Closing Entries in Accounting: Everything You Need to Know +How to Post Them

An accounting year-end which is not the calendar year end is sometimes referred to as a fiscal year end. Notice how only the balance in retained earnings
has changed and it now matches what was reported as ending retained
earnings in the statement of retained earnings and the balance
sheet. The third entry requires Income Summary to close to the Retained Earnings account. To get a zero balance in the Income Summary account, there are guidelines to consider. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.

Accounting software automatically handles closing entries for you. If you don’t have accounting software, you must manually create closing entries each accounting period. After the closing journal entry, the balance on the drawings account is zero, and the capital account has been reduced by 1,300. 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.

1. When closing the revenue account, you will take the revenue listed in the trial balance and debit it, to reduce it to zero.
2. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income.
3. Revenues and expenses are transferred to the Income Summary account, the balance of which clearly shows the firm’s income for the period.
4. It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period.

You might be asking yourself, “is the Income Summary account even necessary? ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account? We could do this, but by having the Income Summary account, you get a balance for net income a second time.

Closing the book on account closures

Revenues and expenses are transferred to the Income Summary account, the balance of which clearly shows the firm’s income for the period. 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. The closing entries are the journal entry form
of the Statement of Retained Earnings. The goal is to make the
posted balance of the retained earnings account match what we
reported on the statement of retained earnings and start the next
period with a zero balance for all temporary accounts. This means that it is not an asset, liability, stockholders’ equity, revenue, or expense account.

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. Instead, the basic closing step is to access an option in the software to close the reporting period. Doing so automatically populates the retained earnings account for you, and prevents any further transactions from being recorded in the system for the period that has been closed. Whether you’re posting entries manually or using accounting software, all revenue and expenses for each accounting period are stored in temporary accounts such as revenue and expenses.

A temporary account is an income statement account, dividend account or drawings account. At the end of the accounting period, the balance is transferred to the retained earnings account, and the account is closed with a zero balance. 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. In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts. Closing entries are journal entries used to empty temporary accounts at the end of a reporting period and transfer their balances into permanent accounts.

AccountingTools

The income statement reflects your net income for the month of December. This challenge becomes even more daunting as your business expands. Manual processes struggle to handle the increasing volume of financial transactions and complexities. Instead,  as a form of distribution of a firm’s accumulated earnings, dividends are treated as a distribution of equity of the business.

Completing the Accounting Cycle

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. Take note that closing entries are prepared only for temporary accounts. Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account.

This legal framework should make clear that banks do not act carelessly, hastily or imprudently. Instead, banks manage and mitigate risks based on what they know and can learn about their individual customers as well as a careful determination regarding the level and type of risks they can assume. When they detect unusual activity, banks must follow https://intuit-payroll.org/ their own written internal policies and procedures to investigate, assess and review such activity. Banks’ SAR filing obligations are not themselves the basis for terminating customer relationships. No account closure decision is made in a vacuum, by an algorithm without human review, or without following established (and tested) procedures.

We
have completed the first two columns and now we have the final
column which represents the closing (or archive) process. 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. 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 Income Summary balance is ultimately closed to the capital account.

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. Closing your accounting books consists of making closing entries to transfer temporary account balances into the business’ permanent accounts. The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted. When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match. It is important to understand retained earnings is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close.

Clear the balance of the expense accounts by debiting income summary and crediting the corresponding expenses. A net loss would decrease owner’s capital, so we would do the opposite in this journal entry by debiting the capital account and crediting Income Summary. The closing entries are also recorded so that the company’s retained earnings account shows any actual increase in revenues from the prior year and also shows any decreases from dividend payments and expenses. When closing the revenue account, you will take the revenue listed in the trial balance and debit it, to reduce it to zero. As a corresponding entry, you will credit the income summary account, which we mentioned earlier.

Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7 were covered in The Adjustment Process. Remember that all revenue, sales, income, payroll expert support and gain accounts are closed in this entry. Because you paid dividends, you will need to reduce your retained earnings account, which is what this entry accomplishes.

Clear the balance of the revenue account by debiting revenue and crediting income summary. Whether you’re processing closing entries manually, or letting your accounting software do the work, closing entries are perhaps the most important part of the accounting cycle. Instead the balances in these accounts are moved at month-end to either the capital account or the retained earnings account. Corporations will close the income summary account to the retained earnings account. Whether you credit or debit your income summary account will depend on whether your revenue is more than your expenses.

What is a Closing Entry?

You can do this by debiting the income summary account and crediting your capital account in the amount of $250. This reflects your net income for the month, and increases your capital account by $250. Temporary accounts are used to record accounting activity during a specific period.

The income summary account is only used in closing process accounting. Basically, the income summary account is the amount of your revenues minus expenses. You will close the income summary account after you transfer the amount into the retained earnings account, which is a permanent account. Notice that the effect of this closing journal entry is to credit the retained earnings account with the amount of 1,400 representing the net income (revenue – expenses) of the business for the accounting period. The purpose of closing entries is to prepare the temporary accounts for the next accounting period. Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account.

What are Temporary Accounts?

Because expenses are decreased by credits, you must credit the account and debit the income summary account. When you manage your accounting books by hand, you are responsible for a lot of nitty-gritty details. One of your responsibilities is creating closing entries at the end of each accounting period. In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year.