on to the final part of problem 3 3a this has us doing closing journal entries and it might be a new concept I'm gonna introduce it as if this is a new concept so we'll talk a little bit about what a closing journal entry is and then we'll just do it for this net lock security company so a closing entry every time a company finishes its fiscal year June 30th it starts a new year and guess what a lot of numbers have to start again at 0 like its sales for 2014 were 499,000 or 2024 pardon me were 499,000 right it's sales for 2024 it's looking at its security revenue pardon me for 2024 is $499,000 well we want to start a new year and so starting the new year what's its security revenue for 2025 fiscal June 30th 2025 the answer is zero right it's gonna start again it's here you got to reset your numbers once in a while so you're starting again from zero and a lot of numbers in the financial statements need to get reset some numbers however do not get reset like when I start a new year it makes all the sense in the world to reset revenues to zero but I can't set like my notes payable to zero I can't say to like the guy I owe money to hey sorry it's a new year my note payable is now zero no no no that doesn't make sense my revenues reset to zero and so I'm gonna give you the list of what we need to reset to zero so again closing entry here's the job of a closing entry reset reste no reset revenues expenses and dividends to zero that's the job that's all we have to do we have to make those accounts go to zero so let's do it and I'll kind of explain as we go for this company we can use the adjusted trial balance so revenues expenses and dividends let's start with our revenues and expenses like from here down so this little box the area that's my revenues and expenses let's reset those amounts to zero so how am I gonna do that let me actually move this over so it's off out of my way uh well we do a journal entry in the journal entry is it June 30th entry June 30th 2024 I if I want revenues to go to zero they're sitting at a credit balance of $4.99 to make them go to zero i debit them so debit security Rev $4.99 I want all my expenses to go to zero they're all sitting in debits I want to make them go to zero I credit them I credit salaries expense 321 500 interest expense 1250 depreciation expense 21400 supplies expense 4700 repairs expense 17,000 insurance expense 9333 rent expense 60 grand income tax expense 7 grand so summing these all up what you're gonna find is they don't balance and and Rev in this case the debits are higher than the credits so let's figure out how far we're off $4.99 on the left actually that's just total the right so 321 5 plus 12 50 plus 21 4 plus 47 hundred plus 17,000 plus 93 33 60 plus 7 442 183 so 442 183 so what am I missing here what's the difference 4 9 900 minus 4 42 183 I'm off by 56 187 56 156 8 17 part of me 56 8 17 so I gotta put a number in here of 56 8 17 just to make it bounce like this isn't a good journal entry right to have debits not equal credits breaks all the rules of journal entries so I need to fill in 56 8 17 on the right hand side now I'm gonna tell you what to do and in 1 minute from now I'll tell you why we're doing it but just right now go with me credit or debit if we're off by a debit you know whatever number you're filling in here when you've zeroed out your revenues and expenses put it to retained earnings whatever that number is plug it through retained earnings will also zero our dividends so dividends were sitting there as a debit of $10,000 we want to make it go to zero so I got a credit dividends $10,000 to make them go to zero and in this case we'll our retained earnings to sort of balance that out $10,000 and there we have our closing entries date that one as well those are our closing entries so that's it we've answered the question but you might be saying why are we doing this again well the first reason is we want to reset revenues expenses and dividends to zero and we've done that but why is retained earnings our balancing account well to figure that out I actually want to take a look at our financial statements and I want to go over to our statement of changes in equity so here we have net lock security statement of changes in equity and specifically the retained earnings column we said retained earnings started at 87,000 it went up by fifty-six 817 because of the net income net income made this go up by fifty-six 817 well if we want to make anything happen in accounting we need journal entries and you can see we've made retained earnings go up by fifty-six 817 because of the revenues and expenses because of the net income so this is the journal entry that captures this align on our statement of changes in equity retained earnings goes up by 56 817 because of the net income and it goes down by 10,000 dollars because the dividends well the make retained earnings go up it's a Cheryl there's equity account to make it go up you credit it to make retained earnings go down you debit it and we debited it $10,000 because of that evidence so this closing entry is really tracking what's happening here in our statement of changes in equity it's saying here retained earnings changed we got to do a journal entry to make it so this is the journal entry that makes it happen so there we are our closing entry if you didn't quite follow why we did it I think it's okay just remember you're gonna reset revenues expenses and dividends to zero and you're gonna do it through your retained earnings there are a million different ways to do this and to line this up what I'm telling you is absolutely right well you learn in a different classroom I might be slightly different we're all gonna end up in the exact same place I like the way I've done it obviously that's why I'm showing you this way but your prof might do it slightly differently in your class but they're gonna end up in the exact same place as I do and this is a good and totally acceptable way of doing a closing journal entry okay if you've made it to the end of this long video series I hope you were here because it's useful to you and for goodness sakes if it's useful to you please do me the favor of giving me the old thumbs up please pass this along to your friend tell your profs you found these videos tell them that it's useful go back and like all my other videos well you don't have to do that but any thumbs up or likes I can get I really do appreciate and again it's just to tell YouTube that I'm doing good work here and it's a nice pat on the back for me too so I appreciate that and I appreciate your being here and being a supporter of this channel that's all for this video I'll see you next time bye for now
Go to: http://www.accountingworkbook.com/ to download the problems. If you'd like to become a member an gain access to over 100 "Members Only" tutorial videos found on http://www.accountingworkbook.com/ - click the join button or click this link: https://www.youtube.com/channel/UCNFClg6mzfZ5ixpuH9c7f1A/join Module 3 examines five types of adjustments: 1.) Depreciation/Amortization, 2.) Prepaid expenses, 3.) Accrued expenses, 4.) Accrued Revenues, and 5.) Unearned Revenues. We learn how to prepare an adjusted trial balance, closing entries and a post-closing trial balance.