 Hello, in this presentation, we will perform the closing process using a four-step method. In other words, we will close out the temporary accounts using four journal entries. Our worksheet will be this. We're going to have the adjusted trial balance, which we will close out to the post-closing trial balance by entering our closing journal entries. It's good to remember where we are at within the process. We're at the end of the process of the accounting cycle, that cycle starting with the normal day-to-day transactions that would happen during the month, the main portion of what happens during the accounting process, that entering bills, entering invoices, writing checks. Then at the end of the period, we will have the unadjusted trial balance created from the system put into the adjusting worksheet, which then will be including the adjusted entries, which will result in the adjusted trial balance that then used to create the financial statements. So, at this point, financial statements have already been created. We're going to use a similar worksheet as we used in the adjusted trial balance type of worksheet. However, this time, instead of starting with the unadjusted trial balance, we start with the adjusted trial balance. We will record our adjusting entries to get the post-closing trial balance format of the trial balance is that we have assets up here in green. We got the liabilities in orange, equity in light blue, revenue and expense account, income statement accounts in the dark blue. We have credits represented by brackets, debits without brackets on the trial balance in order to make this a more condensed format and to help us with formulas. We see that the total debits are equal to the total credits by the zero here, net income adding up to the 800,000 minus all the expenses of 577,000. We also see the accounting equation up top so we can see it in this format too so that assets equal liabilities plus equity. Our goal here is to close out all temporary accounts to the capital account. If we're going to see that, I'm going to just do a shortcut to do that, see the end process here, then we'll go through the four steps in order to get there within those four steps. Note what we want to do is we just want to make all these go down to zero and then put that balance in the capital account. We can see that, if don't do this, I'm just going to, this is just a demonstration. If we just delete this account, we'd see that, okay now we're out of balance by 568,000. We want to be in balance, we want the debits to equal the credits. If we just put that amount then in the capital account, this credit, 568,000, that's what we want to have. We want to have a trial balance which needs to be in balance. We want to have all the temporary accounts gone. We want to have the owner and the equity account to be equal to whatever it needs to be in order for the debits to equal the credits or in other words, in order for the assets here if I highlight these minus the liabilities to add up to Excel's given me 568,000, 568,000. So we're going to be left with just the balance sheets accounts in other words, left with just the permanent accounts, removing all the income statement accounts and temporary accounts including revenue and expenses and the draws account. So I'm going to undo that and we'll start this process. Note that the four step process is the traditional process used within textbooks. It has its pros and cons. The pros are that we get to see smaller chunks of journal entries and we get to basically really check to see if we are in balance before we finalize the process by posting to the owner's capital account. The cons are that it's a longer process of course and we could do this basically in one journal entry and the four journal entries can be a little bit difficult to remember but once we have it a few times it's not too difficult. We're also adding a bit of complexity with the income summary account. The goal of the income summary account is that we can put this information into the income summary account and check if we're okay in and balance and that everything is correct at that point before closing it out to the capital account. So there is a purpose to it. It's called a clearing account because it's going to be zero before this process and zero right after this process. So it's really not going to have any balance in it for any given point in time because we're just going to use it put something into it and take it out just basically in the same point in time. So the four step process is going to first close out revenues in step one to the income summary. Then it's going to close out the expenses to the income summary achieving then the goal of creating all income statement accounts to be zero leaving us within the income statement account net income. So net income will then be moved to the income summary account will then close out the income summary account which will have net income in it to the capital account increasing the capital account by net income. Then we'll finally close out draws and that'll be the same process as the two step method of the quick journal entry just to close out the draws for the final step four step of the closing process. So we'll start off with journal entry one. We're going to go all the way to the top this time because we do have we're going to need more room. We're going to call this step one of the four step process. We're going to close out the revenue account. Here's revenue has a credit balance in it. We need to do the opposite thing to it which in this case will be a debit. So I'm going to copy this account right clicking and copying scrolling up we're going to put that in B five B five right click. I'm going to paste it one two three values only. Then within the debit section because this is a credit we need a debit to make it go down. We're going to put the amount that we need to make it go down to zero by which is 800,000. So within cell C five we're going to put 800,000 and I'm just going to post this as we go. That's going to be how I'm going to do all these just to show that we want to show that this is going to zero. That's the whole point of us and how we determined what to put in that journal entry. So we're going to say equals scroll back up and point to that 800 and enter so we just posted that out there. So this is going right there and so that makes us go to zero. That's what we want. Now the other side is a little bit confusing here because we ultimately wanted to go to the capital account but before we go to the capital account we're first going to put it into this clearing account called the income summary account and once we close revenue and then expenses to it in journal entry two we close the expenses to it. We will have net income in it and can double check that account before closing to the capital account. So we're going to close the other side to the income summary so I'm going to put my cursor in F17, right click and copy, scrolling back up we're going to put that underneath in B6, right click and paste 1, 2, 3. I'm going to indent that by going to the home tab, alignment group, increase the indenting. If you can't do that because of the formatting just double click in it and space bar will work. We're going to put a credit. I could put a negative of 800,000 we will be representing the credits in the credit column here and with negative numbers although over here we will only be using negative numbers in order to optimize our worksheet. I'm going to do that however with a formula so I want to take this number but flip the sign make it a negative so instead of hitting equals and pointing that cell I'm just going to put negative and point to that cell and that will take that cell and say I want that number and yet flipping the sign so it is a negative 800. We're going to post this now the second piece of this journal entry to the income summary which is right there so we are in H17 H17 we're going to say that equals point to that 800,000 and enter. So note what we have done here all we have done is move this 800,000 closing it out of the revenue making revenue zero that being our goal and putting it not into the capital yet but into the income summary temporary account it's going to be held there until we close out the expenses to it as well at which point we will have net income in it and then we'll close it out to the capital account let's do that now. Now the expenses we have here an expense of wages expense the next thing we want to go down all these expenses have debit balances we need to make them all go down to zero so we're going to be crediting all of them and we'll start with the wages expense it has 120 debit we're going to do the opposite thing to it credit going to copy wages expense right click and copy scrolling back up we're going to make our second journal entry here we're going to take these lines out and I'm going to put this on the bottom because the top is going to be something different it'll be the income summary account but I'm going to put this on the bottom so we can put the credits on the bottom so put that there we're going to have a credit and the amount will be that 120 that's what we need represented in the credit side and with a negative number for the journal entry section so I'm going to post this as we go this will be a bit longer of a journal entry than the first one if we post as we go we can see that we are achieving our goal as we construct the journal entry so I'm going to post this in cell H 19 even though we're not done with it equals and point to that 120 that's a credit this is a debit that will make this amount or account go down to zero so there we have that we're going to do the same thing for the utilities expense here we have the debit balance of 48,000 we need to make it go down we're going to do the opposite thing to it which is a credit we're going to copy F 20 right click and copy we're going to put that in B 10 right click and paste 123 we're going to highlight those two cells home tab alignment increase the indenting then we're going to go to D 10 we're going to put negative 48,000 and enter so there it is we're going to post that now to H 20 so we're now in H 20 we're going to say that that equals and point to that 48,000 bringing this balance down by 48,000 to zero going to do this a couple more times we got the insurance expense also having a debit it being an expense all expenses having debits we're going to copy that we're going to do the opposite thing to it crediting it right click copy going to put that underneath next section in our journal entry B 11 the cell right click and paste 123 going to increase the indenting you could do that once again by double-clicking here and hitting the spacebar or I'm going to go off the cell back on it going to the home tab alignment increase indenting now we're in D 11 we're going to put the amount of 12,000 it will be a credit represented in the credit column and with a negative negative 12,000 we're going to post this as we go this is a longer journal entry we are obviously not done with it the debits not equaling the credits at this point but we will be posting as we go to see that we are achieving our goal achieving our goal of having zeros in the expense accounts so in H 20 we're going to say equals and point to that 12,000 these are opposites debit credit opposites making this account go down to zero next we have the supplies it has a debit balance we need to make it go down so we're going to do the opposite thing to it a credit so I'm going to copy the supplies right click and copy scrolling back up to B 12 right click and paste 1 2 3 we will indent go into the home tab alignment increase the indentation and then in D 12 we need to take that 7,000 and put that in D 12 so it's going to be a negative 7,000 then we're going to post that as we go so we're going to scroll back down here to H 12 H 12 equals pointing to that 7,000 bringing this balance down from 7,000 down by 7,000 to zero we only get to do this one more time and then we have to stop we have the depreciation at the bottom last expense it being 36,000 in the debit we got to do the opposite to make it go down that's a credit we're going to copy the depreciation expense scrolling up to B 13 right click and paste 1 2 3 we're then going to indent go into the home tab alignment group and increase the indentation and we're going to put the amount in D 13 that amount of 36,000 it's a debit here we need a credit there therefore we're going to put a negative 36,000 we're going to post this last one as we go so we are in H 23 we're going to say equals and point to that 36,000 this is a debit that's a credit it's going to bring this account down to zero so we have done our goal achieved our goal of making all these accounts go down to zero however we are not in balance we're out of balance by 223,000 and we have to put that number somewhere where we're going to put it not to the capital yet it's going to get there eventually but first we're going to make it go to the income summary account it's going to go to the income summary as we did with the revenue revenue went to the income summary now expenses what's going to be in the income summary after we record the expenses here it should be equal to net income so net income should be an amount in income summary after we do this so what we're going to do is the debit now the debit we need to make this in balance meaning if we highlight all these it has up to 223,000 what we are out of balance by that's what we need here in order to have the debits equal the credits now we're going to do this with a formula I'm going to do it with a formula we could just type in the number but I'm going to do the formula and I'm going to type in instead of equals a negative to flip the sign SUM double-click the sum function and then if this is in your way we can move this so I can move this up here and I usually highlight the whole thing meaning both columns we could just highlight the outer column but if we change anything just note that you can highlight both columns just don't include the column we are in or the cell we are in because that will cause a problem can't sum up the cell that we're in and then we're going to say enter and so there's that so now if I highlight these it adds up to 223,000 the debit is 223,000 if we add up the debits and the credits highlighting all them or selecting all them it sums up to zero the debits minus the credits equaling zero debits equaling the credits that account then what's it going to be income summary so we're going to copy that income summary account copy we're going to paste that in B8 right click and paste 1 2 3 and then we're going to record that right here to the income summary accounts that's going to put us back in balance now there's also there's something in it's already therefore we're going to double-click on it we're going to go to the end of it we're going to say plus and then point to that 223,000 in the income summary journal entry that will bring this balance down the 800 down to 577 number should look familiar what should that number be once again what is that number net income we have net income in the income summary this is important because a lot of textbooks will reference the income summary account when they're when they're talking about how to work a particular problem for example a partnership if we're trying to allocate the income to the partners they may say something like a textbook a problem often says something like the income summary account has this amount in it before it's allocated to the partners and we need to know that we're doing a four-step process and that's just that basically means that we have allocated net income to it and now and so they may not say net income they may say the income summary account before we close out to the capital accounts and therefore it's important just for us to know this terminology just more more phrases and definitions we just need to know in order to to work some problems and know what's what's going on so we got the income summary account here now we're going to close this account out to the capital account so this was step two we're now on step three so note that this account you may think hey this account has no function we just put it in that we could put it right into the capital account why didn't why didn't we do that we'd be done now it would be a three-step process we wouldn't need this step four but the income summary has a function basically the function now is we can say hmm you know it looks like net income ties out to what we have here ties out to the income statement that we had created from the adjusted trial balance before this a closing process and now we have all these accounts at zero so that's what we want we can kind of double check it before we then make the final journal entry closing the income summary to where we ultimately wanted to be which is the capital account so now we're going to close this out this has a credit we're going to do the opposite thing to it a debit so we're going to copy the income summary right click and copy we're going to paste that in B 15 right click and paste one two three and the amount is going to be five hundred and seventy seven thousand then we're going to credit something for that same amount it's gonna be a much smaller journal entry and I'm gonna I'm so just typing it in there I'm gonna put negative of this number we could just type it in there but this will say set of equal that number I want to negative that number meaning I want that number and then flip the sign so that'll give us that and then we're going to put that where to the capital account so we're going to right click and copy the capital account put that in B 16 right click and paste one two three then we're going to increase the indenting go into the home tab alignment increase the indentation and now we can post this out so I'm going to go to the income summary which should be zero after this there's something in H 17 already so we're going to double click on it go to the end of it say plus and point to that income summary which should bring this back down to zero other side go into the capital count so we're up here in H 15 we're going to say equals point to the capital that's going to bring that 1000 up by the 577 to 578 now note this is similar to the equity section in the statement of owner's equity where we have the beginning balance which in this case would be 1000 it then increases by net income in our case we have a credit and a credit increasing in the credit direction to the 578 and then it's going to go down by draws our next journal entry our last journal entry journal entry four of the four step process so draws often a bit of a confusing account it's very useful to have a trial balance in front of you when working problems even if they're multiple choice questions so you can look at an account like draws and say is it a debit or credit balance what do I need to do to it here we can see it's a debit because it has no brackets we can also know it's a debit because it's decreasing the capital account it kind of represents the owner taking money out of the capital account therefore decreasing the amount owed it to the owner given by the total capital accounts so we're decreasing we're going to decrease capital when we post this out so it has a debit we're going to make it go down by doing the opposite which is a credit this by the way is the same journal entry we have the two step process closing out the draws so I'm going to right click and copy we're going to put that on the bottom so here's the four I'm going to put that in B19 right click and paste 1 2 3 going to indent go into the home tab alignment increase the inventing we're going to put that in the credit side note I put it on the bottom just for formatting purposes this is a smaller journal entry we can put the credit on the bottom there's only going to be two accounts affected here we're going to put that negative 10,000 and then they debit what the debit is going to be here I'm just going to put negative of that number meaning take that number and flip the sign to a positive there's that and what account will that be going to the capital account so we're going to post that to the capital account so I'm going to go ahead and copy right click and copy the capital put that in B18 right click and paste 1 2 3 then we're going to post this out so here's the capital account and let's post the draws first even though it's on the bottom and then we'll discuss the capital account so here's the draws we're going to post that out here to H16 within H16 we're going to say equals and point to that 10,000 bringing the 10,000 down by 10,000 to 0 then we have the other side going to the capital now note what the capital has now similar to the statement of owner's equity it started with the beginning capital before we closed out all the activity to it which would give us the ending capital and then we closed out much of that activity that being all this that adding up to net income so we closed out net income to it and now we're going to decrease it by draws so we credited it and credited it to increase it by the net income now we're going to decrease it with a debit for the draws something's in it already so we're going to double click on it we're going to say plus if we're at the end of it here when we're at the end of it and go over here to the capital account and now bring this balance down so there's our end goal once again we have all of these accounts being zero everything below the income summary had something in it close it out that's why it's a clearing account it really has nothing in it at any really given time because it's not even in there for a day we just put it in there and take it out of there as part of the same process so that's going to be back down to zero and the capital account now includes all of this information all these accounts six five sixty eight thousand scrunched into one number there the capital account representing the permanent account permanent number of all capital accounts in one account the post closing trial balance now representing basically balance sheet account all the permanent accounts eliminating all income statement accounts all temporary accounts and draws the other temporary account so that we can start the new process counting up from zero within the new month or new year