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

The purpose of the closing entry is to reset temporary account balances to zero on the general ledger, the record-keeping system for a company’s financial data. ‘Total expenses‘ account is credited to record the closing entry for expense accounts. At the end of a financial period, businesses will go through the process of detailing their revenue and expenses. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary. Hence, strong accounting regulations and policies restrict the public listed companies from abusing certain closing entries: loopholes while producing their financial reports.

Closing Entries: Example

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. The third entry requires Income Summary to close to the RetainedEarnings account. To get a zero balance in the Income Summaryaccount, there are guidelines to consider. With the use of modern accounting software, this process often takes place automatically. That’s why most business owners avoid the struggle by investing in cloud accounting software instead. Closing entries help in the reconciliation of accounts which facilitates in controlling the overall financials of a firm.

• Let’s investigate an example of how closing journal entries impact a trial balance.
• Now, if you’re new to accounting, you probably have a ton of questions.
• The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet.
• The Income Summary balance is ultimately closed to the capital account.
• The IncomeSummary account has a new credit balance of $4,665, which is thedifference between revenues and expenses (Figure5.5).
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For sole proprietorships and partnerships:

If this is the bookkeeping case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings. When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings. Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry. Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations). Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings.

Balance Sheet

Printing Plus has $100 ofdividends with a debit balance on the adjusted trial balance. Theclosing entry will credit Dividends and debit RetainedEarnings. The accounts that need to start with a clean or $0 balance goinginto the next accounting period are revenue, income, and anydividends from January 2019. To determine the income (profit orloss) from the month of January, the store needs to close theincome statement information from January 2019.

Types of Accounts

Made at the end of an accounting period, it transfers balances from a set of temporary accounts to a permanent account. Essentially resetting the account balances to zero on the general ledger. Having a zero balance in theseaccounts is important so a company can compare performance acrossperiods, particularly with income. The permanent accounts in which balances are transferred depend upon the nature of business of the entity.

• It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet.
• In summary, the accountant resets thetemporary accounts to zero by transferring the balances topermanent accounts.
• So for posting the closing entries in the general ledger, the balances from revenue and expense account will be moved to the income summary account.
• Closing entries are an important facet of keeping your business’s books and records in order.
• Automation transforms the process of closing entries in accounting, making it more efficient and accurate.

Unit 4: Completion of the Accounting Cycle

Now, it’s time to close the income summary to the retained earnings (since we’re dealing with a company, not a small business or sole proprietorship). To close expenses, we simply credit the expense accounts and debit Income Summary. In a computerized accounting system, the closing entries are likely done electronically by simply selecting “Closing Entries” or by specifying the beginning and ending dates of the financial statements. As a result, the temporary accounts will begin the following accounting year with zero balances.