 Hello, and welcome to the session. This is Professor Farhad. In this session, we're going to be looking at the closing process and the post-closing trial balance. This topic is typically covered in financial accounting, an introductory course, as well as the CPA exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance, and tax lectures. If you like my lectures, please like them, click on the like button, share them. It doesn't cost you anything. If they're benefiting you, it means they might benefit other people. So share the wealth, connect with me on Instagram. On my website, you'll have additional resources such as exercises, true, false, multiple choice. If you're studying for your CPA exam, 2000 plus CPA questions. So if you want to invest in your career, check out my website. So when I start to look at the closing process, I would like to give the analogy of an odometer. You're going on a trip, and when you start the trip, you want to know how far you traveled on that trip. Well, what can you do? You can go to your car odometer and reset it down to zero. So you can reset it down to zero. Then as you drive, let's assume you drove 50 miles, then this is going to be 50 miles. Well, this is going to be 50 miles. Okay? Once you drove 100 miles, it's going to be 100 miles. When you drove 200 miles, it's going to be 200 miles. Once you get to your destination, you can reset the odometer again and find out how long you traveled. In the closing process, in one way or another, it's the same thing. There are certain accounts that you need to close to reset at the end of each accounting period. Now, the first question is, which accounts do you need to close? So the first thing you need to know is, which one do I close? I have a lot of accounts. Which accounts do I close? Well, if you were in my classroom, I would go through this discussion and I'll ask you to choose an account. And generally speaking, students usually select cash. So the first account that comes to mind is cash. And I'll ask you, let's assume, give me a number in your cash account. And the student would say, I have $50,000. Okay, fair enough. Okay. Well, if you wake up the following day, let's assume your accounting period ends December 1231. When you wake up January 1st, would your cash go away? And the answer would be, no, it doesn't go away. I would say, okay, let's name another asset. Account receivable, $30,000. Would your account receivable go away on January 1st? Well, what is account receivable? Account receivable is what the customers owe you for work you performed and you build them for it. Your customers will be happy if you just reset it down to zero, but it's not in your best interest. Therefore, we don't close account receivable. Let's talk about you have a piece of land and you paid for it $75,000. Would that piece of land go away? No. So what do we say about assets? Assets are not subject to the closing process. We don't close them. But let's go from asset to liabilities. Let's assume you have an account payable and the balance is $45,000. You owe your vendors $45,000. Can you tell them January 1st? Because it's a new accounting period. You have to close this account and now it's zero. Well, would you like to do so? And the answer is, yes, you like to do so. Can you do so? And the answer is no. If you don't pay them, they're going to sue you. They're going to keep billing you. Same thing with the loan. If you have a loan or notes payable, $100,000. Can you tell the bank, guess what? It's a new accounting period. I'm not going to pay you the bill. No, you can't tell them that's the case. And any liability follow the same way. If you owe your employees money, you cannot tell them, well, sorry, I closed your account. Now it's zero. I don't owe you anything. Therefore, also liabilities are not subject to the closing. So you cannot close your liabilities. You cannot close your assets. So what can you close? Well, let me ask you another question. Let's assume I ask you, how much profit did you make in year 2020? And you would say, okay, let me compute my profit. You would say, okay, you want my profit. This is year 2020. I'm going to list my revenues, count my revenues. And I had revenues of $300,000. My expenses were $160,000. Now I have a profit. I had a profit of $140,000. This is my profit or net income. I'll ask you, what was your profit for 2021? Well, you would say, okay, my profit for 2021. And here's what you're going to do mentally. Mentally, you're going to reset your odometer down to zero for revenues and expenses. You're going to say, my revenue for 2021 was $450,000. Well, this one does not include 2020. So now in 2021, you made more profit than 2020. Let's make it $200,000. Okay, let's assume your revenue in year 2021 was $200,000. This revenue did not include anything from 2020. So basically what happened when you started year 2020, you reset your revenue odometer. Why? Because you are counting again for year 2020. And the same thing for your expenses, you would say, my expenses were $120,000. Therefore, my profit is $80,000. Okay. What does that mean? It means revenues and expenses, they are subject to the closings. Every time we start a new accounting period, we reset them down, we reset them down to zero to find out how much we are generating of earnings or profit. Okay. So simply put, here's what's going to happen. We're going to identify the account for the closing, kind of we identified some of them, we're going to record them, post the closing entries, then prepare the post closing trial balance. So revenues, expenses and dividend accounts are reset to zero. And we're going to see the dividend in a moment. I did not mention the dividend, but how much you took money out of the business, you'll have to count this on a yearly basis because it might affect your tax bill. Therefore, every year, you'll have to reset your account down to zero to determine how much did you took out because for tax purposes, you don't want to go mingle the dividend from year to year. The closing process helps summarize a period's revenues, expenses, and account called income summary. So this is a new account. You're going to see it in a moment. So it's going to help us summarize the revenues and the expenses. So let's take a look at assets, liabilities and equity. Well, we already determined that assets, liabilities are not closed. And I'm going to tell you right now, equity is not closed. And what is equity so for, you know, equity is common stock and retained earnings. Those are the two account under equity. Well, hopefully you just kind of notice something that balance sheet account are permanent account. Permanent means they don't go away. We don't close them. And that is true. If you already observe that and that's true. Any account that goes on the balance sheet, which is assets, liabilities, and equity, including counter assets, counter liabilities, counter equity, any account that says assets, liabilities, and equity, they go on the balance sheet, they are permanent. Then we have the temporary accounts. What are the temporary accounts? The temporary accounts are the account that are subject to the closing process, which are revenues, expenses, dividend, and a new account that we call income summary that we did not introduce yet. We're going to introduce in a moment, then get rid of the best way to to learn the closing is to learn first about the steps. What are the steps? There are four steps for the closing process. Step one, close the credit balance and revenue. Revenue will have credit balance to income summary. It means close it down, put it down to zero. What do we do? I'm going to debit revenue and I'm going to credit income summary. Step two, close the debit balance and expenses. Expenses have a debit balance to income summary. How do I close them? How do I make an expense go down to zero? I'm going to credit the expense, which is something that we haven't done yet. Then now we have income summary. Then we're going to close income summary to retained earnings. Then we're going to close dividend to retained earnings. Now the best way to illustrate this is obviously to look at an actual example. If you want to take notes and copy those four steps because we're going to look at an actual example. This is the trial balance and we're going to be looking at the adjusted trial balance, the adjusted trial balance. Basically, the first thing is we want to identify the accounts that we're going to be closing. It's very important. If you don't know which account you're going to be closing, you're going to be in trouble. Let me identify the accounts. We're going to be closing dividend, revenue, revenue, and all the expenses. Those are the accounts we're going to be closing, and those are their balances. 200 dividend, 75, 80, 300, and these are the balances for the expenses. Those are the four steps. Again, this is the balances. This is consulting revenue, rental revenue. These are the balances for depreciation expense, salaries expense, insurance expense, rent expense, supplies expense, utilities expense, dividend, and we have a beginning retained earning balance of 30,000. Let's go through step one. Step one, it says close income statement, credit balances. How do I make this account go down to zero? It's a credit balance. I'm going to debit the balance. I'm going to debit this 7850. Now my balance is zero. I have another balance here of 300. I'm going to debit that balance again to make the revenue goes down to zero. Now, I journalize two debits. I have to credit. I'm going to credit income summary, 8150. The balance goes from revenue to income summary. Basically, the revenues are now zero, and all the revenue transferred to income summary. That's a step one. I'm done with step one. Step one is done. Step two, close income statement, debit balances. Income statement, debit balances. Generally speaking, we're talking about expenses. Why do they have debit balances? Now, are these the only thing that will have a debit balances? No, you might have sales returns and allowances, which we'll talk about those later, but generally speaking, for now, we close the expenses. How do I make the depreciation expense account go down to zero? I'm going to credit that account. How do I make salaries expense go down to zero? I'm going to credit. Credit insurance expense, credit rent expense, credit supplies expense, credit utilities expense, and all these account now, they have a balance of zero. I close them. Now, for all the credits, I need a debit. Well, I'm going to debit income summary. What I did is I transferred all the expenses to income summary. Now, in income summary, now I have a credit balance of 8150 and I have a debit balance. One is revenue and one is expense. Let's find the difference. The difference is 3780. Well, obviously, the difference is net income. Why net income? Because the difference between revenues and expenses is called net income and we have net income. We're done with step two. That's done two. Step three, close income summary account to retained earnings. Now, I have a balance of 3780. I need to get rid of it. What do I do? I debit the balance and what do I credit? It says close it to retained earnings. So I'm going to, if I debit income summary, I credit retained earnings. And as a result, retained earnings will go up. And this should make sense because I had a net income. Therefore, when I transfer net income, net income will increase my retained earnings. I'm done with step three. Step four, close dividend. I have 200 of dividend. It's a debit balance. To make this account go down to zero, I will credit dividend and debit retained earnings. And this should make sense because dividend reduces retained earnings. Now, I can compute my ending retained earnings. I started with 30,000. I added 3785. Then I deducted 200. My balance is 33,585. So what happened? I closed with dividend is done too. So technically, what happened? All the revenues, all the expenses and the dividend income summary, they are all summarized now into this number, 33,580. They all went into retained earnings. So retained earnings absorbed them all. So retained earnings is a permanent account on the balance sheet. Although those accounts are down to zero, they still exist. But when we start the new period, the balance is zero. It doesn't mean we erased all the transaction. The transaction are factored. They are absorbed into retained earnings. Now, once we are done with the closing process, we prepare something called post-closing. And what is post-closing? It's post-closing trial balance. It's after closing. What appears after closing? Only the permanent accounts, which are assets, liabilities, and equity. That's it. Will the other accounts be there? Sure, they will be there, but they will have a balance of zero. And the post-closing trial balance, total debit should equal total credits, and this is a post-closing trial balance. So notice we only have assets, liabilities, and equity. Now, revenues still here, dividend, let's list dividend first, dividends still here, revenues, and all the expenses. But they all have a balance of zero when we start the new period on January 1. So this is basically the post-closing trial balance in a nutshell. At this point, if you have to do reversing entries or anything like this, depending on your company, depending on your company's need, as always, I would like to remind you if you like this recording, please like it, share it, put it in playlist. Visit my website. If you're interested in additional material, you want to practice more. Good luck and study hard. Accounting is worth it.