LECTURE NOTES FOR CHAPTER 4
Before starting chapter 4, I want to mention a couple of errors that a lot of my former
students have made in conjunction with adjusting entries.
First, when making an
adjusting entry, DON’T EVER USE THE CASH ACCOUNT.
Don’t debit it, don’t
credit it, don’t touch it.
Secondly, when making an adjusting entry, the debits and the
credits must equal.
I know that you know that but when it comes to adjusting entries,
students seem to forget that rule.
Now for Chapter 4 .
There are only three things you need to study in chapter 4.
are (1) Classified
balance sheet shown on page 147 and discussed on 149, (2) Closing
entries are discussed starting on page 150 and illustrated at the top of page 153, and (3)
The Post Closing Trial Balance, pages 155 and 156.
The star of the chapter is “Closing
So far in the course, we’ve talked about plain ol’ journal entries and adjusting
Now, here come closing entries.
Here’s the situation.
At the end of the accounting period we are gonna go through
a ceremony known as “closing the books”.
That means that we’re gonna go through the
ledger and make SOME of the accounts have a zero balance.
Reason: We don’t want to
get this year’s information mixed up with next year’s information so to make sure that
doesn’t happen, we are going to wipe the slate clean by making SOME of the accounts
have a zero balance.
Which accounts will be closed out?
Revenues, Expenses, Drawing,
and a new account you’ve never heard of called Income Summary.
How is an account
Its real tough, if an account has a debit balance, close it out with a credit. If it
has a credit balance, close it out with a debit.
: Why don’t we close out ALL of the accounts? Well, we can’t make assets
(such as a building) disappear by making a closing entry, and even if we could, why
would we want to? So leave the assets alone.
What about liabilities? Wouldn’t it be great
if we could make a debt disappear simply by making a closing entry? Guess what: It
doesn’t work that way. The only way you can make a debt disappear is to pay it.
leave the liabilities alone. Is owners equity closed out? NO!
It is adjusted (changed) but
it is not closed.
The term “closed” means we’ll make it have a zero balance, and that
isn’t going to happen.
Before going any further, please note that in one corner we have a “Set of Books”