Accounting 1: Program #16 – “Closing Journal Entries: Conclusion”

Greetings everybody here we are again this
is the last lecture before you take your second test. And that test is over chapters three
and four so this is the final lecture before we'll have and then well want to take the
test over three and four so be aware of that. For you folks at home you should always be
able to look at your syllabi or your syllabus, and see when those due dates are for the test
and remember you have those due dates I give you in the syllabus folks at home that's the
date you have to take it by you don't have to take it on that date you have to take it
by that date and I always have it in there for at least a week before that date so that
gives you a little window of time when it works best with your schedule.

Ok let's go
ahead and dive right in I gave you a lot of homework, but some of them didn't take that
long hopefully lets go ahead and do quick study four one ok now we are going to talk
a little bit about the test and what's going to be on there a little later today, but I
do like to ask you a question kind of like quick study four one alright in quick study
four one says list the following steps in the accounting cycle in their proper order
ok. Now you guys have learned a lot in the last sixteen seventeen class periods I want
now we've been kind of focusing in on making journal entries, and making adjusting journal
entries, and make closing journal entries and all that sort of stuff. Now I want to
take a step back and kind of look at the overall process and this should make sense than if
we did it a couple weeks ago. So quick study four one the very first step the very first
step in the accounting cycle process is to analyze transactions and events ok different
events will happen and we will analyze those and then we will make journal entries or journalize
them correct? Ok so we will analyze things as they will happen and then make journal
entries? What's the next step then were going to post those we post those to the t accounts
or to the ledger right makes sense? The next thing we do is after that is we prepare the
unadjusted trial balance the unadjusted trial balance ok let me highlight that that's the
unadjusted trial balance then what do we do? Well we journalize and post the adjusting
journal entries and then we prepare the adjusted trial balance ok.

Now what down e do after
we do the adjusted trial balance anybody know? That's when we prepare the financial statements
ok we prepare the financial statements lets go through the rest of this and I'll talk
a little bit more about that. What do we do after that then we journalize then post the
closing journal entries closing journal entries are different then the adjusting journal entries.
And then we prepare the post-closing trial balance those are the steps. Now one thing
is I want to point is that is for some students it seems like preparing the financial statements
should be the final step it's not the final step is it? We prepare the financial statements
after we prepare the adjusted trial balance. Because once we close all those revenues and
expense accounts and withdrawal accounts we are going to have a real hard time making
our financial statements aren't we? So that is there order of events there is there any
questions on that? I always ask that on the test I'm probably not going to give you all
nine steps and then ask you to put them all in that order but I may give you a few I may
give you a few and then you have to put the rest in there or do it as a multiple choice
or something I promise you I'm not going to have a question on there that says list the
steps and you have to memorize all nine of those and write them out I guarantee it won't
be that it will be some sort of multiple choice or you will be able to choose from the steps
or whatever does that make sense? But that's on the test ok cool.

Alright let's go to quick
study four three and this one was simply asking you to complete the current ration wasn't
it? Now one thing I want to point out here is do you guys know what your current assets
and your current liabilities are do you guys know that? We went over that in class the
other day didn't we? Now let me point out something real quick on angel whoops hold
on a second let me talk while I'm doing this. We're going
to talk a little bit more about current assets and current ratios and current assets current
liabilities and current ratios like I said I will ask you that on the test I don't always
ask that but I want you to know that ratio because that's one of the most important ratios
that businesses use.

Ok so make sure that you put that down there one of the most important
things that you need to have to are able to do the current ratio is an understanding what
your current assets and what your current liabilities are. Ok now I want to show you
showing I put in your angel here so let's that come up generally speaking I try to put
everything in angel for you guys and put for you folks at home of course.

Ok go over to
the screen it will be nice to have a refresher about how to get into angel ok log in to angel
and then you are going to put in your name and password my password is one two three
four five six seven I'm kidding its not then go to your class go to lessons go to handouts
distributed in class vie got several things in there for you go to the chapter, chapter
four ok I have a list of current assets and liabilities for you I also have a chapter
three and four review sheet in there for the test we'll talk about hat a little later.
And then we are going to have something we are going to work one here in class so let's
go ahead and open that up cause this is something I want you to know for the test ok.

I want you to know for the test ok. And take a look at that that is your list of current
assets any assets due within one year and that is a list of your current liabilities
any liabilities due within one year. Ok so I'm not going to get real tricky with you
but I want you to know that for the test I guarantee you you're going to have a test
question where I list out different assets and liabilities, and I want you to tell me
is it a current or is it a non-current asset or liability? So if I said accounts receivable
you'd check current or if I said fixed assets you'd say non-current ok. If I said unearned
revenue you'd say current if I say long term notes payable due in five years you'd say
noncurrent right? Ok so that is in there you don't have to write that down its out on angel
there for you and I think we kind of discussed most of these anyways the other day didn't
we? But I kind of wanted to get it in a formal list there for you all.

Alright ok so let's
go ahead with that knowledge and lets go ahead and look at quick study four three and quick
study four, four alright. Ok quick study four three compute the current ratio with the following
information so the first thing we have to do is we have to know which of the current
assets and which the current liabilities are so for this specific client or this specific
company. The current assets are cash, AR, office supplies, pre-paid insurance and those
add up to twenty five thousand three hundred. Kara? "Wouldn't building be a part of that?"
No good question building are a long term asset think about if you bought a building
would derive all of your use in that building for the next year no that's a long term asset
ok JCCC bought the building your sitting in about thirty five forty years ago and were
still enjoying the benefits right? It's a long term asset so any fixed assets like building
equipment automobiles land office equipment those are all long term those are not current
so we don't include those in the current assets right? With current assets there's some understanding
of liquidity there liquidity means close to cash and even with some of the current assets
we use there's some question on that and we'll talk about in other chapters.

The current
liabilities in this example are accounts payable and unearned revenue. Once we have the current
assets total and the current liabilities total we can figure out current ratio and in this
case it's one point eight one. As a rule of thumb you know your current ratio you feel
best if it's around two point zero you certainly want it more than one and a half I don't think
they have some sort of indication on what their competitors were did they? So we can't
really evaluate too much this is more of comp computing it now make sure you don't round
that to one point eight or certainly not to two point zero I like to do my ratios out
to two decimal places ok don't round too much or you can lose some of the meaningfulness
of them ok.

Ok any questions on quick study four three? If not then let's go on to quick
study four-four ok. Quick study four-four is they want us to look at these different
assets and liabilities and select the letter the balance sheet where the item would typically
appear and this goes towards some of our knowledge of the class where we lectured on balance
sheet which we lectured on last period right? Ok so where would trademarks go you don't
really know about that but that is an intangible asset so number one is d intangible asset.
What about accounts receivable that's a current asset isn't it? Number three what about land
not currently used in operations? Well that's a tricky one I wouldn't ask you that on the
test, but that's actually a long term investment because it's not used in operations if it
was used in fixed operation it would be a fixed asset so number three is B.

Number four
is notes payable due in three years and you always have to know the due date of these
notes payable is ok you can't just say what is notes payable because if it's due in six
months that's a current liability if its due in three year like in this case it's a long
term liability so number four if F. Number five is cash that is a current asset correct?
Number five is A a current asset.

What about wages payable number six that is a current
liability E number six is E. Number seven store equipment we talked about this just
a few minutes ago number seven store equipment is a plant asset or fixed asset so number
seven is C. And number eight accounts payable is E a current liability. Does that make sense?
Alright so if you missed any of those folks at home there is the answers to quick study
four-four ok? Any questions, any question I think we've have done all the quick studies
now we are zooming through aren't we? No question ok? lets take a look at exercise four one
now exercise four one wanted you to do some closing entries correct? and these were these
t accounts that they wanted you to close form these weren't your normal t accounts with
your balance at the bottom these are more like you would see in real life or in the
computer where the balance is kind of carried over to the right but hopefully that didn't
cause too much confusion.

Now remember with closing entries we have to first close our
revenue to income summary and then we close our expenses to income summary and then we
close our income summary to capital. Then we close our withdrawals to capital right
ok. And let me back that up make sure you can see that there are the answers to the
closing entries on exercise four one now if yours looks a lot different than that here's
what I want to avoid sometimes people go will mine looks a little different than that but
I think its ok no its probably wrong ok it needs to look exactly like that you do not
need the little explanations ok but if you got income summary for example down here at
the bottom its probably that's wrong.

Kara? "If you do the expenses first is that ok or
should you do the revenue then expenses then capital?" Well here's what I would say I'd
say a couple things in regard to what you just said if you close the expense s and then
the revenues on the test I probably wouldn't take off for it, but I always encourage people
they can do whatever they're used to because remember other people look at this stuff so
I would close your revenues and then your expenses the other thing I want to say is
the way you said that third closing entry you want to be careful the third closing entry
we are not closing capital were closing income summary to capital does that make sense? Did
anybody put the wrong number in that third closing entry? If you put if the number you
had was forty two thousand then you might be incorrectly thinking we're closing capital
we are not closing capital we are closing to capital.

Now let me remind lest you forget
after this first and second closing entry you need to do a t account ok don't be lazy
and don't try to shortcut yourself cause whenever students do that they have a tendency to miss
points we posted a seventy four thousand dollar credit right there here we debited income
summary for fifty two one hundred. Now what is the balance of that income summary account
what is it? It's twenty one nine hundred ok how would you close this whoops I need to
back up how would you close that? Well you have to close remember the third closing entry
is to close income summary how would you close that how would you zero that out? You would
debit income summary for twenty one nine hundred. Now listen to me folks this number that goes
into the third closing entry that number is derived from doing this t account. Sometimes
on of the most common questions is where do you get that twenty one nine hundred I get
it by doing a t account after the first and second closing entry. Marlin? "The twenty
one nine hundred that represents net income?" Yes in this situation you are exactly right
we have a net income situation because our revenues are greater than our expense that's
not always going to be the case and we are going to look at another example of that today
does that make sense? Now then I think they wanted you on this one not just to post the
closing entries but then to post the entries to the ledger accounts right? And what they
are trying to get at you there.

Who's got a yellow high liter they can throw at me?
See that folks at home I caught that I got great hands. Ok what they are trying to get
across there is the balances after closing are zero in your temporary accounts now is
zero in capital no cause capital is not a temporary account tis a permanent account
but in your temporary accounts its zero correct. Ok any questions on exercise four-one? "Is
this the second part going to be on the test?" I don't know I always have to be cognitive
to how much time you have. So I don't want to say no but if I did it, it would probably
be in way that it would be quickly answered ok I guarantee you'll have to do closing entries
I guarantee posting them I might try to ask you in a conceptual question.

Ok any other
question on exercise four one if not let's do exercise four three now here they give
you an adjusted trial balance on exercise four three and they want you to do the closing
entries and then do the post-closing trial balance is that correct? So let's do that
once again we close the revenues out we close the expenses out and then what do we have
to do after that second journal entry? What do we have to do folks? We have to do a t
account for income summary ok the first entry we credited income summary for thirty six
thousand dollars the second we debited income summary for twenty eight one hundred so what
is the balance of that now what is the balance of that? Seventy nine hundred so if I want
zero out income summary and I do what do I have to do I have to debit it right and there
it is right there that number is derived from the t account ok so I close out income summary
and I close it to capital Marlin this is also a net income summary isn't it? And doesn't
it make sense that we are crediting capital cause capital we know to be a credit balance
account thus if we are crediting it we are increasing it and from our statement of equity
we know that net income is that increases capital.

Marlin? "So if it's a net loss we'd
switch those two." He's asking how we handle a net loss were going to do ne her in class
in a few minute on that ok and of course that final entry is to close withdrawals. Final
closing entry it to close withdrawals, withdrawals is a debit balance account thus we debit it.
Then they want you to do a post-closing trial balance, a post-closing trial balance now
again the post-closing trial balance the only purpose to that is so when you look at that
and make sure there are not any temporary accounts that have balances ok everything
on here is a permanent account right? If you made the mistake of putting the beginning
balance of capital in of forty six, six hundred this thing doesn't balance the debits don't
equal the credits do they? Remember the balance of capital is the beginning balance of forty
six six hundred plus the seventy nine hundred that we posted to it in the third closing
entry and then we debited capital for six thousand in the fourth closing entry and that
gives us our ending balance of forty eight five which goes in the post-closing trial
balance is that correct? So remember that capital balance you have to have the beginning
balance and then this third and fourth closing entry to it to get your new balance in a way
we flushed all the revenues and expenses into the capital balance cool? Alright any questions
ion exercise four three any questions? Ok then let's do something here real quick go
ahead and I'll pass these out you can show this on the Elmo while I'm doing this what
I want you all to do is just what Marlin was asking about I want you to look at a situation
where we have a net loss situation cause we know companies have net losses don't they
so here and for you folks at home this is in the chapter four lessons under handouts
under chapter four there is this exercise but I want to spend some times for you folks
here in class and for you folks at home I want you to do it to let's do what they're
asking which is to post the four closing entries and then to do a post-closing trial balance
so let's take some time and have the music playing and we shall do that I'll see you
in a few ok.

(26:05-38:00) alright I want to make sure we have time to go over that
answer if you folks at home aren't done with it just pause it and push play when you are
done. Ok let's take a look at this one this is a situation where we close the revenues
we close the expenses those are your first two closing entries there right now what do
we have to after the second closing entry? We have to do the t account so the first closing
entry we credited income summary for six thousand the second one debited income summary for
six, six, six zero.

Now is this a net income or a net loss situation? Its net loss because
the revenues are less than the expenses correct? So what is the balance of this income summary?
Now do not as a reminder an income summary or any t account never ever has a minus sign
in it doesn't have a minus sign so what is the balance of this account? Six sixty on
the debit side don't put negative six sixty here there's no negative sign I don't care
if you put a hyphen as a negative or parenthesis as a negative there's no negative so how do
we close are third closing entry as income summary? How do you close this account? How
do I zero out this situation? I credit income summary for six sixty right now it has a zero
balance I have to credit income summary so are third closing entry is thus ok? We credit
income summary for six sixty and here we debit capital now this should make sense cause this
is a net loss right? And buy us debiting capital we are decreasing capital which is on the
statement of equity we would be decreasing capital would we not? And then that final
closing entry is the same we close withdrawals so that is the third and the fourth closing
entry questions there? Let take a look at the post closing trial balance
there's the post-closing trial balance do you all agree how many people got that raise
your hand.

Make sure I did it right ok. Now remember that capital balance of twenty eight
three forty is your beginning balance of capital and then that third and fourth closing entry
to it those were both debits weren't they? Don't get lazy don't try to skip your t accounts
in your postings. "are you going to mark us off if we don't do a t account I don't I think
they confuse me cause they don't have a debit or credit balance I don't like them" well
you don't I mean I think you should understand but in this sort of situation what I asked
if you don't have a t account that's fine if you can do this but you know I want you
to try to understand t account you're probably closer to understanding them than you think

Alright now I made a big deal when I handed this out to you to say this is closing entries
in a net loss situation you might want to write it out on your answers right here cause
I don't want you later on going wait a minute we credited capital here what's the deal?
Well we debited capital in this situation because it's a net loss situation.

Any questions
on that handout? If not I want to go through those last three exercises real quick and
that is they gave you information and they wanted you to prepare an income statement,
statement of equity and then a classified balance sheet right? So let's take a look
at exercise four four so I'll talk but go ahead and leave the camera on the Elmo alright.
I haven't written the test I'm not sure if I don't know I'm going to ask you to do financial
statements I always have to be aware of the time however you should always be able to
do financial statements ok remember that's the main purpose of accounting is to prepare
financial statements to help users make better decisions.

Ok so there was a net income of
twenty seven five hundred in the income statement course that's prepared in proper form with
the name of the company the name of the statement and it's dated properly isn't it? This should
be review and then that net income flows down into the statement of equity alright can you
see that back there? Alright any other questions on that income and the statement of owners'
equity now the capital account is sixty nine five hundred right? That's going to flow over
to the classified balance sheet the classified balance sheet now this one wasn't as subtotaled
as the one in the slide that we went over but one of the important things on here is
they did a subtotal for both current assets as well as current liabilities right? Of course
your total assets equal your total liabilities of course it's prepare in proper form the
name of the company the name of the statement and either at December two thousand and eleven
or as of or just the date but not for the month ended remember that ok so that is your
classified balance sheet and yours might look a little different and that's fine you know
there is always a little wiggle room about how you prepare your financial statements
ok any question on that classified balance sheet? It's a good refresher on preparing
financial statements wasn't it? It was a lot of fun to do I'm betting wasn't it? I knew
it would be enjoyable for you now the next question they ask you is to do the current
the current ratio for this situation right? Well looking back at that classified balance
sheet we have our subtotal for current assets and for current liabilities and thus our current
ratio is as such which is pretty dog on near the other one isn't it? I need to change the
numbers a little bit ok the current assets were twenty five, five the current liabilities
were fourteen thus our current ratio is one point eight two.

Now the industry norm is
one point five right? So just looking at that measure we can see that it exceeds which is
good slightly better position. Remember what the current ratio measures does it measure
the company's profitability? No it measures a company to pay it short term debts in the
near future right? Ok so if you got that classified balance sheet you've got that classified balance
sheet you've probably got that right. Ok any questions we have about three minutes left
are there any questions on exercise four-four, four five four six? Ok alright one thing that
I also put on angel under lessons under chapter four I put this review sheet for the test
and I think we you folks here I might have emailed it to you didn't I? Now you don't
have to copy this down you at home or you here cause it's in its on angel ok but let's
just touch on some stuff real quick umm I want you to be able to do something like quick
study two three that's where I say how do you cause the indicated change.

Ok don't leave
on me yet folks ok give me another minute here or so. I want to make sure you can do
adjusting journal entries like exercise three two and three-three now didn't we last period
I also showed you those extra AJE handouts on angel under chapter three that you can
do for practice. Right and the answers are on their back to chapter three make sure you
can do a salary accrual problem like quick study three five or three six make sure you
can do closing journal entries and a post-closing trial balance like in exercise four three
which we did today and folks make sure your shifted in the right gear on the test don't
have your brain shifted in adjusting journal entries and I'm asking you to do closing journal
entries you see what I'm saying, or vice versa.

Read carefully make sure you're shifted into
the right gear. Back to this make sure I'm going to list you accounts and you got to
tell me that there permanent or temporary we know that the permanent accounts are assets
liabilities and capital those are our permanent account what are the temporary accounts? Revenues
expenses withdrawals and there is one other what's that? Income summary is temporary we
zero that out we close that out. So I'll give you a list of accounts and you tell me whether
they're permanent or temporary.

Make sure you understand the correct order of steps
in the accounting cycle and we talked about that already. I'm give you a list of accounts
and you have to tell me whether they're current or non-current and we talked about that today
to didn't we? And then lastly make sure you understand the current ratio alright. Now
you guys got some time to study for that you have lots of resources you've got a practice
test out there you've got demonstration problems in the back of your chapter you got a multiple
choice in the back of your chapter you've got answers to them you've got these extra
handouts and of course what's the number one way to study for my tests? Get a blank piece
of paper out and see if you can redo the homework.

Alright next time we see each other on camera
we will being going over chapter five alright good luck on the test everybody bye-bye..

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