Closing entries Closing procedure

A trial balance is a report that can be run to verify that the total debits for an accounting period equal the total credits for the same. In it, the account balances for temporary accounts can be found and used to prepare the closing entries. 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. The income summary account balance depends on whether or not the business in question earns or loses money during the accounting period being closed. The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance.

When the income statement is published at the end of the year, the balances of these accounts are transferred to the income summary, which is also a temporary account. A closing entry is an accounting entry that is used to transfer the balances of temporary accounts to permanent accounts. Below are some of the examples of closing entries that can be used to transfer revenue and expense account balances into income summary and from there to the retained earnings. The permanent accounts in which balances are transferred depend upon the nature of business of the entity. For example, in the case of a company permanent accounts are retained earnings account, and in case of a firm or a sole proprietorship, owner’s capital account absorbs the balances of temporary accounts.

What is a Closing Entry?

That means it would have a balance at the end of the year and be shown in the balance sheet. All accounts provided on the balance sheet, with the exception of dividends, is permanent. These entries are created to prepare a business for the next accounting bookkeeping for startups period. The Business Consulting Company, which closes its accounts at the end of the year, provides you the following adjusted trial balance at December 31, 2015. This entry zeros out dividends and reduces retained earnings by total dividends paid.

• This is done through a four-step process often known by the acronym REID (Revenue, Expenses, Income Summary, Dividends).
• A company will see its revenue and expense accounts set back to zero, but its assets and liabilities will maintain a balance.
• Notice that the balances in interest revenue and service revenue are now zero and are ready to accumulate revenues in the next period.
• 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.
• Now that the income summary account is closed, you can close your dividend account directly with your retained earnings account.

This transaction increases your capital account and zeros out the income summary account. One of the most important steps in the accounting cycle is creating and posting your closing entries. 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. 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.

Close Expense Accounts

They are reported under the head current liabilities on the balance sheet, and this account is debited whenever any payment has been made. The closing entries reset the balances of these temporary accounts to zero. ‘Total expenses‘ account is credited to record the closing entry for expense accounts. This will zero out the balance in each of the expense accounts and transfer it to the income summary account. This will zero out the balance in each of the revenue accounts and transfer it to the income summary account.

• Closing entries prepare a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period.
• 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.
• Transfer the balance of dividends account directly to retained earnings account.
• Are the value of your assets and liabilities now zero because of the start of a new year?
• The income statement reflects your net income for the month of December.
• Remember from your past studies that dividends are not expenses, such as salaries paid to your employees or staff.

In other words, temporary accounts are reset for the recording of transactions for the next accounting period. By doing so, companies move the temporary account balances to the permanent accounts of the balance sheet. 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.

Close Income Summary

You need to use closing entries to reduce the value of your temporary accounts to zero. That way, your next accounting period does not have a balance in your revenue or expense account from the previous period. 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. If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends.

As mentioned earlier, this is just an intermediate account that is used to zero out all the other revenues and expenses accounts into one place. The balances of the income summary account will eventually also be transferred to the retained earnings account on the balance sheet. It can directly be closed in the retained earnings account or it can be done through a longer process. The longer process requires temporary accounts to be closed in an intermediate income summary account first and then that account is zeroed out to the retained earnings. The result in both cases is the same and depends on the bookkeeper’s preference or company’s policy on it.

This will ensure that the balances of those expenses account are transferred to the income summary account. From the income summary account, the net balance of the temporary accounts will be transferred to retained earnings, a permanent account that is listed on the balance sheet. The permanent account to which the balances of all temporary accounts are closed is the retained earnings account in case of a company and owner’s capital account in case of a sole proprietorship. Your closing journal entries serve as a way to zero out temporary accounts such as revenue and expenses, ensuring that you begin each new accounting period properly. It is also possible to bypass the income summary account and simply shift the balances in all temporary accounts directly into the retained earnings account at the end of the accounting 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.

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