Closing Journal Entries

Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings. Temporary (nominal) accounts are accounts thatare closed at the end of each accounting period, and include incomestatement, dividends, and income summary accounts. This is no different from what will happen to a company at theend of an accounting period. A company will see its revenue andexpense accounts set back to zero, but its assets and liabilitieswill maintain a balance.

What are Temporary Accounts?

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. Closing entries are completed at the end of each accounting period after your adjusted trial balance has been run. One of the most important steps in the accounting cycle is creating and posting your closing entries. The general journal is used to record various types of accounting entries, including closing entries at the end of an accounting period.

  1. You begin the closing process by transferring revenue and expense account balances to the income summary account, a temporary account used specifically to transfer revenue and expense account balances.
  2. One of the most important steps in the accounting cycle is creating and posting your closing entries.
  3. 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.
  4. We could do this, but by having the Income Summary account, you get a balance for net income a second time.
  5. Now that the journal entries are prepared and posted, you are almost ready to start next year.

Step 1: Close Revenue accounts

Companies are required to close their books at the end of each fiscal year so that they can prepare their annual financial statements and tax returns. However, most companies prepare monthly financial statements and close their books annually, so they have a clear picture xero practice manager of company performance during the year, and give users timely information to make decisions. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand.

Step 3 of 3

As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI.

Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance. The closing entry will debit both interest revenue and service revenue, and credit Income Summary. If a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit.