The $10,000 of revenue generated through the accounting period will be shifted to the income summary account. Now, it’s time to close the income summary to the retained earnings (since we’re dealing with a company, not a small business or sole proprietorship). In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company. Since the income summary account is only a transitional account, it is also acceptable to close directly to the retained earnings account and bypass the income summary account entirely.
- Below are the T accounts with the journal entries already posted.
- The first entry requires revenue accounts close to the Income
Summary account. - What are your total expenses for rent, electricity, cable and internet, gas, and food for the current year?
Closing journal entries are made at the end of an accounting period to prepare the accounting records for the next period. They zero-out the balances of temporary accounts during the current period to come up with fresh slates for the transactions in the next period. The income summary is used to transfer the balances of temporary accounts to retained earnings, which is a fixed asset definition permanent account on the balance sheet. As with other journal entries, the closing entries are posted to the appropriate general ledger accounts. After the closing entries have been posted, only the permanent accounts in the ledger will have non-zero balances. The income summary account is an intermediary
between revenues and expenses, and the Retained Earnings account.
You can do this by debiting the income summary account and crediting your capital account in the amount of $250. This reflects your net income for the month, and increases your capital account by $250. We see from the adjusted trial balance that our revenue account has a credit balance. To make the balance zero, debit the revenue account and credit the Income Summary account. Total revenue of a firm at the end of an accounting period is transferred to the income summary account to ensure that the revenue account begins with zero balance in the following accounting period.
Printing Plus has $100 of supplies expense, $75 of depreciation
expense–equipment, $5,100 of salaries expense, and $300 of utility
expense, each with a debit balance on the adjusted trial balance. The closing entry will credit Supplies Expense, Depreciation
Expense–Equipment, Salaries Expense, and Utility Expense, and debit
Income Summary. The second entry requires expense accounts close to the Income Summary account. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. Printing Plus has $100 of supplies expense, $75 of depreciation expense–equipment, $5,100 of salaries expense, and $300 of utility expense, each with a debit balance on the adjusted trial balance.
Your closing journal entries serve as a way to zero out temporary accounts such as revenue and expenses, ensuring that you begin each new accounting period properly. After closing both income and revenue accounts, the income summary account is also closed. All generated revenue of a period is transferred to retained earnings so that it is stored there for business use whenever needed. At the end of an accounting period when the books of accounts are at finalization stage, some special journal entries are required to be passed.
Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts. These accounts are temporary because they keep their balances during the current accounting period and are set back to zero when the period ends. Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings. 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. In other words, the temporary accounts are closed or reset at the end of the year.
Notice that the balance of the Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses. The third entry requires Income Summary to close to the Retained
Earnings account.
Overview: What are closing entries?
Whether you’re processing closing entries manually, or letting your accounting software do the work, closing entries are perhaps the most important part of the accounting cycle. 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.
- The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.
- ‘Total expenses‘ account is credited to record the closing entry for expense accounts.
- For smaller businesses, it might make sense to bypass the income summary account and instead close temporary entries directly to the retained earnings account.
- All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future.
- And so, the amounts in one accounting period should be closed so that they won’t get mixed with those in the next period.
To get a zero balance in a revenue account, the
entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service
revenue, each with a credit balance on the adjusted trial balance. The closing entry will debit both interest revenue and service
revenue, and credit Income Summary. This means that
it is not an asset, liability, stockholders’ equity, revenue, or
expense account. The account has a zero balance throughout the
entire accounting period until the closing entries are prepared.
Closing entries definition
Well, dividends are not part of the income statement because they are not considered an operating expense. That’s exactly what we will be answering in this guide – along with the basics of properly creating closing entries for your small business accounting. Notice how only the balance in retained earnings
has changed and it now matches what was reported as ending retained
earnings in the statement of retained earnings and the balance
sheet. We
have completed the first two columns and now we have the final
column which represents the closing (or archive) process.
Four Steps in Preparing Closing Entries
To get a zero balance in the Income Summary
account, there are guidelines to consider. Closing entries are an important facet of keeping your business’s books and records in order. By maintaining your bookkeeping, you can ensure that you are constantly kept informed. As well as being consistently up-to-date on the financial health of your business.
Module 4: Completing the Accounting Cycle
The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet. Closing entries are completed at the end of each accounting period after your adjusted trial balance has been run. One of the most important steps in the accounting cycle is creating and posting your closing entries. To close expenses, we simply credit the expense accounts and debit Income Summary.
Instead, as a form of distribution of a firm’s accumulated earnings, dividends are treated as a distribution of equity of the business. Answer the following questions on closing entries
and rate your confidence to check your answer. All accounts can be classified as either permanent (real) or temporary (nominal) (Figure 5.3). Answer the following questions on closing entries and rate your confidence to check your answer. Then, just pick the specific date and year you want the closing process to take place, and you’re done!
Recording a Closing Entry
The month-end close is when a business collects financial accounting information. Using the above steps, let’s go through an example of what the closing entry process may look like. 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. We at Deskera offer the best accounting software for small businesses today.