Closing Journal Entries

Debits and credits are the key tools for adjusting company accounts. Closing entries are part of the accounting cycle, which starts with a financial transaction and ends with the preparation of financial statements. The retained earnings account balance has now increased to 8,000, and forms part of the trial balance after the closing journal entries have been made. This trial balance gives the opening balances for the next accounting period, and contains only balance sheet accounts including the new balance on the retained earnings account as shown below.

• Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets.
• All accounts can be classified as either permanent (real) or temporary (nominal) (Figure 5.3).
• ‘Total expenses‘ account is credited to record the closing entry for expense accounts.
• As the drawings account is a contra equity account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account.
• This trial balance gives the opening balances for the next accounting period, and contains only balance sheet accounts including the new balance on the retained earnings account as shown below.

While they tend to be similar and repetitive, it is worth having a good understanding of what entries are being made and why they are being made. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Then, just pick the specific date and year you want the closing process to take place, and you’re done!

Step 3: Close Income Summary to the appropriate capital account

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 permanent account on the balance sheet. Then you are going to create a journal entry to transfer the balance of each temporary account to the appropriate permanent account. For example, the balance of a revenue account will go to the income summary.

Although the drawings account is not an income statement account, it is still classified as a temporary account and needs a closing journal entry to zero the balance for the next accounting period. Although it is not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period. The temporary account balances are not carried forward to the next accounting period, so they must be closed by passing closing entries at the end of an accounting period. Closing entries are journal entries to reset balances of temporary accounts on the income statement to zero at the end of an accounting period. Now that the revenue account is closed, next we close the expense accounts.

Step 2: Transfer Expenses

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. In the closing process, the balances are not directly transferred to the income statement; rather, an intermediate income summary account is created.

What Are Closing Entries in Accounting?

In other words, the temporary accounts are closed or reset at the end of the year. The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance. The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings. We do not need to show accounts with zero balances on the trial balances.

Step 4: Closing the drawing/dividends account

The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. Notice that the Income Summary account is now zero and is ready for use in the next period. 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.

Answer the following questions on closing entries
and rate your confidence to check your answer. Answer the following questions on closing entries taxpayers have more time to file in 2017 and rate your confidence to check your answer. All accounts can be classified as either permanent (real) or temporary (nominal) (Figure 5.3).

Trial Balance

If the company is using accounting software, then it automatically passes closing entries at the end of the accounting cycle and resets the temporary account balances to zero. One account you’ll want to be aware of when performing closing entries is the income summary account. The income summary account is a temporary account that you put all revenue and expense accounts into at the end of the accounting period. 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.

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