Closing Entries: Step by Step Guide

You have also not incurred any expenses yet for rent, electricity, cable, internet, gas or food. This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period. Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total which of the following is not a closing entry of the income summary account after the all temporary accounts have been close should be equal to the net income for the period. Clear the balance of the expense accounts by debiting income summary and crediting the corresponding expenses.

Closing Journal Entries Process

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. Closing, or clearing the balances, means returning the account to a zero balance. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings.

Financial and Managerial Accounting

• All generated revenue of a period is transferred to retained earnings so that it is stored there for business use whenever needed.
• Accountants may perform the closing process monthly or annually.
• The Income Summary balance is ultimately closed to the capital account.
• Notice that revenues, expenses, dividends, and income summary all have zero balances.
• To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019.

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. Any account listed on the balance sheet is a permanent account, barring paid dividends. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent.

Trial Balance

The following video summarizes how to prepare closing entries. All accounts can be classified as either permanent (real) or temporary (nominal) the following Figure 1.27. Closing entries help in the reconciliation of accounts which facilitates in controlling the overall financials of a retained earnings firm.

Close all revenue and gain accounts

• The remaining balance in Retained Earnings is $4,565 (Figure 5.6).
• Now that all the temporary accounts are closed, the income summary account should have a balance equal to the net income shown on Paul’s income statement.
• The post-closing T-accounts will be transferred to the post-closing trial balance, which is step 9 in the accounting cycle.
• The income summary account must be credited and retained earnings reduced through a debit in the event of a loss for the period.
• This resets the income accounts to zero and prepares them for the next year.

Permanent Bookkeeping for Consultants accounts are accounts that show the long-standing financial position of a company. These accounts carry forward their balances throughout multiple accounting periods. Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings.