 In this presentation, we will take a look at the closing process for a corporation. We're going to enter the journal entries on the left side. We will post that not to the general ledger, but to a worksheet in the center column. Our worksheet down here being a trial balance, which has a beginning trial balance, where we will enter our adjustments and then see very quickly and easily what the effect will be on the assets liabilities equity income expense and those assets liability equity income expense are listed here color coordinated assets in green liabilities in orange the equity section life blue and the income statement revenue and expenses dark blue we have the debits represented by positive or non-bracketed numbers credits represented by brackets or negative numbers the debits minus the credits will be 0 indicated here which is an indication that the debits do indeed equal the credits we have our net income at 425,000 representing the credits of revenue minus the debits of expenses to give us that 425,000 so what we're going to do here is the closing process the closing process is much the same for a corporation or any type of entity whether it be a sole proprietorship partnership or a corporation we're going to choose just a small income statement because our goal here isn't really to go through all the different expense accounts to close them out they will all be similar in nature meaning all expense accounts have debits and all revenue accounts have credits and so we're just going to have one account basically representing all expenses the thing that will differ from a corporation to other types of entities is where we close this process to so this will give us a reminder of the first three steps of the closing process which is to close out revenue to the income summary then close out expenses to the income summary then close out the income summary where net income will be to the new thing which is retained earnings because this is really the new account retained earnings is different from a sole proprietorship or partnership in which case we have capital accounts for the owner or owners in the case of a sole proprietorship or partnership respectively so we're going to close it out to retained earnings the other difference will be that we don't have draws we have this account called dividends that will close out so really when we look at the closing process we are typically only looking at these accounts and this can be a little bit confusing because if we're looking at a partnership or a sole proprietor we have capital accounts and we're closing part of the revenue out to all more closing all the revenue out to the capital accounts in some way either the one owner or the multiple owners and so we might you get the idea of up here and say well why is it going to retained earnings and we're leaving the whole other half of the equity section untouched and that's because remember because we're a corporation we don't have to break things out by who owns the company we break it out by stocks and they're all the same what we'll do instead is break it out by the investment portion which is this and then the portion that is the earnings that have accumulated over time and have not yet been distributed which is this side down here so what we're working with here is net income what has been earned it's not going to go into the investment half up here it's just going to go into the retained earnings now this process can be compared to the statement of retained earnings which is like the statement of owner's equity statement of equity type of transaction and where we have the beginning retained earnings which is going to be from here we're going to close out net income to it in essence adding net income to it because retain you know the retained earnings is going to go up by net income in other words that's the 425 and then it's going to be decreased by the dividends which will be the dividends from here that's going to give us the 478 so that's in essence well that is what we'll be left with when we finish the closing process so we'll get this to that same 478 all temporary accounts will be removed including this and these two income statement accounts okay so let's do that first step of the four step closing process is to close out revenue to the income summary the income summary is our clearing account remember it's going to be zero before we start it'll be zero when we're done so the revenue account has a credit balance we're going to do the opposite thing to it in order to make it to go down our objective is to make this zero this zero this zero and then being balanced by putting the difference here at the end of the day but we'll do that with a four step process so i'm going to copy this or a copy revenue right click and copy we'll put that up top it's going to be a debit so we'll put in a two right click and paste one two three the amount's going to be this 500 000 that's the debit 500 000 we're going to credit something for the same amount i'm just going to do that with a negative of this number so that's you could just type in a negative 5000 will work as well 500 000 will work as well now that's going to go to our clearing account this is where we're going to hold it why are we putting it here not to retain earnings because we want to go to the clearing account to stick with this four step process and get net income in the clearing account and give us a kind of a check before we finish the closing process closing it out to retained earnings so we'll copy the income summary so by the way that's just why you've probably we don't see income summary on the trial balance most of the time because it's only there when we start the closing process okay so we're going to go back up we're going to put this in uh a three right click and paste one two three there's our first transaction we'll post this to our middle column so we've got the revenue it's going to be down here to the revenue section we're going to be in the middle column i'm in column i'm in cell g 19 within g 19 we will say equals scroll up just a bit and point to that 500 000 and enter so then we bring this down to zero as we want we're out of balance of course by the 500 000 until we record the other side the other side being the income summary income summary it's going to be posted here to the income summary account in the middle column in g 18 we will do that by saying equals scrolling up just a bit and go into that income summary uh credit and enter so now we've we've done our objective which is to make this zero and we've temporarily put that into the income summary where we will ultimately put it is retained earnings but this will be our holding account until we close out all revenue all expenses leaving us with net income for 25 000 there after we're done with that that we will then close out to retained earnings after we've checked that all temporary accounts for the income statement are zero next we're going to close out the expenses now there's only one here but really we're just saying that all expenses are we kind of grouped into one account just so we can simplify this process if we had a whole lot of expenses like many companies will they will all be debit balances so the the process will be the same and we've seen the process in prior courses so we're going to go through here and and just do this in one kind of lump sum for all expenses and show how that will work here's the debit we're going to do the opposite thing to it which is a credit so i'm going to copy this i'm going to copy the expense right click and copy i'm going to skip the line because it's a new journal entry i'm going to skip another line because it's going to go on the bottom and we are down here in a six right click and paste one two three we're going to go into the credit side now it's going to be for that 75 000 i'm going to put a negative for credit 75 000 then we're going to have a debit we'll put that on top as it traditionally is done and we're in b5 where we will say negative of this number we could just type in 75 000 i think the formula is fun or good or useful to do when applicable so then we're going to go down and we're going to put that to our temporary our holding account our income summary account so we're going to copy the income summary account in e18 right click and copy scroll back up we're going to put that in a5 right click and paste one two three then we'll post this out to our center column starting with the income summary it has the debit scrolling down just a bit here's the income summary we want to be in that middle column there's something in g18 so we're going to double click on it go to the end of it say plus and then scroll back up to that debit in b5 and enter so what we have in there is what's in these two income summaries are netting out and we're left with the 425 425 should look familiar because that is now net income net income has now been moved over here so we're going to post the other side now to expenses we're going to post the credit to expenses there it is on the journal entry here it is on the trial balance we want to be in the center column in g20 where we will say equals scroll back up point to those expenses 75 thousand and enter and there we have it so now the whole income statement which we've kind of grouped together it's just one revenue and one expense account is now zero that being the goal or one of the goals of the closing process because these are temporary accounts we want them to start at zero just like a stopwatch is reset to go forward in the next time period the net income then is now in the income summary which is our holding account our temporary account our account which is kind of a check figure to see one that we have the net income as it should be as it should be reported on the income statement that we had prepared for this and we see that all temporary accounts related to the income statement are zero if that is indeed the case then we can go that look looks good checks out therefore we're going to do the next process the step three of the four step process which is to close out the income summary now having net income in it to retain earnings so and that's of course is the new step just because the name is different that's the only thing it's different from a sole proprietorship partnership we would close it out to a capital account or some capital accounts if it were a sole proprietorship or partnership we are closing it now to retained earnings which you know at the definition of the name you can see and there's basically the earnings that have been generated over the lifetime of the company that have been retained in other words have not yet been distributed to the owners in the form of dividends so we are going to increase this then uh or we're going to take it out of income summary and put it into the uh retain earnings so here's a credit and it's useful to actually post these because then you'll see that there's an income summary account has a credit in it and and we need to go to zero so we're going to do the opposite thing to it which is a debit so we're going to go to uh e18 right click and copy scroll back up we're going to skip a line put it on a new journal entry in a eight and right click and paste one two three the amount will be for that 425 thousand now be careful if you're using formulas it's tempting just to show you it's tempting to say equals uh negative possibly of this number or this number and that'll work for now but i'll show you just i'll keep it for now it'll have a circle reference when we post it so you want to you want to use formulas like this whenever possible but if you see a circle reference i'll show you what'll happen just to be aware of that's kind of one of the most common problems they could be a little confusing especially if the circle references is a few cells deep before worksheets get a little bit more complicated it's kind of hard to see those so we'll i'll check that out for a second we're going to put a negative of this number we're going to have a credit going somewhere this is the income summary it's going to close out to retained earnings so we're going to copy retained earnings put that in b9 right click and paste one two three now we're going to post this out starting with the income summary here it is on the journal entry here it is on the trial balance we're going to be in the middle column we're going to go to the center column double click go to the end of it and plus now again we're going to have a problem here because it's going to be a circle reference we're just going to show you what'll happen because remember we drew this cell from over here so i'm going to say plus this number and enter and it says there is more there there are one or more circle references for a formula refers to its own cell rather than directly or indirectly this might cause them calculate incorrectly okay so you know you can see the the logic here for excel is going i can't do that why because you told me to take that number to make this number and then you told me to make this number and change that number with this number but this number is derived from the same cell that you told me to change that cell with and so it's a circle reference so here it's it's pretty obvious that it is like if you see that a few times you can say how that's pretty obvious if we have a if we have a lot of formulas that are connecting each other the circle reference can actually be a little bit more difficult to find so what do we have to do there well we have to hard code this number we can't use this reference i can't put it in there as negative g18 i can put it in there as 425 000 that's hard coding it and enter and now we're okay so now this is drawing all those three cells no problem no circle reference does what we expected to do bring the income summary down to zero now we're going to post the other income summary second part of this journal entry here to the income summary account we are in cell g17 where we will say equals and point to the retained earnings this is a credit that's a credit two credits bringing the credit balance up in the credit direction from 317 000 by 425 000 to 742 000 so this and it makes sense that that would go up because this represents part of what is owed back to the owners part of what the in that part being what the company has earned over the life of the business but yet not has yet distributed unlike this part which represents the investments that has gone in from the owners which is owed back to the owners as well but this is what has been accumulated over and above that now we're going to do the last step which is to close out the dividends to retain earning now note you may not have dividends broken out on the trial balance they may have just put them to the retained earnings whenever the dividend was done uh but uh and if that's the case then we'd have to go into retained earnings and just check what the beginning retained earnings is and if there's any activity meaning we'd go into the general ledger in order to check that information to do something like the statement of retained earnings but i'm going to break it out here so that we can see it and so that it can mirror the four-step process and so that we can compare what is the dividends as compared to what happens on the sole proprietor or a partnership and that means and dividends are are most similar to draws so in a sole proprietor uh the owner tries to do the same thing they're going to earn revenue and then of that revenue that has been accumulated it'll be posted to the capital account rather than to retained earnings just one account representing everything investments and revenue for a sole proprietor and then the sole proprietor has the ability to pull out whatever they want and we call that draws typically pretty much pretty much whatever they want as long as they don't as long as they have the money and their and their account here capital account hopefully doesn't go to negative then they can pull out pretty much whatever they want they have a lot of discretion to do so on the corporate side we do not the corporation stockholders uh are entitled to dividends but because those dividends have to be given to all shareholders in an equal proportion then that limits any individual shareholders ability to make draws so dividends the big difference is that it's still just a distribution from the corporation to the stockholders but the stockholders individually do not have as much leeway to determine what those dividends will be and when the dividends are determined it's in a collective fashion we can't give some owners dividends and others non dividends so you can think of it as the same way from the four step process though and that's just going to be that dividends represents the stuff that was paid to the owners so therefore it's going to decrease the amount that is owed to the owners just like draws would so this represents this retained earnings represents part of what is owed to the owners we paid out 264 000 therefore we're going to close this out here and it'll bring down this amount so in other words dividends is on the books here we need to make it go down we're going to do the opposite thing to it in order to do that which in this case is a credit so in e 16 we're going to right click and copy scroll up top i'm going to skip a line skip another line so the credit will be on the bottom i'm in cell a 12 right click and paste 123 we're then going to put the amount which will be a credit i'm going to put negative 264 000 then we're going to put a debit in b 11 i'm going to do that with a negative of this number and then that's going to go to retained earnings so here's retained earnings i'm going to copy retained earnings right click and copy we'll put that up top in a 11 right click and paste 123 so there we have it here's retained earnings on the on the journal entry here it is on the trial balance we're going to be in cell g 17 something's in it so we'll double click on it go to the end of it plus and point to that 264 000 and enter so that brings the net income back down or the retained earnings back down and then we're going to go to dividends so here's the dividends on the journal entry here it is on the trial balance we want to be here in g set g 16 where we will say equals and point to the 264 000 bringing this 264 down by 264 to zero so now we've achieved our objective we have all zeros on the income statement the income statement on the income summary account the clearing account goes back to zero dividends the other temporary account is at zero and the retained earnings now represents all of these numbers we combine those together 478 000 credit 478 000 that also matching what's on the statement of retained earnings here and then we again might say well hmm what happened to these two numbers those aren't affected because that's part of the investment that's what was invested that's not where we're accounting for the accumulation so these two numbers represent the distribution of stock not the accumulation of earnings over and above that initial or that capital investment