 In this presentation, we will take a look at the closing process for a corporation. We'll go through an example. We'll put the journal entry on the left side. We're going to record this information to the trial balance on the right side. We're going to start off here with the statement of retained earnings and see how the statement of retained earnings will compare and contrast to the closing process. Over here we have the trial balance. This is going to be the beginning trial balance. We're going to post our adjustments here. We can see that the trial balance has the assets in green, liabilities in orange, equity in light blue, and revenue and expenses in dark blue. The debits will be non-bracketed or positive numbers. The credits will be bracketed or negative numbers. We see that net income is currently at the 425,000. That is net income, not a net loss calculated as revenue credit of 500,000 minus expenses debit of 75,000 to bring us to that 425,000. You'll note that this is going to be a simplified trial balance in net. Obviously, it's simplified in many regards, but on the income statement side where we will be concentrating, we have grouped all the expenses together here. Our goal here is not to close out all expense accounts. All expense accounts will have debit balances and they'll close out in the same way. We've taken a look at the closing process in prior courses. We're going to focus here on the main thing that will differ within the closing process, that thing being the retained earnings. We're going to close out to retained earnings. In other words, when we have a sole proprietor or partnership, we will have much the same closing process. We're going to go through a four-step closing process which will achieve the goals of closing out temporary accounts, including the revenue and expense accounts, all income statement accounts 2-0, and the dividends account which will be similar to draws 2-0. All the temporary accounts will be closed, but not to the capital account as would be the case for the sole proprietorship or partnership, but to retained earnings. Why? Why do we have this difference? Well, a sole proprietorship or a partnership, we are going to track the equity section by who is basically entitled to the net assets, to the assets minus the liabilities. With the case of a corporation, we don't have to list out all these corporate stockholders, all the owners of the company, because all the stocks are the same. Instead, we're going to break out this information by the capital investments, which will be the common stock and the paid in capital. When we sold the stock or issued the stock, we got this money that's basically like the investment and the amount that has been earned over and above that investment, which may be the initial investment in terms of income that has not been given back in the form of draws. We can compare this to the statement of retained earnings here. The statement of retained earnings is going to start with the beginning retained earnings, which is going to be this number. Beginning retained earnings is going to be this number, because this number has not yet been closed out through the closing process, meaning net income hasn't been closed to it or dividends. Therefore, this will generally be the beginning number until we do so. Then, we've got the net income, the 425, the 425, and then we're going to decrease it by the dividends, which is the 264, this 264, which will leave us with the 478,000. That's what we're going to get at the end of the day here with the closing process, meaning all these accounts will then be zero, and this account should then be at this 478,000. Let's go through our steps. There's going to be four of them. We're going to close out revenue to the income summary, expenses then to the income summary. Step three, we close out dividends to, I'm sorry, step three, we close out the income summary to retained earnings, that being the difference. Step four, we close out dividends to retained earnings. First step, closing out the revenue. Revenue has, remember our goal is to make all of these zero, all the income statement accounts. Revenue has a credit balance, we're going to do the opposite thing to it, a debit to make it go down. We're going to put it into this temporary account, the income summary account. This income summary account will only appear in the closing process, it'll be zero before the closing process, it'll be zero after the closing process. That's why it's not only a temporary account, it's a clearing account is what I typically call it, meaning it really only has that one specific purpose and then will be gone. That purpose being to close out the entire income statement into it and give us a check to see that net income will then be in it and that the income statement accounts are then zero and therefore ready to be closed out to where we ultimately want them, retained earnings. If we post these then, the revenue account here is going to be posted, it was at 500,000, it's going to be debited by 500,000 going down to zero, that being the objective. Here's the income summary, it's going to be posted to the income summary here starting at zero going up by 500,000 in the credit direction to 500,000. Here's where we're at so far, the income summary having that 500,000 revenue, the revenue now being at zero. Next of the four step process is going to be to close out the expenses. The expenses are currently on the books at 75,000. Now we've grouped all expenses into just one expense account, it may be typical for us only to have one revenue account or a few of them, expenses typically we will have a lot of expense accounts like telephone expense, the meals and entertainment expense, we're going to have supplies expense, we're going to have whole different amounts of expenses because of course when we have the revenue we concentrate on whatever we do to earn revenue and then we pay for whatever else. So whatever else will be different categories of expenses. We're going to group them all into one expense category because they're all going to be debit balances and our focus here is on the things that will differ in the closing process which will be not the expenses but the retained earnings and dividends. So this is a debit balance, we're going to do the opposite thing to it which is a credit to close it out and we're going to put the difference to the income summary. So we got the credit to the expenses then the difference is going to go into this clearing account, the income summary account. So this is going to be the same as it would be for a sole proprietor or partnership if we post this then we've got the income summary starting at 500,000 it's going to go down by this debit to the 75 or by 75,000 to 425,000. That 425,000 is what net income started out so that's the net income here. And then we're going to close out the expenses, expenses 75,000 going down by 75,000 to zero. So what we have now is the income summary now having the net income in it and we've closed out all revenue and expense accounts and so we can give our check, we can say kind of check and see if we are at where we want to be. That being that the income summary has the net income in it that should match on the financial statements that we had created for the income statement net income and all expense accounts are zero. If that's the case we go yep looks good closing process functioning as we think it should and therefore we'll finish the closing process clearing out the income summary taking it back down to zero posting that information to retained earnings. So that's what step three will be. So we have income net income 425,000 in the income summary due to closing out both revenue accounts and expense accounts to it. So we have a net credit balance income net income in the income summary. We're going to close it out by doing the opposite thing to it, which will be a debit to the income summary account of that 425. And then we're going to close it out to retained earnings. Remember that retained earnings is going to be the thing that differs here meaning in a sole proprietorship or partnership we would close it out to the capital accounts representing the owner share of the assets minus the liabilities. Here we're going to post it to retained earnings representing the share that is assets minus liabilities applied to the earnings that have accumulated over time which have not yet been distributed in the form of dividends as opposed to the other component of the equity section being the investments that have been in the company due to stock distribution. So this investments in a sole proprietor or partnership would be just put directly into the capital accounts in essence. And then but for here for the corporation we want to break out the part that was an investment and the part that is retained earnings. So we have a better understanding about how much we can give out in terms of dividends at least that's one of the reasons we want to break this out. So if we post this out then we're going to say the income summary started at the 425 it's going to go down by the 425 to zero. And then the retained earnings is at the 317 it's going to go up in the credit direction by 425,000 to the 742,000. So here's our total accounts note that retained earnings went up that makes sense because this represents as the name suggests the earnings that have been accumulated over the lifetime of the business which have been retained and therefore not yet distributed to the owners in the form of dividends. That brings us to step three here or I'm sorry step four of the four step process which is to close out the dividends account. Now note that the dividends account may be posted directly to retained earnings meaning when we gave out a dividend we may have reported that as a reduction to retained earnings at the point in time dividends were declared. Here we're going to break it out into its own dividends account and close it out as a temporary account in a similar fashion as we do for a sole proprietor typically or a partnership. We don't have dividends for a sole proprietorship or partnership but the dividends account can be closely related to the drawings account. So note that if you're a partnership in other words what happens here is you're going to have a capital account that will increase and that will when we have earnings and that will be the partner's distribution of or the breakout of revenue minus expenses their share of the book value of the company and that's going to be now if they want to take money out of the company then typically the two main restrictions would be one do we have the cash to do it and two do you have a capital account balance high enough to do to take it out you can't take out more money than in the capital accounts. There might be more restrictions than that in the partnership agreement but that the partner has a lot of leeway to take out whatever they want in the form of draws reducing the money taking it out of the of the business reducing their capital account and taking the money for personal use the dividends is the same in that it is going to be a payment from the company to the to the owners but remember that the dividends have to all be this all be equal to all stockholders so it's not like one stockholder even if they have a 51% of stock a majority share they can't just vote and say hey give me a dividend on my 51 shares and not on anybody else's 49% shares because they all the dividends by definition have to have to be the same to all the stocks so the difference with a corporation is it's the dividends differ from draws simply in that the dividends represent distributions to the owners like draws however those distributions are all even to all owners meaning all stocks their owners could differ based on the fact they have more or less stock but the distribution will be even per stock so that in other words the rest of it will be the same in terms of the closing process it'll be the same meaning this represents a distribution to the owners we it's a clearing account it needs to go down it has a debit balance we're going to do the opposite thing to it to make it go down so we're going to credit the dividends and then we're going to put the difference to retained earnings so if we see this again we're going to say that the dividends are going to go down there's a debit balance we're going to do the opposite to make it go to zero and then we're going to put the other side to retained earnings which is going to be kind of like the accounts we're going to close everything out to in a closing process in a similar fashion as we would to capital accounts for a partnership or a sole proprietor posting this out here's the retained earnings starting at seven hundred and forty two thousand and well let's close the dividends first it's at the two sixty four thousand and we're going we started at two sixty four thousand debit it's going to go down by a credit of two sixty four two zero that's the objective then the seven forty two thousand of retained earnings is going to go down by two sixty four thousand to the four seventy eight thousand and that would make sense because the retained earnings remember represents the earnings that have been retained over the life of the business and have not yet been distributed the retained earnings or the dividends represent distributions to the owners in the form of dividends so it will reduce the retained earnings to the four seventy eight so we're left with then the common stock in the patent capital this portion being like the investment portion which hasn't changed during this process and then the retained earnings the all of these within represents assets minus liabilities assets minus liabilities will equal the sum of these accounts the sum of these accounts is the net book value of the company assets minus liabilities and represents what is owed to the owners the stockholders how do we know who gets that money if we were liquidated if we close the business it's just going to be distributed evenly depending on by share so whoever has how many shares are going to get an even distribution per share so here's going to be the full process then note the end process we started here with the 425 we've got the four steps we've got we closed out the revenue to income summary we closed out expenses to the income summary then step two step three we closed out the income summary to retained earnings and then we closed out dividends to retained earnings we had this temporary account and the income statement accounts we closed out the income statement accounts to the income summary in step one we closed out the income summary to retained earnings and these are step one and two and step three and then we closed out the dividends to retained earnings in step four the result was that net income got closed out to retained earnings as did the dividends leaving us with zeros and all temporary accounts and $478,000 in the retained earnings, which will be the ending number as well in the statement of retained earnings.