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Ch. 4 Journal Entries to Master
Journal Entries (Perpetual Inventory)
🔹Buyer-Side Journal Entries (Perpetual)
Transaction: Buying inventory using cash:
Transaction: Acquiring inventory on credit:
Transaction: Covering shipping costs with cash as the buyer:
Transaction: Returning inventory or obtaining a price discount from the supplier:
Note: This entry is simply a “flip” of the purchase entry!
Transaction: Paying an invoice with cash (outside the discount window) for inventory first acquired on credit:
Transaction: Paying with cash (within the discount timeframe) for inventory initially taken on credit:
🔹Seller-Side Journal Entries (Perpetual)
Transaction: Selling inventory and collecting cash:
Important: In a Perpetual Inventory System, you’ll make TWO entries:
- Record the sales (what you charged the customer).
- Account for the cost (your original purchase price of the inventory).
This method ensures COGS is updated in real-time!
Transaction: Selling inventory on credit:
Important: In a Perpetual Inventory System, you’ll make TWO entries:
- Record the sales (what you charged the customer).
- Account for the cost (your original purchase price of the inventory).
This method ensures COGS is updated in real-time!
Transaction: Paying shipping costs as the seller:
Transaction: Customer returning inventory (goods shipped back):
Important: Record TWO entries: One for the sales return and another for the cost.
Transaction: Customer returning inventory (accepting a price reduction but keeping the goods):
Note: Only ONE entry is required, as only the sales are affected.
Transaction: Receiving cash for inventory sold on credit (outside the discount period):
Transaction: Receiving cash for inventory sold on credit (within the discount period):
🔹Closing Entries (Perpetual)
First, review closing entries from Chapter 3.
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Revenue Accounts
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
- Revenues operate on a (-/+) basis, meaning to close (i.e., reduce to zero), we must DEBIT THEM.
- Then, we total the closed revenue accounts, and “dump” them into the Income Summary on the other side of the entry — ensuring debits are equal to credits.
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one revenue account to close (e.g. Fees Earned), or multiple revenue accounts needing closing (Fees Earned, Consulting Revenue, Rent Revenue, Sales, etc.).
- In essence, the point I’m trying to illustrate is that, whatever revenues you see on the income statement — they will ALL need to be closed!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Expense Accounts
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
- Expenses work the opposite of revenues, like (+/-), which means to close, i.e. reduce them to zero, — we must CREDIT THEM.
- Then, we total the closed expense accounts, and “dump” them into the Income Summary on the other side of the entry — ensuring debits are equal to credits.
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one expense account to close (e.g. Cost of Goods Sold), or multiple expense accounts needing closing (Depreciation Expense, Wages Expense, Rent Expense, Advertising Expense, etc.).
- In essence, the point I’m trying to illustrate is that, whatever expenses you see on the income statement — they will ALL need to be closed!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Income Scenario)
- Closing this account depends on whether we had a net income (Revenues > Expenses) or a net loss (Revenues < Expenses) for a given period.
- This is best illustrated by using a T Account for Income Summary, which includes entries from the previous steps of closing revenues and expenses (R.E.I.D).
- Refer to the example below, drawing on prior examples of closing entries — which lead to Net Income:
- Simply put, the "Income Summary" account is a summarization of the Net Income or loss.
- Therefore, in this example, context, the $25,000 debit balance in Income Summary represents Net Income!
- This ending balance is derived from the debit to Income Summary of $100,000 (closing revenues) minus the credit to Income Summary of $75,000 (closing expenses),
- Since Revenues were greater than Expenses, this results in our Net Income of $25,000.
- This aligns with the Net Income calculation in an income statement:
- Revenues Equals Net Income or Loss
- Making sense?
- In my opinion, this understanding of how the Income Summary account functions is crucial — as it provides a much deeper comprehension than simply memorizing the closing entry.
- Remembering the closing entry for Income Summary, in a Net Income scenario, becomes way easier when we focus on why Retained Earnings, an equity account (-/+), is credited.
- Recall that crediting an equity account (-/+), like Retained Earnings, will INCREASE that account.
- If we have Net Income, why should we increase Retained Earnings when closing Income Summary?
- Because Net Income for the period does exactly that—it gets added to the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
- PLUS NET INCOME*
- Seeing it?
- Notice that when closing the Income Summary account under a Net Income scenario — we need to increase Retained Earnings by crediting it, since we know that Net Income is added to Retained Earnings!
- If you remember this, you'll automatically know that the opposite side, the debit, goes to Income Summary.
Less Expenses
Beginning R/E
Minus Dividends
Equals Ending R/E
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Loss Scenario)
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Loss Scenario)
- Closing this account depends on whether we had a net income (Revenues > Expenses) or a net loss (Revenues < Expenses) for a given period.
- This is best illustrated by using a T Account for Income Summary, which includes entries from the previous steps of closing revenues and expenses (R.E.I.D).
- Refer to the example below, drawing on hypothetical examples of closing entries — which lead to a Net Loss:
- Simply put, the "Income Summary" account is a summarization of the Net Income or loss.
- Therefore, in this example, context, the $25,000 credit balance in Income Summary represents a Net Loss!
- This ending balance is derived from the debit to Income Summary of $75,000 (closing revenues) minus the credit to Income Summary of $100,000 (closing expenses),
- Since Expenses were greater than Revenues, this results in our Net Loss of $25,000.
- This aligns with the Net Income calculation in an income statement:
- Revenues Equals Net Income or Loss
- Making sense?
- In my opinion, this understanding of how the Income Summary account functions is crucial — as it provides a much deeper comprehension than simply memorizing the closing entry.
- Remembering the closing entry for Income Summary, in a Net Loss scenario, becomes way easier when we focus on why Retained Earnings, an equity account (-/+), is debited.
- Recall that debiting an equity account (-/+), like Retained Earnings, will DECREASE that account.
- If we have a Net Loss, why should we decrease Retained Earnings when closing Income Summary?
- Because Net Loss for the period does exactly that—it gets subtracted from the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
- MINUS NET LOSS*
- Seeing it?
- Notice that when closing the Income Summary account under a Net Income scenario — we need to decrease Retained Earnings by debiting it, since we know that Net Income is added to Retained Earnings!
- If you remember this, you'll automatically know that the opposite side, the credit, goes to Income Summary!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
Less Expenses
Beginning R/E
Minus Dividends
Equals Ending R/E
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Dividends (Contra Equity)
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
Contra — i.e. opposite of — Equity? (+/-)
- Dividends operates on a (+/-) basis, meaning to close (i.e., reduce to zero), we must CREDIT the account.
- Recall that debiting an equity account (-/+), like Retained Earnings, will DECREASE that account.
- If we’ve paid Dividends, why does this decrease Retained Earnings?
- Because Dividends for the period do exactly that—they gets subtracted from the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
Beginning R/E
Plus Net Income
- Minus Dividends*
Equals Ending R/E
- Seeing it?
- Connecting the closing of Dividends to the idea that Dividends are subtracted in the Statement of Retained Earnings can be a super useful memorization tool.
- If you remember that Dividends decrease Retained Earnings — it will help you recall that Retained Earnings must be debited when closing out Dividends!
Now, see below for how closing entries translate to a merchandising scenario.
Closing Revenues:
Closing Expenses:
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one expense account to close (e.g. Cost of Goods Sold), or multiple expense accounts needing closing (Depreciation Expense, Wages Expense, Rent Expense, Advertising Expense, etc.).
- In essence, the point I’m trying to illustrate is that, whatever expenses you see on the income statement — they will ALL need to be closed!
Closing Income Summary (if net income, like above):
Closing Income Summary (if net loss):
Closing Dividends:
Journal Entries (Periodic Inventory)
🔹Buyer-Side Journal Entries (Periodic)
Transaction: Buying inventory using cash:
Transaction: Acquiring inventory on credit:
Transaction: Covering shipping costs with cash as the buyer:
Or, sometimes you’ll see this:
Transaction: Returning inventory or obtaining a price discount from the supplier:
Note: This entry is simply a “flip” of the purchase entry!
Transaction: Paying an invoice with cash (outside the discount window) for inventory first acquired on credit:
Transaction: Paying with cash (within the discount timeframe) for inventory initially taken on credit:
🔹Seller-Side Journal Entries (Periodic)
Transaction: Selling inventory and collecting cash:
Important: In a Periodic Inventory System, you’ll only make ONE entry:
- Record the sales (what you charged the customer).
- You won’t account for the cost (your original purchase price of the inventory) until the end of the period.
COGS is only updated in real-time in Perpetual Inventory Systems!
Transaction: Selling inventory on credit:
Important: In a Periodic Inventory System, you’ll only make ONE entry:
- Record the sales (what you charged the customer).
- You won’t account for the cost (your original purchase price of the inventory) until the end of the period.
COGS is only updated in real-time in Perpetual Inventory Systems!
Transaction: Paying shipping costs as the seller:
Transaction: Customer returning inventory (goods shipped back):
Important: In a Periodic Inventory System, you’ll only make ONE entry:
- Record the sales-side (the amount of your customer return).
- You won’t account for the cost (your original purchase price of the goods shipped back) until the end of the period.
COGS is only updated in real-time in Perpetual Inventory Systems!
Transaction: Customer returning inventory (accepting a price reduction but keeping the goods):
Note: Only ONE entry is required, as only the sales are affected.
Transaction: Receiving cash for inventory sold on credit (outside the discount period):
Transaction: Receiving cash for inventory sold on credit (within the discount period):
🔹Closing Entries (Periodic)
First, review closing entries from Chapter 3.
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Revenue Accounts
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
- Revenues operate on a (-/+) basis, meaning to close (i.e., reduce to zero), we must DEBIT THEM.
- Then, we total the closed revenue accounts, and “dump” them into the Income Summary on the other side of the entry — ensuring debits are equal to credits.
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one revenue account to close (e.g. Fees Earned), or multiple revenue accounts needing closing (Fees Earned, Consulting Revenue, Rent Revenue, Sales, etc.).
- In essence, the point I’m trying to illustrate is that, whatever revenues you see on the income statement — they will ALL need to be closed!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Expense Accounts
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
- Expenses work the opposite of revenues, like (+/-), which means to close, i.e. reduce them to zero, — we must CREDIT THEM.
- Then, we total the closed expense accounts, and “dump” them into the Income Summary on the other side of the entry — ensuring debits are equal to credits.
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one expense account to close (e.g. Cost of Goods Sold), or multiple expense accounts needing closing (Depreciation Expense, Wages Expense, Rent Expense, Advertising Expense, etc.).
- In essence, the point I’m trying to illustrate is that, whatever expenses you see on the income statement — they will ALL need to be closed!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Income Scenario)
- Closing this account depends on whether we had a net income (Revenues > Expenses) or a net loss (Revenues < Expenses) for a given period.
- This is best illustrated by using a T Account for Income Summary, which includes entries from the previous steps of closing revenues and expenses (R.E.I.D).
- Refer to the example below, drawing on prior examples of closing entries — which lead to Net Income:
- Simply put, the "Income Summary" account is a summarization of the Net Income or loss.
- Therefore, in this example, context, the $25,000 debit balance in Income Summary represents Net Income!
- This ending balance is derived from the debit to Income Summary of $100,000 (closing revenues) minus the credit to Income Summary of $75,000 (closing expenses),
- Since Revenues were greater than Expenses, this results in our Net Income of $25,000.
- This aligns with the Net Income calculation in an income statement:
- Revenues Equals Net Income or Loss
- Making sense?
- In my opinion, this understanding of how the Income Summary account functions is crucial — as it provides a much deeper comprehension than simply memorizing the closing entry.
- Remembering the closing entry for Income Summary, in a Net Income scenario, becomes way easier when we focus on why Retained Earnings, an equity account (-/+), is credited.
- Recall that crediting an equity account (-/+), like Retained Earnings, will INCREASE that account.
- If we have Net Income, why should we increase Retained Earnings when closing Income Summary?
- Because Net Income for the period does exactly that—it gets added to the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
- PLUS NET INCOME*
- Seeing it?
- Notice that when closing the Income Summary account under a Net Income scenario — we need to increase Retained Earnings by crediting it, since we know that Net Income is added to Retained Earnings!
- If you remember this, you'll automatically know that the opposite side, the debit, goes to Income Summary.
Less Expenses
Beginning R/E
Minus Dividends
Equals Ending R/E
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Loss Scenario)
- Revenues
- Expenses
- Income Summary
- Dividends
- Closing the Income Summary Account (Net Loss Scenario)
- Closing this account depends on whether we had a net income (Revenues > Expenses) or a net loss (Revenues < Expenses) for a given period.
- This is best illustrated by using a T Account for Income Summary, which includes entries from the previous steps of closing revenues and expenses (R.E.I.D).
- Refer to the example below, drawing on hypothetical examples of closing entries — which lead to a Net Loss:
- Simply put, the "Income Summary" account is a summarization of the Net Income or loss.
- Therefore, in this example, context, the $25,000 credit balance in Income Summary represents a Net Loss!
- This ending balance is derived from the debit to Income Summary of $75,000 (closing revenues) minus the credit to Income Summary of $100,000 (closing expenses),
- Since Expenses were greater than Revenues, this results in our Net Loss of $25,000.
- This aligns with the Net Income calculation in an income statement:
- Revenues Equals Net Income or Loss
- Making sense?
- In my opinion, this understanding of how the Income Summary account functions is crucial — as it provides a much deeper comprehension than simply memorizing the closing entry.
- Remembering the closing entry for Income Summary, in a Net Loss scenario, becomes way easier when we focus on why Retained Earnings, an equity account (-/+), is debited.
- Recall that debiting an equity account (-/+), like Retained Earnings, will DECREASE that account.
- If we have a Net Loss, why should we decrease Retained Earnings when closing Income Summary?
- Because Net Loss for the period does exactly that—it gets subtracted from the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
- MINUS NET LOSS*
- Seeing it?
- Notice that when closing the Income Summary account under a Net Income scenario — we need to decrease Retained Earnings by debiting it, since we know that Net Income is added to Retained Earnings!
- If you remember this, you'll automatically know that the opposite side, the credit, goes to Income Summary!
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
Less Expenses
Beginning R/E
Minus Dividends
Equals Ending R/E
Use the R.E.I.D acronym to easily recall the accounts closed at the end of each period!
- Revenues
- Expenses
- Income Summary
- Dividends
Closing Dividends (Contra Equity)
With a solid understanding of debits & credits for each account type, closing entries become very straightforward. Let's reference the following framework from Chapter 2 for debits & credits: Assets = Liabilities + Equity Revenues / Expenses (+/-) (-/+) (-/+) (-/+) (+/-)
Contra — i.e. opposite of — Equity? (+/-)
- Dividends operates on a (+/-) basis, meaning to close (i.e., reduce to zero), we must CREDIT the account.
- Recall that debiting an equity account (-/+), like Retained Earnings, will DECREASE that account.
- If we’ve paid Dividends, why does this decrease Retained Earnings?
- Because Dividends for the period do exactly that—they gets subtracted from the Retained Earnings account!
- To illustrate this, reflect on the Statement of Retained Earnings formula from previous chapters:
Beginning R/E
Plus Net Income
- Minus Dividends*
Equals Ending R/E
- Seeing it?
- Connecting the closing of Dividends to the idea that Dividends are subtracted in the Statement of Retained Earnings can be a super useful memorization tool.
- If you remember that Dividends decrease Retained Earnings — it will help you recall that Retained Earnings must be debited when closing out Dividends!
Now, see below for how closing entries translate to a merchandising scenario.
Closing Revenues:
Closing Expenses:
- This is simply a hypothetical scenario.
- Depending on your exam, you may have only one expense account to close (e.g. Cost of Goods Sold), or multiple expense accounts needing closing (Depreciation Expense, Wages Expense, Rent Expense, Advertising Expense, etc.).
- In essence, the point I’m trying to illustrate is that, whatever expenses you see on the income statement — they will ALL need to be closed!
Closing Income Summary (if net income, like above):
Closing Income Summary (if net loss):
Closing Dividends:
