Unit 8

Closing Entries, Post-closing Trial Balance, and

Reversing Entries

I. Closing Entries

This is the 7th step in the accounting process. As mentioned above, closing entries will
cause the balances of nominal accounts to be zeroed out. As a result, these accounts
can no longer be carried over to the next period. But how exactly do we close the
nominal accounts and reduce their balances to zero?

Remember that closing entries are also journal entries. Thus, we observe their normal
balances and placements. To eliminate an account, we just have to place it on the
opposite side.

Therefore, if we close expense accounts, we put them on the credit side since their
normal balance is debit. To bring their balances to zero, the entire remaining
amount must be placed on the opposite side (credit).

If we’re dealing with income accounts whose normal balances belong to the credit
side, we simply place them on the debit side and put the entire amounts to bring the
balances to zero.

In using the double entry system, any debit entry will have its corresponding credit
entry and vice versa. To comply with this, the income or expense account being closed
shall be paired with another account called “Income and Expense Summary” while
the drawing/ withdrawal account shall be paired automatically with the capital
account.

Example:

a. Closing of income account

Service Revenue 52,000

Income and Expense Summary 52,000

b. Closing of expense accounts

Income and Expense Summary 36,500

Depreciation Expense 10,000
Salaries Expense 20,000
Supplies Expense 1,500
Repairs and Maintenance 5,000

c. Closing of Income and Expense Summary account to Capital account

Income and Expense Summary 15,500

Moksri, Capital 15,500

*** 52,000 – 36,500 = 15,500

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 d. Closing of the Drawing account to Capital account

Moksri, Capital 10,000

Moksri, Drawing 10,000

In letter (a), the income account is placed on the debit side since its normal balance is
credit. It is paired with Income and Expense Summary account which is positioned
on the credit side.

Letter (b) shows the expense accounts on the credit side to eliminate them totally. It is
also paired with Income and Expense Summary account which is placed on the debit
side.

Letter (c) eliminates the total of the Income and Expense Summary account from
letter A and B. Note that the account has a credit balance of ₱52,000 in letter A and a
debit balance of ₱36,500 in letter B. If we combine the two balances belonging to
different sides, we proceed with subtraction of one from the other. This gives us a
difference of ₱15,500 (net income). Since the credit balance from letter A is bigger
than the debit balance from letter B, the ₱15,500 shall have a credit balance following
the side having the bigger figure.

Therefore, to eliminate the ₱15,500 credit balance of Income and Expense Summary
account, it should be placed on the DEBIT side and closed directly to the Capital
account. The corresponding credit entry to the capital account tells us that there is an
increase in capital due to the net income generated by the business. There is net
income because the revenue is higher than the total amount of expenses.

The entry in letter (d) shows us the closing of the Drawing account to the Capital
account. Since the Drawing account has a normal debit balance, it should be placed on
the credit side for its closure. The corresponding debit entry to the Capital account (in
letter D) signals a decrease of capital.

After preparing all the necessary closing entries, it is as if the nominal accounts are
erased from the records because their balances are now zero (0).

Illustrative Problem:

Continuing the problem set from Mireio Motor Servicing, you may now prepare the closing
entries using the financial statements (Income Statement, Changes in Equity, and Balance
Sheet) as your guide. (see financial statements for Mireio Motor Servicing on page 65-66)

Service Revenue 45,000

Income and Expense Summary 45,000

Income and Expense Summary 32,375

Utilities Expense 3,000
Salaries Expense 12,000
Taxes and Licenses 13,000
Supplies Expense 4,000
Depreciation Expense 375

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 Income and Expense Summary 12,625
M, Capital 12,625

**45,000 – 32, 375 = 12,625

M, Capital 25,000
M, Drawing 25,000

II. Post-closing Trial Balance

The preparation of Post-closing Trial Balance marks the 8th step in the accounting
process. This report is prepared after making the closing entries. Because of the
timing by which it is prepared, it will no longer reflect any income/ revenue,
expenses, and drawing accounts. Only the real accounts will remain in this report as

the nominal/ temporary accounts have zero balances already. This trial balance will
be shorter than the adjusted trial balance.

The format, contents, and arrangements of accounts will still be the same except for
those accounts that have already been closed as they will no longer be included in
the report.

See example below.

Chatchu-on Car Spa

Post-closing Trial Balance
January 31, 2020

PARTICULARS Debit Credit

Cash 150,000
Accounts Receivable 8,000
Supplies 500
Land 1,500,000
Machinery 200,000
Accumulated Depreciation- Machinery 10,000
Accounts Payable 15,000
Accrued Repairs 5,000
Loans Payable 500,000
Moksri, Capital 1,328,500
1,858,500 1,858,500

As you can see, there are no more nominal accounts (income, expenses, and drawing).
The reason is that those accounts have already been closed and reduced to zero (0).

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Illustrative Problem:

Continuing the problem set from Mireio Motor Servicing, you may now prepare the Post-
closing Trial Balance using the financial statements and closing entries as your guide. (see
closing entries on page 70)

MIREIO MOTOR SERVICING

Post-closing Trial Balance
January 31, 2020

PARTICULARS Debit Credit

Cash 1,254,000
Prepaid Insurance 500,000
Supplies 1,000
Machinery 35,000
Accumulated Depreciation- Machinery 250
Office Equipment 15,000
Accumulated Depreciation- Office Equipment 125
Accounts Payable 5,000
Salaries payable 12,000
Loans Payable 800,000
M., Capital 987,625
1,805,000 1,805,000

III. Reversing Entries

From the title itself, you may have a clue on how this kind of entry will be done. An
existing pair of entries will simply be swapped in terms of their respective positions
(debit or credit). This means that the account from the debit side shall be credited and
the account from the credit side shall be debited. This is the 9th step in the accounting
process.

It is important to note that NOT ALL journal entries are to be reversed. If so, what
entries must be reversed at the beginning of the next accounting period?

The following are the entries that will have a reversal:

a. Adjusting entries
a.1 All accruals
a.2 Deferrals under income and expense method

Example:
Adjusting entry

Salaries Expense 10,000

Salaries Payable 10,000

Reversing entry

Salaries Payable 10,000

Salaries Expense 10,000

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Summary:

WHAT HOW EFFECTS

TOPIC
(to close) (to close) (after closing)

Nominal accounts: Debit: Nominal accounts

Income Income will have zero (0)
Expenses balances. Thus,
Closing Entries Drawing they cannot be
Credit: forwarded to the
Expenses next accounting
Drawing period

TOPIC WHAT WHEN FORMAT

(to include) (to prepare)

Real/permanent accounts: After having Same as the unadjusted

Post-closing Trial Balance Assets and contra-assets the closing and adjusted trial
Liabilities entries balance
Capital/equity

TOPIC WHAT HOW WHEN

(to reverse) (to reverse) (to reverse)

Reversing Entries Adjusting entries: Swap Beginning of the next

*All accruals positions of accounting period
*Deferrals under the accounts
income and expense
method

References:

HBL Module by Chavez & Malquisto

********** Nothing Follows**********

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