 Hello, in this presentation, we will perform the closing process using a two-step method. So we're going to close out the temporary accounts, however, we are going to do that with two journal entries, rather than one, rather than four. There's pros and cons to each type of format. The two-step process is pretty easy to memorize or visualize, even though it has more than just the single step, it's got two journal entries. And it's not as complex, obviously, as the four-step process, but it also kind of mirrors what we'll see in the statement of equity, meaning we'll see net income being closed out to the capital account, and then we'll see draws in a similar format. As that statement of equity does in a plus and minus format, we will do it with journal entries with debits and credits. For that reason, it's the format that, to me, I visualize easiest. And it's important to be able to visualize some method so that we can interpret financial statements and be able to read them from time period to time period, know what the temporary accounts are doing, even if we are reading them within accounting software. So what we have here is our worksheet. We've got the assets and then the liabilities in orange, then the equity in light blue and the revenue and expenses in the dark blue. We have the adjusted trial balance. That, of course, is within the system after we've made the adjusting entries. So where are we in the process at this time? We have entered the normal day-to-day journal entries. We generated the unadjusted trial balance. We then adjusted the unadjusted trial balance to the adjusted trial balance with the adjusting journal entries. Now, we're using a similar worksheet as we saw with the adjusting journal entries. Whenever we're starting with the adjusted journal entry, the adjusted trial balance this time rather than ending with it, then we're going to post our closing journal entries to get to the post-closing trial balance. We also see our accounting equation up here, which is just summing these up and we can see that we are in balance in that format as well just to see that the accounting equation is the same thing. What we're going to do is we're going to close out all the temporary accounts, which are everything below the capital account. To give a quick demonstration of where we want to be, don't do this. I'm just going to show this just to see where we are going. Note we want all these to be zero and we want this to still help us to remain in balance. So in other words, if I was just to do this without a journal entry, if I was just to highlight all these and delete it, then they would all be zero in essence, but we would be out of balance by the 567,000. If I delete capital, then we're out of balance by 568,000. Now I'm just going to put in whatever in capital we need in order to be in balance a negative 568,000. In other words, it's also calculated as the assets minus the contra-asset minus the liabilities, which is 568,000. So the post-closing trial balance will be the same down to the liability. It will then have a different owner capital, that owner capital representing everything that is done here, all that just being crammed in there. And so we're going to do that, of course, rather than just, you know, plugging in the number. We're going to do that with journal entries. So I'm going to undo all this. We're going to undo, undo, undo. And then we'll do this process with a two-step process. The first step is to close out the income statement accounts. So we're going to close this entire thing out. We're going to close all of this out to the capital account in a similar way as we do with the statement of equity, where we have the beginning balance. And then we typically, our next increase is net income. So in essence, we're going to take net income, all of this, which makes net income 577,000, close it out to the capital account. So to do that, we're going to scroll up. I'm going to put this up a little bit. I'm not going to go all the way to the top here, so we can be somewhat closed, but we want to have enough room. So I'm going to make it right here. So we're in B9, we're going to start the journal entry. Now we'll skip draws, even though draws is going to have to go down to zero, two, because it's temporary. We're going to start with the revenue, income, or sales account. Now it's got a credit of 800,000. We need to make it to go down. We're going to do the opposite thing to it in order to do that, which is a debit. So I'm going to copy the revenue, income, or sales account, copy that. We're going to put that in B9, right click, paste 123. Then we're going to put the amount, 800,000, right here, 800,000. And I'm going to post this as we go. Obviously we are not in balance. We only have one account, but we'll post it as we go because that will give us an idea of what we're doing, why we're doing it. What we're doing is making all of these accounts zero. And so we're going to see that as we go if we post it as we go. So we'll be in H17 here within H17. We're going to say this equals and point to that 800,000. That's a debit. This is a credit. Those are opposites. Bringing the balance down to zero. So that's what our goal was. We have achieved it there. Rest of the accounts, all expense type accounts, all have debit balances, therefore they all need to be credited. We're going to do this one step at a time, however, just so we can practice this and see this full process rather than just copy the whole thing over there. So we're going to say wages expense has a debit of 120,000. It needs to go down. We're going to do the opposite thing to it, which in this case is a credit. So we're going to put our cursor in F18, right click and copy. We'll paste that to B10, right click and paste 123. Then the amounts going to go in the outer column and be represented with a negative number to represent a credit 120,000. Also going to indent this number, clicking on it and going to the home tab alignment and increase the indentation. Now we're going to post this as we go. So here it is here. It's debit. We're going to be in H18 equals and point to that 120,000, bringing the debit balance down by that credit to zero. Next item, we've got the utilities at 48,000. It's a debit. We need to make it to go down with a credit. So we will copy the utilities expense, right click and copy. We're going to put that in B11, right click and paste 123. Also going to indent, going to the home tab alignment, increase the indentation. Then we'll go to the outer column D11 and we're going to put in a negative 48,000. Now we're going to post this. We're going to go down here to H19. We are in H19 equals and point to that 48,000, bringing that debit balance down by the credit to zero. Now we're going to do the same thing for the insurance expense. It has 12,000 in it. We need to bring it down. So we're going to do the opposite thing to it, a credit. So we're going to put our cursor in insurance at 20, right click and copy. Then go over here to B12, right click and paste 123. Going to go to the home tab alignment, increase the indenting. Note, you can increase the indenting by just double clicking and space barring three times if there's some type of block because of formatting of the worksheet. And then we're going to put our cursor in D12 negative 12,000. Now we're going to post that as we go. So we'll scroll down here to H20. We will say equals, point to that 12,000. This is a debit, that's a credit, bringing the balance down to zero. Two more times here. We got two more expenses, first one supplies. It too has a debit balance of, in this case, 7,000. We're going to copy the supplies. We're going to credit supplies, copy. We'll put that in B13, right click and paste 123 values only. Then we'll go to the home tab alignment group and increase the indentation in the outer column as well as represented with a negative number. We'll type in negative 7,000 for the credit. Now we're going to post that. So we're going to post that to H21. We are in H21 equals, and we're just posting this as we go, we're just building this journal tree as we go, achieving the goal of making these zero. Point into that 7,000, that's the credit, this is a debit, those are opposite, making the balance go down to zero. Last one, depreciation expense. So we're going to copy depreciation expense, we're going to paste that over there and credit depreciation expense to make it go down. Right click and copy, scrolling over to B14, right click and paste 123, home tab alignment, increase indentation, then we'll be over here in D14 negative 36,000. Now we're going to post this to this area here. So we are in H22 equals and pointing to that 36,000, bringing this debit balance down by that credit to zero. We have now achieved our goal of having all zeros in the revenue accounts, however we are out of balance by the 577,000, that being net income. So we're out of balance by net income. We can see that over here too if we highlight this whole thing, or let's sum it up. I'm going to sum up the debits and credits. So you don't have to do this. I'm just going to sum this up for an example, equals the sum, I'm just going to do this quickly for the examples and then we'll sum up the debits, meaning the sum of this column is 800,000 and the sum of this column is 223,000. If we take the difference there, the 800 plus the negative, the difference between the two 800 minus the 223, we have the 577,000 net, which is what we're out of balance by, and is net income. So that's what we need in order to put this balance in balance, put this journal entry in balance. Note we can also see that by highlighting the 800 down to the 36, Excel will then calculate that here as well, taking the debits minus the credits, the positive minus the negative. So I'm going to delete this, we're going to put that amount here, this is going to be the credit, this is what we need to be in balance that 577, instead of just typing it in there as we could do, I'm going to do it with a formula, a sum function, but if we just sum it, if I just add these up, it'll be a positive number. We want it as a negative, therefore, rather than equals, I'm going to start with a negative sign, then SUM, double clicking the sum function, highlighting the 800,000 down to the 36,000, and enter. And that gives us that 577, that's what we need to be in balance. Where's it going to go to the capital? So it's going to go to the capital account here, this is the equity account. So we're going to copy the capital, we're going to put that in B15, right-click and paste 123, home tab, alignment, increase indentation. Now we'll go ahead and record it. So we are in H15, we're going to say equals and point to that 577,000, bringing this credit up in the credit direction to 578,000. So note what we did, it's similar to when we do the statement of owner's equity. We started with beginning equity, because it doesn't include all the activity. And then we increase it first by net income. So that's what we do typically on the statement of owner's equity, increase it by net income, then it's going to go down by draws, because we're sole proprietor in this case, if it was a corporation dividends. So that's what we're going to have here, this is the last piece we need to take out. This is step one of the two step process that we just did. Now we are in step two, and step two is nice and short compared to step one, we just need to close out the draws account. So the draws account has 10,000, it's a debit balance, which is often the most confusing thing. It's good to have the trial balance in front of us so we can see that it's a debit balance and see what we need to do, a credit opposite to make it go down. If you don't have it in front of you, many people get confused on whether the draws is a debit or a credit. When you think of draws it's not part of the income statement, it's not part of net income calculation, however it is temporary, it's on the statement of owner's equity and therefore it needs to go down and be closed out to the capital account. So it has a debit, we need to make it go down, we're going to do the opposite thing to it then, which is a credit. So we're going to copy the draws, right click and copy, we're going to put that underneath, I'm going to put this on the bottom so there's only two accounts, it's easy for us to follow the convention of debits on top, credits on the bottom, this will be on the bottom, it's a credit. Right click and paste 1, 2, 3, we're going to go up to the home tab, alignment, increase the indentation, and then we'll be in the outer column D18, we're going to put that negative 10,000. Then we'll debit the 10,000 as well, so there's the debit to the 10,000, you could just type it in there but I like to put a negative of this number, meaning take that and flip the sign, that's what that means. And there is that. And now we're going to go ahead and post that too, where's that second account going to go? It's going to go to capital as well. So we're closing this out to capital as well, right click capital, copy it, pasting it in B17, right clicking and pasting it, 1, 2, 3. So there we have it, now we're going to push this out and I'm going to post the draws first even though it's on the bottom just to show that it will close out and then post the capital. So we are in H16, I'm going to say equals and point to the credit to the draws, that's a debit, this is a credit, this will make this account go down to 0, now we're out of bounds by the 10,000, now we're going to go to the capital, now note it went up before by net income, now we're bringing it down by draws, the second step that we typically see on a statement of owner's equity, we got basically the beginning balance plus income, in this case a credit and a credit increasing minus the debit, which will decrease by the draws. So because there's something in this we need to double click on it, I'm going to go to the end of it and then we're going to say plus and then point to this capital number, the 10,000, bringing this balance down and that will put this back in balance here. So there we have it, back in balance on the zeros, here we have this. So we have now achieved our goal, that goal being all temporary accounts including draws, revenue and all expense accounts, 0 and then making the capital count what it needs to be in order to put us back in balance. So we were in balance before, we're in balance still even though we zeroed out all these numbers by closing everything out to the equity account, the owner's capital account in a similar way as we see on a statement of owner's equity meaning we have the beginning balance, we increased it by net income, which is net income because we closed out revenue and expenses to it and then we decreased it by the draws, decreased it by the draws, given us that ending balance, this is where we stand as a point in time, this is the assets minus the liabilities, 568,000 as of this point in time, the post closing trial balance in essence representing the balance sheet accounts, the permanent accounts.