ACF5950 · Introduction to Financial Accounting
Completing the Accounting Cycle
Week 5 completes the accounting cycle: the worksheet, closing the temporary income, expense and drawings accounts to owner's equity through a Profit or Loss Summary, and preparing a post-closing trial balance of the permanent accounts only. You see how closing resets the temporary accounts to zero for the next period while carrying assets, liabilities and capital forward (learning outcome 3). Closing entries and the distinction between temporary and permanent accounts are standard exam and Quiz/Test items. The week shown is the unit's standard arc — confirm the exact teaching week on Moodle / the unit outline.
What this chapter covers
- 01The full accounting cycle: analyse → journalise → post → unadjusted TB → adjust → adjusted TB → statements → close → post-closing TB
- 02Temporary (nominal) accounts — revenues, expenses, drawings — vs permanent (real) accounts — assets, liabilities, capital
- 03The Profit or Loss Summary (Income Summary) account as the closing conduit
- 04Closing revenue accounts: Dr Revenue / Cr P&L Summary
- 05Closing expense accounts: Dr P&L Summary / Cr each Expense
- 06Closing the P&L Summary to Capital (profit → Cr Capital; loss → Dr Capital) and closing Drawings to Capital
- 07The post-closing trial balance: only permanent accounts remain; debits = credits into the next period
Closing entries via the Profit or Loss Summary
- +1Close revenue to the summary: Dr Service revenue 72,000 / Cr Profit or Loss Summary 72,000.
- +1Close the expenses to the summary: Dr Profit or Loss Summary 41,000 / Cr Wages expense 28,000, Cr Rent expense 9,000, Cr Depreciation expense 4,000 (total expenses 28,000 + 9,000 + 4,000 = 41,000).
- +1Close the summary to capital. The summary now holds profit = 72,000 − 41,000 = 31,000 (a credit balance), so Dr Profit or Loss Summary 31,000 / Cr Capital 31,000.
- +1Close drawings to capital: Dr Capital 12,000 / Cr Drawings 12,000. Net effect on capital = +31,000 − 12,000 = +19,000 increase.
Key terms
- Accounting cycle
- The recurring sequence from analysing transactions through journalising, posting, trial balances, adjustments, statements, closing entries and the post-closing trial balance, repeated each reporting period.
- Temporary (nominal) accounts
- Revenue, expense and drawings accounts that are closed to zero at period end so that each period's performance is measured separately.
- Permanent (real) accounts
- Asset, liability and capital accounts whose balances carry forward from one period to the next; they are not closed.
- Closing entries
- Journal entries that transfer the temporary account balances to owner's capital (via a Profit or Loss Summary), resetting them to zero for the next period.
- Profit or Loss Summary
- A temporary clearing account (also called Income Summary) used to collect revenues and expenses during closing; its balance — the profit or loss — is then transferred to capital.
- Post-closing trial balance
- A trial balance prepared after closing that contains only permanent accounts and confirms debits equal credits going into the next period.
Completing the Accounting Cycle FAQ
Why do we make closing entries?
To reset the temporary accounts — revenues, expenses and drawings — to zero so the next period's performance is measured cleanly, and to transfer the period's profit or loss and the owner's drawings into the permanent capital account. Without closing, revenue and expense balances would accumulate across periods and profit could not be measured period by period.
Which accounts are closed and which are not?
Temporary accounts are closed: all revenue and expense accounts and the drawings account. Permanent accounts — assets, liabilities and owner's capital — are not closed; their balances carry forward. After closing, only permanent accounts appear on the post-closing trial balance.
Why are drawings closed directly to capital and not through the summary?
Because drawings are a distribution to the owner, not an expense of earning revenue. Routing them through the Profit or Loss Summary would understate profit. Drawings are closed with Dr Capital / Cr Drawings, separately from the revenue-and-expense closing that determines profit.
Can AI help me with closing entries in ACF5950?
Yes, as a study aid. Sia can walk through the four closing steps, show why drawings bypass the profit summary, and check the net movement in capital. It supports understanding and rehearsal only, not graded assessment — Monash academic-integrity rules apply, so confirm the AI policy for each task on Moodle.
Exam move
Memorise the closing sequence and practise it end to end: revenues to the summary, expenses to the summary, the summary (profit or loss) to capital, then drawings to capital. Keep the temporary-versus-permanent distinction sharp — if an account is an asset, liability or capital it is never closed. The single most common error is routing drawings through the profit summary, so rehearse closing drawings separately every time. Finish by preparing a post-closing trial balance containing only permanent accounts and confirming it balances. Because this closes the loop that Weeks 3-6 build, being fast and accurate here is directly rewarded in the Quiz/Test and the 50% hurdle exam.
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