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Female Narrator: Welcome back
to another Lions and Tigers video.
This week, we're gonna do the closing entries.
First, I'm gonna show you the three-step,
and then, I'm gonna show you the four-step.
And I'll explain why one
is sometimes preferred over the other.
The theory is the same though.
So the first thing that we have to do regardless
is we have to close revenue.
Now, I find it's easier to do these closing entries
if I print out the adjusted trial balance,
or the income statement, or the financial statements,
'cause they help me with this process.
Revenue has a normal debit...credit balance.
Revenue has a normal credit balance,
so to make it go away, we need to debit it.
In the three-step process,
we close revenue straight into retained earnings,
because if you think about the retained earnings statement,
remember, we take beginning retained earnings,
plus net income, minus dividends to get ending retained earnings.
So grooming revenue is a part of net income,
and it's increasing retained earnings.
Secondly, we're going to close all of our expenses
to retained earnings.
And in reality, it's easier to close them,
and it makes more sense to close them as one entry.
So we're gonna go through,
and we're going to credit each expense account.
And that's because expenses have a normal debit balance,
so to make them go away, we have to credit them.
So the first thing I'm gonna do is list each of 'em out,
and once again, you can use
either your income statement or your adjusted trial balance.
I prefer the adjusted trial balance,
'cause then I can catch and see
if I made any mistakes on the income statement.
I like having those double, triple checks.
And my interest expense.
And this is 1,000, and this is 500,
and this is 700, 75, 250, 170, 70.
Add them all up, and you should get 2,765.
This should agree with the income statement.
So look at what we have in retained earnings so far.
We started with a 0 balance.
We added...
our revenues.
We subtracted our expenses.
And we're gonna go on to the final step,
because remember, this is the three-step process.
We are going to close dividends.
Dividends have a normal debit balance,
so we need to credit them to make them go away.
And we know dividends
get subtracted from retained earnings.
So dividends are going to go where?
Well, they're gonna go on the same side as the expenses.
We're gonna do the math,
and what do we come up with here?
Anybody know how to check this number
and make sure it's what you expect it to be?
Well, you're gonna go to your retained earnings statement,
and you're gonna see if this matches your ending balance
in your retained earnings.
And you should get $92.
So that's the three-step process...
or three-step process.
Now what I don't like about the three-step process
is I can't look at retained earnings and see net income.
So if we go to the four-step process,
the idea is still the same,
but the difference is that we closed income summary
instead of straight to retained earnings.
So now, we're going to start with an income summary account.
The only thing we use it for is closing,
and we're going to close our revenues.
We're going to close our expenses.
And that is going to give us net income.
So then, when we post to our retained earnings,
we close income summary, and this becomes 0.
Our retained earnings shows our net income.
And the last step doesn't change.
We subtract out our dividends,
and we now have ending retained earnings.
What I like about this
is I can look at the retained earnings statement any year,
and I can see net income and dividends.
It helps clean...keep retained earnings clean,
and it shows you a very clear distinction
that ties directly to the financial statements.
You guys will be responsible for both,
so please let me know if you have questions.
Have a great day.