Content
The accountant closes entries at the end of each accounting period involving revenues, gains, expenses, and losses. The accountant debits expenses, and incomes are credited to the income summary statement. Closing journal entries are entries compiled at the end bookkeeping for startups of the accounting period to close out temporary accounts to zero balances and prepare them to record activity for the coming accounting period. Closing entries differ from other journal entries in that they are used only at the end of the accounting period.
- These entries are created to prepare a business for the next accounting period.
- The remaining balance in Retained Earnings is $4,565 the following Figure 5.6.
- Transfer the balances of various expense accounts to income summary account.
- The method of first moving the balances to an income summary account and then shifting the balances to the retained earnings account will be more time consuming for the company.
- If dividends were not declared, closing entries would cease at this point.
All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary. Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company. A closing entry is recorded by debiting the relevant temporary account and crediting the relevant permanent account. To close the account, we need to debit the income summary account and credit all the relevant individual expenses accounts such as utilities expense, wages expense depreciation expense, etc. The expense accounts are now cleared by issuing debits to the income summary account and crediting the expense accounts.
Closing Entries – A Practical Exercise:
The balances of the temporary accounts will end up being used to create the business’s income statement when the fiscal year ends. Once all of the required entries have been made, you can run your post-closing trial balance, as well as other reports such as an income statement or statement of retained earnings. 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.
The next day, January 1, 2019, you get ready for work, but before you go to the office, you decide to review your financials for 2019. What are your total expenses for rent, electricity, cable and internet, gas, and food for the current year? You have also not incurred any expenses yet for rent, electricity, cable, internet, gas or food. This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period. At the end of the year, all the temporary accounts must be closed or reset, so the beginning of the following year will have a clean balance to start with.
Income Summary
The method of first moving the balances to an income summary account and then shifting the balances to the retained earnings account will be more time consuming for the company. However, it will provide a better audit trail for the accountants who review these at a later point in time. Finally the dividends account may be closed through a debit to the retained earnings account and credit to the dividends account. Here are a few examples of performing closing entries in order to zero out the income statement temporary accounts. During the process of performing closing entries, a company’s net income is transferred to retained earnings which will be listed on the balance sheet. At the end of every period, temporary accounts must be set to a zero balance, and in order to do this, their balances will be deposited into the income summary account.
