Closing Entries: Step by Step Guide

The Second Step of Closing Entries is closing the Expense Account. To complete the Expense account, you must credit all the Accounts and debit the Income Summary account once again. Doing this would bring the balances of the Expenses Account to zero.

1. The Printing Plus
   adjusted trial balance for January 31, 2019, is presented in

   Figure 5.4.

2. Instead the balances in these accounts are moved at month-end to either the capital account or the retained earnings account.
3. 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.
4. Dividends are payments by corporations to the shareholders using the extra profits they have generated during the fiscal year.
5. 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).

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 (Figure
5.5). The balance in Income Summary is the same figure as what
is reported on Printing Plus’s Income Statement. All revenue accounts will be zero after debiting the revenue account and crediting the income summary account, and the revenue account will be closed at the same time. Instead, companies transfer the net income or net loss from the revenue and expense accounts to a temporary account called “Income Summary,” and then to the owner’s capital. We see from
the adjusted trial balance that our revenue accounts have a credit
balance.

We and our partners process data to provide:

Financial expenses are expenses from lenders/borrowers and other economic activities. An example would be if the company were to get sued, then a lawyer would be hired, and that fee would need to be paid. Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally.

Any funds that are not held onto incur an expense that reduces NI. One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors. The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company’s financial data. 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?

When closing entries, those three types of accounts are the only ones closed. Below are the T accounts with the journal entries already posted. This entry zeros out dividends and reduces closing entries are retained earnings by total dividends paid. Adjusting entries are used to modify accounts so that they’re in compliance with the accrual concept of recording income and expenses.

Unit 4: Completion of the Accounting Cycle

Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero. Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. 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. Close the income summary account by debiting income summary and crediting retained earnings.

The temporary accounts are now ready to gather data for the next accounting period, which will be distinct from the data from previous periods. The next day, January 1, 2019, you get ready for work, but before you go to the office, you decide https://personal-accounting.org/ 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.

Financial Accounting

In other words, it contains net income or the earnings figure that remains after subtracting all business expenses, depreciation, debt service expense, and taxes. The income summary account doesn’t factor in when preparing financial statements because its only purpose is to be used during the closing process. 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. 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. If a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings.

Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms. Retained earnings are those earnings not distributed to shareholders as dividends, but retained for further investment, often in advertising, sales, production, and equipment. Now, if you’re new to accounting, you probably have a ton of questions.

Closing entries are those journal entries made in a manual accounting system at the end of an accounting period to shift the balances in temporary accounts to permanent accounts. 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. Closing entries are journal entries posted at the end of an accounting period to reset temporary accounts to zero and transfer their balances to a permanent account known as retained earnings.

We do not need to show accounts with zero balances on the trial balances. This is no different from what will happen to a company at the end of an accounting period. A company will see its revenue and expense accounts set back to zero, but its assets and liabilities will maintain a balance. Stockholders’ equity accounts will also maintain their balances. In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts.

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. If there is a net profit, the balance of the income summary account is also zeroed by debiting the income summary account and crediting the capital account. When the credit balance of the revenue account and the debit balance of the expenses account are transferred to the summary account, the account’s balance is either net income or a net loss. In each temporary account, closing entries also result in a zero balance.

In this example we will close Paul’s Guitar Shop, Inc.’s temporary accounts using the income summary account method from his financial statements in the previous example. 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.