Closing Entries: Step by Step Guide

The main purpose of these closing entries is to bring the temporary journal account balances to zero for the next accounting period, which keeps the accounts reconciled. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account. After preparing the closing entries above, Service Revenue will now be zero.

Interim Financial Periods

Closing, or clearing the balances, means returning the account to a zero balance. Notice that revenues, expenses, dividends, and income summary all have zero balances. The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle. The first entry requires revenue accounts close to the Income Summary account. To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary.

Close Expense Accounts

Both closing entries are acceptable and both result in the same outcome. All temporary accounts eventually get closed to retained earnings and are presented on the balance sheet. Closing all temporary accounts to the retained earnings account is faster than using the income contra asset account summary account method because it saves a step.

• State whether each account is a permanent or temporary account.
• The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4.
• 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.
• Now for this step, we need to get the balance of the Income Summary account.
• The Printing Plus adjusted trial balance for January 31, 2019, is presented in the following Figure 1.28.
• It is important to understand retained earnings is not closed out, it is only updated.
• Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account.

Step 4: Close withdrawals to the capital account

Take note that Interior Design Bookkeeping closing entries are prepared only for temporary accounts. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account. 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. In other words, revenue, expense, and withdrawal accounts always have a zero balance at the start of the year because they are always closed at the end of the previous year. When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings.

Closing Entry for Expense Account

We could do this, but by having the Income Summary account, you get a balance for net income a second time. This gives you the balance to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings. The first entry closes revenue accounts to the Income Summary account. The second entry closes expense accounts to the Income Summary account.

• The credit to income summary should equal the total revenue from the income statement.
• It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year.
• Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
• These permanent accounts show a company’s long-standing financials.
• We do not need to show accounts with zero balances on the trial balances.
• As mentioned, temporary accounts in the general ledger consist of income statement accounts such as sales or expense accounts.

Temporary Accounts

• The balance in the Income Summary account equals the net income or loss for the period.
• If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings.
• We have completed the first two columns and now we have the final column which represents the closing (or archive) process.
• Stockholders’ equity accounts will also maintain their balances.
• For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company.

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. The process of using of the income summary account is shown in the diagram below. For partnerships, each partners’ capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C).

Permanent Accounts

Now that we have closed the temporary accounts, let’s review what the post-closing ledger (T-accounts) looks like for Printing Plus. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses in Figure 1.29. The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. It is important to understand retained earnings is not closed out, it is only updated.

Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided. which of the following is not a closing​ entry? The eighth step in the accounting cycle is preparing closing entries, which includes journalizing and posting the entries to the ledger. In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year. Such periods are referred to as interim periods and the accounts produced as interim financial statements.