Hello in this lecture, we’re going to talk about the closing process. Step two of the four step process being closing the expense accounts to the income summary. Remember that the goal of the closing process is to close out the temporary accounts that would include the drawers as well as all the income statement accounts, including revenue and expenses to the capital account. So we want our adjusted trial balance to thing we used to make our financial statements to look like the post closing trial balance with all the zeros from the capital accounts down. How do we do that? Last time we did the first step step one, which was to close out income to the income summary. This time we’re going to close out expenses to the income summary. Next time we’re going to close out the income summary to the capital account. And finally closeout draws to the capital account.
00:50
This is step one, what we did in step one was close out revenue to zero. So there’s one of those zeros. We want all of these to be zero. So we have started In our process in step one, but we have a ways to go, we’ll get a lot further in the process in step two here where we are going to close out expenses to the income summary, income summary being that new account, that clearing account, which now has the revenue in it. What we’re going to do now is make all the expenses zero. How do we do that? Well, wages expense has a debit 195 870 in it, we need to make it go down. Therefore, we’re going to the opposite thing to it, we’re going to credit the wages expense. Now, because we’re going to credit all the expenses. Notice all the expenses have debit balances, they generally only go up, I’m going to put the debit on top, the debit will be that clear in account, we’re going to put everything into the income summary.
01:42
We don’t know the amount yet. So I’m just going to say hey, there’s the debit. We’re going to list all the expenses, all the expenses will be credits, and then we’ll figure out what that income summary account should be. It’ll be the debit to plug out the debits equal the credits. So we have wages, we’re going to credit the wages expense For the amount that is in there, the 195 870. If we post that out, I’m going to post it as we go, because this will be a bit of a longer journal entry. And we can see the progress as we go, we’re going to credit that account, making it go to zero. That was the goal. That’s the objective, same goal and objective for the utilities expense, which has 42 375 in it, it has a debit, therefore, we’re going to do the opposite and credited. If we post that out, as we go, notice this will be a longer journal entry. There’s not just two accounts in the journal entry. That’s okay.
02:29
We’re going to say credit of 42 375. Bringing the balance down to zero, that looks good. That’s what we want. Then we have a debit of 1000 insurance expense, we’re going to do the opposite thing to it, we’re going to credit it, if we post that out as we go, then that’s going to bring it down to zero. That’s what we’re looking to do. Then we have a debit of 2009 25 in supplies expense, we’re going to do the opposite thing to it bringing it down. If we post that out, then we’re going to credit it bringing the balance down to zero. And finally, we have to prove expense a debit 1100, we’re going to do the opposite thing to it, bringing that balance down to zero. So that will bring all these to zero, we did what we need to do.
03:10
Now we need to do whatever we need to do to make the debits equal the credits for this journal entry, because we will not be other in balance otherwise, ultimately, remember, we want it to go to the capital account, but we’re putting it first into the income summary. So we’re going to debit the income summary, which has at this point 330 to 250, which was revenue or income. Now what we’re going to do is take all the expenses that we put into this one number all the expenses have been included in this 243 270 and post that to the income summary. So now we have the revenue that was in there the 330 to 250. Then the expenses that we have now closed in the income summary to 43 to 70, giving us if we subtract those out the 88 980 What is that number that is net income.
03:59
Remember that we ultimate Want this number into the capital account? But this is kind of our check figure. Before we do that last process, we can ask the question now we could say, okay, is it the case that all the income statement accounts our zero at this point? Let’s take a look here. Yes, they’re all zero everything from the revenue on down the expenses are zero, and is the amount in the income summary equal to net income, which was reported on our income statement as of the end of 1231? It is, okay, then now it’s okay for us to take it out of there and apply it out to the appropriate equity account. In this case being just the one capital account. If we were like a partnership, then we would have to apply it out to multiple partners. But in this case, we’re gonna say okay, now we’ve got that 88 980. We can ply it out then to the applicable capital accounts. Therefore, this is where we are at at this point in time. We have all these zeros down here, we’re closed. That’s what we’re getting close to. We want everything from the capital account on down including draws and the income summary to be zero. What have we done so far? We’ve called closeout income to the income summary. Now we just closed out all the expenses to the income summary. And next time we’re going to close out the income summary now having net income in it to the capital account, then we’re going to do that last step when we see that 5000 that two needs to be closed out draws to the capital account.