26-4 Adjusting, Closing, and Reversing Entries for a Corporation

Adjustments

Adjustments recorded on the worksheet do not update accounts until they are journalized. To journalize Adjusting Entries, do the following:

  • Begin a new general journal page
  • Write in the heading Adjusting Entries centered on the first line (there are no source documents for Adjusting Entries, so the heading alerts the reader where the information comes from)
  • Use the last date of the fiscal period (as stated on the worksheet) as the date for all transactions, written out in full for the first entry
  • Match up the letters in the adjustments to make journal entries, listing the debit account title first
  • Continue to journalize adjusting entries until all letters are matched and journalized

Sample: Work Together 26-4

Closing Entries

The purpose of closing entries is to close temporary accounts to zero balances so the business can begin the next fiscal period. Temporary accounts are accounts that have balances for one fiscal period only, then must be closed so that the next year the balance starts over. For example, Sales is a temporary account. If Sales was never closed, the sales from one year to the next would run together in the balance of the account. It would be difficult to see how many sales were made in one year as compared to the next.

All closing entries will be taken from the worksheet. There are four closing entries to make:

  1. Close all income statement accounts on the worksheet with credit balances (except Income Summary)
  2. Close all income statement accounts on the worksheet with debit balances (except Income Summary)
  3. Transfer net income or net loss to the Retained Earnings account, which in turns closes Income Summary. The two accounts affected in this transaction are Income Summary and Retained Earnings. If there is a net income, Retained Earnings will be credited. If there is a net loss, Retained Earnings will be debited.
  4. Close Dividends to Retained Earnings

When preparing closing entries, follow these steps:

  • Begin a new general journal page
  • Write the heading "Closing Entries" centered on the first line of the journal (we do this because there are no source documents for closing entries)
  • Use the same date as on the worksheet; write in full for the first entry
  • Create entries from the four steps listed above; remember, the purpose is to close accounts to zero balances; the first two closing entries will be closed through Income Summary; the third step closing Income Summary; the fourth step closes Dividends to Retained Earnings

Sample: Work Together 26-4

Reversing Entries

If an adjusting entry creates a balance in an asset or liability account, then a reversing entry is made. All a reversing entry is is undoing an adjusting entry. Look at your worksheet. If an asset or liability account had a zero balance on the Trial Balance, then has an adjustment, that account should be reversed. Follow these steps when recording reversing entries:

  • Begin a new general journal page
  • Center the heading "Reversing Entries" on the first line of the journal
  • Use the first day of the next fiscal period, written in full for the first entry
  • Find those adjusting entries that created a balance in an asset or liability account through an adjusting entry; reverse those entries

Sample: Work Together 26-4