Closing Entries: Step by Step Guide

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 purpose of closing entries is to prepare the temporary accounts for the next accounting period.

• The first part is the date of declaration, which creates the obligation or liability to pay the dividend.
• If you paid dividends for the month, you will need to close that account as well.
• The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5).
• They are housed on the balance sheet, a section of the financial statements that gives investors an indication of a company’s value, including its assets and liabilities.
• We have completed the first two columns and now we have the final column which represents the closing (or archive) process.
• To close that, we debit Service Revenue for the full amount and credit Income Summary for the same.

Failing to make a closing entry, or avoiding the closing process altogether, can cause a misreporting of the current period’s retained earnings. It can also create errors and financial mistakes in both the current and upcoming financial reports, of the next accounting period. Accounts are considered “temporary” when they only accumulate transactions over one single accounting period.

Closing Entry for Revenue Account

The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period. However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period. Now that all the temporary accounts are closed, the income summary account should have a balance equal to the net income shown on Paul’s income statement.

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. To close the income summary account to the retained earnings account as mentioned earlier, we need to debit the income summary account and credit retained earnings account. This will ensure that the balance has been transferred on the balance sheet.

Step 1: Close Revenue accounts

Below are examples of closing entries that zero the temporary accounts in the income statement and transfer the balances to the permanent retained earnings account. Companies use closing entries to reset the balances of temporary accounts − accounts that show balances over a single accounting period − to zero. By doing so, the company moves these balances into permanent accounts on the balance sheet. These permanent accounts show a company’s long-standing financials. First, all the various revenue account balances are transferred to the temporary income summary account. This is done through a journal entry that debits revenue accounts and credits the income summary.

These accounts carry forward their balances throughout multiple accounting periods. Temporary accounts are accounts in the general ledger that are used to accumulate https://1investing.in/bookkeeping-for-a-law-firm-best-practices-faqs/ transactions over a single accounting period. The balances of these accounts are eventually used to construct the income statement at the end of the fiscal year.

What are closing entries?

The end result is equally accurate, with temporary accounts closed to the retained earnings account for presentation in the company’s balance sheet. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. This balance is then transferred to the Retained Earnings account. Other accounting software, such as Oracle’s PeopleSoft™, post closing entries to a special accounting period that keeps them separate from all of the other entries.

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. After preparing the Nonprofit Bookkeeper vs Accountant Who Should You Hire? above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. Some common examples of closing entries include the closing of revenue accounts, expense accounts, and dividend accounts. In a partnership, separate entries are made to close each partner’s drawing account to his or her own capital account.

Step 2: Closing the expense accounts

The Retained Earnings account balance is currently a credit of $4,665. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If your expenses for December had exceeded your revenue, you would have a net loss. When closing expenses, you should list them individually as they appear in the trial balance.

• Corporations will close the income summary account to the retained earnings account.
• The Ascent is a Motley Fool service that rates and reviews essential products for your everyday money matters.
• All modern accounting software automatically generates closing entries, so these entries are no longer required of the accountant; it is usually not even apparent that these entries are being made.
• That’s why most business owners avoid the struggle by investing in cloud accounting software instead.
• The cost of goods sold (materials, direct labor, manufacturing overhead) and capital expenditures are not included in operating expenses (larger expenses such as buildings or machines).
• The abbreviation REID makes it simple to recall which accounts need to be closed and how they are completed.