Use Closing Entries to Wrap up Your Accounting Period

” Could we just close out revenues and expensesdirectly into retained earnings and not have this extra temporaryaccount? We could do this, but by having the Income Summaryaccount, you get a balance for net income a second time. This givesyou the balance to compare to the income statement, and allows youto double check that all income statement accounts are closed andhave correct amounts. If you put the revenues and expenses directlyinto retained earnings, you will not see that check figure.

Unit 4: Completion of the Accounting Cycle

Examples are cash, accounts receivable, accounts payable, and retained earnings. These accounts carry their ending balances into the next accounting period and are not reset to zero. Then you are going to create a journal entry to transfer the balance of each temporary account to the appropriate permanent account.

Financial Accounting

For the rest of the year, the income summary account maintains a zero balance. The final step in the merchandising accounting cycle would be to prepare a post-closing trial balance. The post closing trial balance will contain assets, liabilities, common stock and the new ending balance calculated for retained earnings.

Closing Entries Accounting with Automation

• Imagine you own a bakery business, and you’re starting a new financial year on March 1st.
• This is the same figure found on the statement ofretained earnings.
• After the closing journal entry, the balance on the dividend account is zero, and the retained earnings account has been reduced by 200.
• After this entry is made, all temporary accounts, including the income summary account, should have a zero balance.
• In summary, the accountant resets the temporary accounts to zero by transferring the balances to permanent accounts.
• This process prepares accounts for the next financial year, allowing the business to start fresh with zero balances in its income and expense accounts.

And in this case, the income summary is going to have a credit balance. Because the revenues were credits, so those credits were bigger than the expenses, those debits. So we end up with a net credit balance in the income summary. So since it has a credit balance, we need to use a debit to get rid of the income summary, and the opposite would be true.

• Are the value of your assets and liabilities now zero because of the start of a new year?
• The company can make the closing entry for revenues by debiting all the revenues accounts and crediting the income summary account.
• We’ll use a company called MacroAuto that creates and installs specialized exhaust systems for race cars.
• Likewise, all revenue accounts and all expenses accounts will be closed by transferring all revenues and expenses to the income summary account.
• This kind of going to summarize our income into one account in the income summary account.

For example, the balance of a revenue account will go to the income summary. If you paid out dividends during the accounting period, you must close your dividend account. Now that the income summary Medical Billing Process account is closed, you can close your dividend account directly with your retained earnings account. The company can make the income summary journal entry for the expenses by debiting the income summary account and crediting the expense account.

• At the end of a period, the balances of all income and expense accounts are transferred to the income summary account.
• Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow.
• And without closing expense accounts, you couldn’t compare your business expenses from period to period.
• This is the second stage in using the income summary account; the account should now have a zero balance.
• Accounts can be closed on a monthly, quarterly, semi-annual or annual basis.
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Close all expense and loss accounts

Therefore, these accounts still have a balance in the new year, because they are not closed, and the balances are carried forward from December 31 to January 1 to start the bookkeeping new annual accounting period. Only incomestatement accounts help us summarize income, so only incomestatement accounts should go into income summary. What is the current book value ofyour electronics, car, and furniture? Are the value of your assets andliabilities now zero because of the start of a new year? Your car,electronics, and furniture did not suddenly lose all their value,and unfortunately, you still have outstanding debt.

It lists the current balances in all your general ledger accounts. In this case, we can see the snapshot of the opening trial balance below. Closing the books not only helps to ensure the accuracy and completeness of the financial statements but also provides a clean set of income summary account books for the next accounting period.

Step 2 – Closing of Expense Accounts

We have completed the first two columns and now we have the final column which represents the closing (or archive) process. You can close your books, manage your accounting cycle, issue invoices, pay back vendor bills, and so much more, from any device with an internet connection, just by downloading the Deskera mobile app. We at Deskera offer the best accounting software for small businesses today. Our program is specifically developed for you to easily set up your closing process and initiate book closing within seconds – no prior technical knowledge necessary. Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings.