Chapter 6
The Accounting Cycle: Statements and Closing entries
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Notice that the value of Parish, Capital
(marked 2) comes directly from the state-
ment of owner’s equity in Figure 6.5 and not
from the worksheet.The journal entries used
to update the capital account will be demon-
strated in the next section.
Notice how equipment is presented. The
accumulated depreciation is subtracted from the asset account, giving the net book value of $8,150.
Closing entries
The statement of owner’s equity shows the balance of the owner’s capital account after it has been
updated with the net income or loss from the period and any drawings. Although this presents
the ending balance of owner’s capital in the financial statements, the actual account in the general
ledger does not yet reflect this new balance.The owner’s capital balance must be updated to reflect
these changes.This process is called closing the books.
Closing the books
updates owner’s capital
(the equity of the business) and starts a new income statement for the next accounting period.
In a manual accounting system, equity (owner’s capital) is only updated at the end of the period.
That means that all accounts that affect equity must have their balances transferred to owner’s
capital. Thus, revenue and expenses are considered to be
temporary accounts
because they are
brought back to a zero balance at the end of each period.This is done so that a new income state-
ment can be prepared for the next period with a fresh start.
An income statement reports net income (or net loss) for a specific period of time. For example,
if MP Consulting had net income of $100,000 for a period ended December 31, 2016, this
amount would relate exclusively to the period ended on that date and would not be carried over
to the next period. Therefore, all revenue and expense accounts are classified as temporary. They
must be cleared at the end of an accounting period to start a new fiscal year.
Besides revenue and expenses, owner’s drawings is also a temporary account which needs to be
closed at the end of the period.This is because owner’s drawings measures the amount the owner
takes from the business during a specific accounting period and is used to calculate the value of
equity. Figure 6.7 illustrates which accounts are temporary and which are permanent.
Permanent Accounts
(not closed)
Temporary Accounts
(closed at the end of each accounting period)
ASSETS
LIABILITIES
REVENUES
OWNER’S DRAWINGS
EXPENSES
OWNER’S CAPITAL
________________
Figure 6.7
There are two methods to close the books, and we will use MP Consulting to illustrate both methods.
ASPe uses the term “Balance Sheet”, although
the term “Statement of Financial Position” is
also allowed.
iFrS uses the term “Statement of Financial Position”,
although it also allows the term“Balance Sheet”.
ASPE vs IFRS
