 In this presentation, we will take a look at a closing process for a partnership. We're going to enter the information in the left-hand side in the general journal and post that to a worksheet so that we can see the effect on the accounts in the worksheet. Our worksheet has a trial balance. The trial balance has the green accounts being the assets, the liability count in orange, the capital accounts in light blue, then the income statement accounts including the revenue and expenses in the dark blue. The net income is at $7,000. We have $7,000, which is revenue minus expenses of that $7,000. Debits are in positive numbers, credits negative numbers to result in debits minus credits of zero. So we're in balance because the debits equal the credits. Our goal here, like any goal of the closing process, no matter what type of business, is to close out the temporary accounts. So the temporary accounts will be similar for any type of business in terms of the income statement accounts of revenue and expenses. And then the things that will differ is when we get to the capital type of accounts, meaning a sole proprietor will only have one capital account, which makes it a lot easier. And a corporation is actually usually easier as well because it will be closed out to a retained earnings account. With a partnership, however, we're going to have the multiple types of accounts that we're going to have to close to for the multiple capital accounts here. For the purposes of this problem, we're going to assume an even allocation, kind of the most basic type of closing process in terms of the profit sharing. Later, we'll take a look at some more complex types of profit sharing for the net income allocation. Here, we just want to get used to the same kind of closing process and note the differences and what textbooks might put together when asking problems related to the closing process and income allocation. So we're going to close out first revenue, then expenses. Then we're going to close out the income summary to the capital accounts. And finally, we'll close out the draws. That's our four step. That's a typical four step process, the same that would be used for any type of business. So we're going to start with revenue. Revenue has a credit balance. We're going to do the opposite thing to it, a debit. So I'm going to right click and copy the revenue. We'll put that up top in K2, right click and paste 123. The amount then will be 10,000. Then we're going to credit something for 10,000. So we're going to put a negative of that 10,000. We could just type in negative 10,000 as well, but I like to use that formula. And we're going to put that into our new account, this clearing account. The account that will be zero before the closing process and after the closing process, income summary. So we're going to right click on the income summary and copy. We will put that in K3, right click and paste 123. So that's going to be our first of four journal entries. So here's the revenue account. We're going to put that in the revenue account on the trial balance in cell Q12. So within Q12, we will say equals, point to that 10,000, bringing the 10,000 credit down by 10,000 to zero. Then we have the income summary account, which will go to the income summary here on the trial balance in cell Q11, where we will say equals, point to that 10,000 credit, bringing the zero up in the credit direction to 10,000. So we in essence have just moved the revenue credit to the income summary from the revenue account. Now we're going to close out the expenses. We only have one here just in our example, just to give a quick example of this. And so we'll close out the expenses here as if they're all grouped into one expense account. And we'll close that out to the income summary. So our goal here is to make all temporary accounts zero. So I'm going to right click and copy the expense. I'm going to put that on the bottom. So I'm going to skip a line, skip another line, and put it in cell K6. Right click and paste 123. And then the amount is going to be a credit in M6 of negative 3,000. Then we'll debit something 3,000 L5. I'm going to say negative of this number and enter. And the account we're going to put that into is the income summary account. So we're going to go down to the income summary, right click and copy. We'll put that in K5, right click and paste 123. Then we'll post this out. So here's the income summary account. We're going to post that to the trial balance income summary account here. There's something in it. So we're going to double click on it, go to the end of it and say plus. And then point to that 3,000, bringing the balance from 10,000 down by 3,000 to 7,000. Then we're going to go to the expenses. So here's the expense we're going to post. Here it is on the trial balance. We want to be in the middle column in Q13, where we will say equals. Point to that 3,000, bringing the 3,000 balance down by 3,000 to zero. So the effect here is that we closed out net income to the income summary. It's important to note that process because many book problems will actually just start at the income summary when talking about the allocation of net income to the partners. They often just say, well, the income summary is here before we close it out to the capital accounts and then we need to close it out to the capital accounts. For our purposes it's nice to actually close out the process so we know what comprises net income and we know how that allocation is going to work. It's going to first go to the income summary or we can think of it as going through the income summary, then we can use that income summary account to close out to the partners. In this case, we're just going to use an even allocation, just a one-third even split allocation between the three partners for the example of the closing process. If we had any more complex type of allocation method, then we would need to go through a table and go through whatever the allocation will be. But whatever it comes out to between C, K and M, we will have to allocate this 7,000 net income. So the net income is going to go down and we're going to allocate to these three partners. So I'm going to right-click and copy net income. We're going to put that in K8, right-click and paste 1, 2, 3. Then the amount in 7 in L8 will be 7,000. Then we're going to credit the capital accounts, which will be C's capital. I'm going to hold down control, K's capital, hold down control, and M's capital. Let go of control. Now I've just highlighted these non-adjacent sales. I'm going to do this so we can copy them all at the same time. You don't have to do it this way. We could just copy them one at a time or just type in the accounts as well. But I'm just going to right-click and copy these. We'll put that in K9, right-click and paste 1, 2, 3. Then we're just going to get the amounts. And the amounts are just, I'm going to assume that our profit-sharing agreement is a simple profit-sharing agreement of one-third allocation to each partner. So we're just going to take one-third of that 7,000 to each one. So to do that, I want to flip the sign. So instead of setting equals, I'm going to say negative that number divided by 3. Enter. Same thing here. We're going to say negative of the 7,000 divided by 3. And one more time, same result, negative of that number divided by 3. So now we've got these three adding up to 7,000 or the debit of 7,000 minus the credits adding up to zero. Now we're going to post this income summary closing out to the capital accounts. So here's the income summary. Here's the income summary here. We want to be in the middle in Q11. Double-click on that, go to the end of it, say plus, point to that 7,000, bringing the balance down to zero. Then we're going to post C's capital. So here's C's capital on our journal entry. Here it is on the trial balance. We want to be in cell Q6 where we will say equals, point to the 2,333, and, oops, wait a sec, I'm in the wrong zone. We want to be in the capital in Q5. So I deleted that, delete that, and go back up to Q5 and we want to say equals, point to the 2,333, bringing the balance up from 40,000 by 2333, 2,333 to 42,333. So of course the capital accounts are increasing and that's because the partnership owes the owners more money. That's why we're in business. We earned revenue. We're increasing the capital account representing each partner's share of that revenue earned and in theory, amount that can be withdrawn from the partnership to the partner. So we're going to do the same for K. Here's K's capital. It's going to go here in the trial balance. We're going to be in cell Q7 where we will say equals, point to that 2,333, bringing the 50,000 balance up by 23332, 52,333. Then we have M's capital which will go here to M's capital. We are in Q9 where we will say equals, point to that 2,333 which will bring the 30,500 balance up by 23332, 32,833. Next journal entry, last step of the four step process is to close out the draws. So the draws we have, we see that each owner has a capital account and a draws account, capital account draws account. The capital account is a credit, the draws account a debit. If we sum those two up, they add up to a net of something less than the total capital or 40,333. That's what is actually an owed to the owner in a way. The net value of the partnership which is allocated or owed to this particular owner. Now what we want to do is just make this one account. We want to close out this temporary account of draws to the capital account and we want to do it for each owner. We could do that with three separate journal entries which means this is a debit. We would credit it and debit the capital account, decreasing capital, bringing this to zero. Typically it's done with one journal entry because it's part of our four step process. So we will close out all draws accounts to all capital accounts in one process. So to do that, we're going to do the same kind of thing here and we're going to debit the draws. So I'm going to copy all the capital accounts first. So we'll put our cursor on C's capital, hold down control, put our cursor on K capital, hold down control and M capital, holding down control, then let's go of control and then right click on the selected areas and copy. We're going to put that in K13, right click and paste 123. Then the amounts are going to be whatever's in the draws accounts. So C's capital account and the draws account, we have 2000 in it. So 2000 there. Then we have 1000 in K's withdrawals. So 1000 and then we've got 1500 in the draws for M, 1500. Okay so then we're going to close those out to the withdrawals or we'll close out the draws to the capital accounts. So we're going to pick up the draws in a similar way. We're just going to highlight. We're going to put our cursor or select the cursor on C's withdrawals which is in 06 and then select or hold down control and then we'll put our cursor on K's withdrawals and M's withdrawals. So what we're doing is selecting those, let go of control and then we're selecting those non-adjacent cells with the cells that are not next to each other at the same time. We don't have to do that but it's a little faster to do that. We might as well learn how as we go. So we're going to right click on those cells and copy and we'll put that down here in K16, right click and paste 1, 2, 3. Okay so then we're just going to put the same amounts here. So here's the C's capital will be a credit to the draws. So I'm going to do that with a little formula. Instead of putting equals we're going to put a negative to flip the sign of that 2000 and enter. We'll do the same for K's draws instead of equals we'll put negative of that 1000 and enter and then M's we're going to put negative of that 1500 and enter. So there we have it. We have all the capital counts and the draws. We're going to post this out now starting with C's capital which has 2000 in it. Here's C's capital up top. We're going to be here in Q5, double click on it, go to the end of it and plus point to that 2000 bringing the balance from 42,333 down by 2000 to 43,333. And then we have K's capital which has 1000 in it. Here's K's capital on the trial balance. We're going to go to Q7, double click on it, go to the end of it and plus and then point to that 1000 and enter. So that'll bring the capital count down. Then M's capital we'll go here to M's capital we're going to be in cell Q9, double click, go to the end of it and plus and point to that 1500 and enter. Now we'll record the withdrawals which should make all the draws accounts go to zero. So we will start at Q6, Q6 where we will say equals, point to that 2000 bringing the 2000 balance down by 2000 to zero and then we'll be in Q8 where we will say equals and point to the 1000 for the withdrawals bringing the 1000 draws down by 1000 to zero and then we're on the last withdrawals here for M which will be here in Q10 where we will say equals, point to that 1500 in M18 bringing the 1500 balance down by 1500 to zero. So that's what we have now. We're left with pretty much a post closing trial balance one in which there are no temporary accounts, no income statement accounts, no revenue and expense accounts and no draws accounts and in any of the draws we're left with then revenue or not revenue. Assets minus the liabilities which equals the 123,000 in this case and that will be equivalent to what's in equity which will be the sum of all of the capital accounts 123,000 in the capital accounts. So very similar to a sole proprietor here in the post closing trial balance only difference being that instead of one capital account remaining we have three capital accounts. We need to make sure that we're keeping track of these capital accounts because they represent the amount of net assets that is due to or owed in the partners to the partnerships. In other words you can think of it if we liquidated the partnership then in theory the partners would get these amounts. Now that doesn't happen, we'll do a liquidation problem multiple of them but that doesn't happen in practice most of the time because we might sell something like the equipment on the books and we may not get 80,000 for it, we may get more than 80,000 for it, we don't know until we sell it. So if we were to get exactly 80,000 for say the equipment and any other assets we have inventory and whatnot then this would be the exact amount of allocation that we can allocate out but if the liquidation process ended up in something different happening then we'd have some different type of allocation. Also note that we have an even allocation of the net profits here when we allocated the net income we don't have the same even capital accounts here and that is often the case meaning the profit sharing does not necessarily coincide with the draws or with the investments and therefore the ending resulting capital accounts will not be in the same type of ratio as the profit sharing it's not a one-third, one-third, one-third each of the net assets allocated to each partner because the things that could differ are investments and draws which aren't on a one-third, one-third, one-third basis.