within the corporate entity.
  • Equity totals:
    • Yazici Advertising (post-closing): Share capital—ordinary $10{,}000$ + Retained earnings $2{,}360 = 12{,}360$.
    • Cheng Ltd. ($\text{NT\$}$ in thousands): Share capital—ordinary $20{,}000$ + Retained earnings $14{,}050 = 34{,}050$.
  • Non-Current Liabilities:
  • Definition: Financial obligations that a company reasonably expects to liquidate after more than one year.
  • Examples: Long-term notes payable, mortgage payable, and bonds payable.
  • Cheng Ltd. non-current liabilities: Mortgage payable $10{,}000$ + Notes payable $1{,}300 = 11{,}300$.
  • Current Liabilities:
  • Definition: Obligations that a company must satisfy within the coming year or its operating cycle, whichever is longer.
  • Examples: Accounts payable, salaries and wages payable, notes payable (short-term), interest payable, income taxes payable, unearned service revenue, and current maturities of long-term debt.
  • Liquidity diagnostic: Demonstrates the capacity to satisfy claims due within the upcoming period.
    • Low liquidity: Current liability obligations of $10$ with available cash of only $5$.
    • Strong liquidity: Current liability obligations of $10$ with available cash of $20$.
  • Current Maturities of Long-Term Debt:
    • A portion of long-term debt that shifts into the current liability classification as its maturity date nears.
    • Demonstration: A company borrows $3{,}000$ on January 1, 2022, on a 3-year term maturing December 31, 2024.
    • Balance sheet at December 31, 2022: Due in 2 years $\rightarrow$ Classified as non-current liability (long-term debt).
    • Balance sheet at December 31, 2023: Due within 1 year $\rightarrow$ Reclassified as current liability (current maturities of long-term debt).
• Comprehensive Exemplar: Cheng Ltd. Classified Statement of Financial Position (as of October 31, 2025; NT$ in thousands):
  • Assets:
  • Intangible assets:
    • Patents: $3{,}100$
  • Property, plant, and equipment:
    • Land: $10{,}000$
    • Equipment: $24{,}000$
    • Less: Accumulated depreciation—equipment: $(5{,}000)$
    • Net equipment: $19{,}000$
    • Total Property, plant, and equipment: $29{,}000$
  • Long-term investments:
    • Investment in shares of Walters Corp.: $5{,}200$
    • Investment in real estate: $2{,}000$
    • Total Long-term investments: $7{,}200$
  • Current assets:
    • Prepaid insurance: $400$
    • Supplies: $2{,}100$
    • Inventory: $3{,}000$
    • Notes receivable: $1{,}000$
    • Accounts receivable: $7{,}000$
    • Short-term investments: $2{,}000$
    • Cash: $6{,}600$
    • Total Current assets: $22{,}100$
  • Total Assets: $3{,}100 + 29{,}000 + 7{,}200 + 22{,}100 = 61{,}400$
  • Equity and Liabilities:
  • Equity:
    • Share capital—ordinary: $20{,}000$
    • Retained earnings: $14{,}050$
    • Total Equity: $34{,}050$
  • Non-current liabilities:
    • Mortgage payable: $10{,}000$
    • Notes payable: $1{,}300$
    • Total Non-current liabilities: $11{,}300$
  • Current liabilities:
    • Notes payable: $11{,}000$
    • Accounts payable: $2{,}100$
    • Salaries and wages payable: $1{,}600$
    • Unearned service revenue: $900$
    • Interest payable: $450$
    • Total Current liabilities: $16{,}050$
  • Total Equity and Liabilities: $34{,}050 + 11{,}300 + 16{,}050 = 61{,}400$
• Classification Exercise (DO IT! 4):
  • Salaries and wages payable: Current liabilities ($\text{CL}$
  • Service revenue: Not on Statement of Financial Position / Income statement ($\text{NA}$
  • Interest payable: Current liabilities ($\text{CL}$
  • Goodwill: Intangible assets ($\text{IA}$
  • Debt investments (short-term): Current assets ($\text{CA}$) — Entity owns bonds maturing soon.
  • Mortgage payable (due in 3 years): Non-current liabilities ($\text{NCL}$
  • Share investments (long-term): Long-term investments ($\text{LTI}$
  • Equipment: Property, plant, and equipment ($\text{PPE}$
  • Accumulated depreciation—equipment: Property, plant, and equipment ($\text{PPE}$) — Contra-asset.
  • Depreciation expense: Not on Statement of Financial Position / Income statement ($\text{NA}$
  • Share capital—ordinary: Equity ($\text{E}$
  • Unearned service revenue: Current liabilities ($\text{CL}$) — Obligation to render future service.

Practical Applications and Closing Entry Problems

• DO IT! 2 Problem: Hancock Company Closing Process (December 31):
  • Adjusted trial balance balances: Accounts Payable $€27{,}000$; Dividends $€15{,}000$; Service Revenue $€98{,}000$; Share Capital—Ordinary $€42{,}000$; Rent Expense $€22{,}000$; Accounts Receivable $€38{,}000$; Salaries and Wages Expense $€51{,}000$; Supplies Expense $€7{,}000$.
  • Omitted permanent accounts (not closed): Accounts Payable, Accounts Receivable, Share Capital—Ordinary.
  • Four sequential closing journal entries:
  • Entry 1 (Close revenue to Income Summary):
    • Debit: Service Revenue $98{,}000$
    • Credit: Income Summary $98{,}000$
  • Entry 2 (Close expenses to Income Summary):
    • Debit: Income Summary $80{,}000$
    • Credit: Salaries and Wages Expense $51{,}000$
    • Credit: Rent Expense $22{,}000$
    • Credit: Supplies Expense $7{,}000$
    • Total expenses computation: $51{,}000 + 22{,}000 + 7{,}000 = 80{,}000$.
  • Entry 3 (Close Income Summary balance to Retained Earnings):
    • Net Income calculation: $98{,}000 - 80{,}000 = 18{,}000$.
    • Debit: Income Summary $18{,}000$
    • Credit: Retained Earnings $18{,}000$
  • Entry 4 (Close Dividends to Retained Earnings):
    • Debit: Retained Earnings $15{,}000$
    • Credit: Dividends $15{,}000$
  • Net retained earnings impact: Net increase of $18{,}000 - 15{,}000 = +3{,}000$.
• Practice Case 1: Maple Studio Inc. (December 31; Appendix):
  • Initial adjusted trial balance data: Beginning Retained Earnings $10{,}000$; Service Revenue $45{,}000$; Cash $12{,}000$; Salaries and Wages Expense $20{,}000$; Accounts Payable $4{,}000$; Rent Expense $8{,}000$; Dividends $6{,}000$; Utilities Expense $3{,}000$.
  • Permanent accounts not subject to closing: Cash, Accounts Payable.
  • Sequential closing entries:
  • Entry 1: Debit Service Revenue $45{,}000$; Credit Income Summary $45{,}000$.
  • Entry 2: Debit Income Summary $31{,}000$; Credit Salaries and Wages Expense $20{,}000$, Rent Expense $8{,}000$, Utilities Expense $3{,}000$ ($20{,}000 + 8{,}000 + 3{,}000 = 31{,}000$).
  • Entry 3: Debit Income Summary $14{,}000$; Credit Retained Earnings $14{,}000$ ($\text{Net income} = 45{,}000 - 31{,}000 = 14{,}000$).
  • Entry 4: Debit Retained Earnings $6{,}000$; Credit Dividends $6{,}000$.
  • Final ending retained earnings determination: $10{,}000 + 14{,}000 - 6{,}000 = 18{,}000$.
• Practice Case 2: River Tours Inc. Net Loss Closing Process (December 31; Appendix):
  • Initial adjusted trial balance data: Beginning Retained Earnings $15{,}000$; Service Revenue $30{,}000$; Supplies Expense $1{,}000$; Salaries and Wages Expense $26{,}000$; Dividends $2{,}000$; Rent Expense $7{,}000$.
  • Sequential closing entries:
  • Entry 1: Debit Service Revenue $30{,}000$; Credit Income Summary $30{,}000$.
  • Entry 2: Debit Income Summary $34{,}000$; Credit Salaries and Wages Expense $26{,}000$, Rent Expense $7{,}000$, Supplies Expense $1{,}000$ ($26{,}000 + 7{,}000 + 1{,}000 = 34{,}000$).
  • Entry 3 (Net Loss Entry): Total expenses ($34{,}000$) exceed revenues ($30{,}000$), generating a net loss of $4{,}000$. Income Summary holds a debit balance of $4{,}000$.
    • Debit: Retained Earnings $4{,}000$
    • Credit: Income Summary $4{,}000$
  • Entry 4: Debit Retained Earnings $2{,}000$; Credit Dividends $2{,}000$.
  • Final ending retained earnings determination: $15{,}000 - 4{,}000 - 2{,}000 = 9{,}000$.
• Practice Case 3: Post-Closing Trial Balance Account Filter (Appendix):
  • Verification test: Permanent accounts with ongoing balances appear; temporary accounts reduced to zero do not appear.
  • Accounts appearing on post-closing trial balance (Permanent / Yes):
  • Cash
  • Accumulated Depreciation
  • Unearned Service Revenue
  • Retained Earnings
  • Prepaid Insurance
  • Share Capital—Ordinary
  • Accounts excluded from post-closing trial balance (Temporary / Closed to Zero / No):
  • Service Revenue
  • Dividends
  • Rent Expense
  • Income Summary (terminated in Step 3 of closing).