5 1 Describe and Prepare Closing Entries for a Business Principles of Accounting, Volume 1: Financial Accounting

The month-end close is when a business collects financial accounting information. This entry zeros out dividends and reduces retained earnings by total dividends paid. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. Notice that the Income Summary account is now zero and is ready for use in the next period. The Retained Earnings account balance is currently a credit of $4,665. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.

  • You can find this by taking a look at the trial balance or income statement in your accounting system.
  • The income summary account is a temporary account that you put all revenue and expense accounts into at the end of the accounting period.
  • Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption.
  • The assumption is that all income from the company in one year is held onto for future use.
  • Retained earnings are those earnings not distributed to shareholders as dividends, but retained for further investment, often in advertising, sales, production, and equipment.

This step is completed after the financial statements have been prepared. After closing, the balance of Expenses will be zero and the account will be ready for the expenses of the next accounting period. At this point, the credit column of the Income Summary represents the firm’s revenue, the debit column represents the expenses, and balance represents the firm’s income for the period.

What Is a Closing Entry?

Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations). Now that we have closed income and expenses, we need to move the balances from the income summary to retained earnings. You can find this by taking a look at the trial balance or income statement in your accounting system.

  • The balances of these accounts are eventually used to construct the income statement at the end of the fiscal year.
  • This transaction increases your capital account and zeros out the income summary account.
  • Temporary accounts are used to compile transactions that impact the profit or loss of a business during a year, while permanent accounts maintain an ongoing balance over time.
  • To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary.
  • Closing entries, also called closing journal entries, are entries made at the end of an accounting period to zero out all temporary accounts and transfer their balances to permanent accounts.

Instead the balances in these accounts are moved at month-end to either the capital account or the retained earnings account. It’s important to note that neither the drawing nor the dividends accounts need to be transferred to the income summary account. Corporations will close the income summary account to the retained earnings account. This is the same figure found on the statement of retained earnings.

Where does the company keep track of its closing entries?

When you make closing accounting entries, you can follow the same steps. We are going to go over these at a high level and then jump into each step individually. It effortlessly sifts through large amounts of data and generates closing entries automatically. This ensures that your financial operations infrastructure can scale with your business’s growth.

Journalizing and Posting Closing Entries

If both summarize your income in the same period, then they must be equal. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand. Adjusting entries are used to modify accounts so that they’re in compliance with the accrual concept of recording income and expenses. From the Deskera “Financial Year Closing” tab, you can easily choose the duration of your accounting closing period and the type of permanent account you’ll be closing your books to.

Example of closing entries

Remember that expense accounts have a normal debit balance so a credit will zero out their balance and then you can debit the income summary to move it. Companies could close each income statement account to the owner’s capital immediately while making closing entries. The accounting cycle requires journalizing and posting closing entries.

The third entry requires Income Summary to close to the Retained Earnings account. To get a zero balance in the Income Summary account, there are guidelines to consider. It is the end of the year, December 31, 2018, project accounting software and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000.

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Having a zero balance in these accounts is important so a business can compare performance across periods, particularly with income. It also helps the business keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period. This transfer to retained earnings is required for three main reasons. A temporary account is an income statement account, dividend account or drawings account.


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