Closing Entries: Step by Step Guide

These accounts are temporary because they keep their balances during the current accounting period and are set back to zero when the period ends. Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings. 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. Stockholders’ equity accounts will also maintain their balances.

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It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000. 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. Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings. Notice that the balance of the Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses.

Income Summary

At the end of the year, all the temporary accounts must be closed or reset, so the beginning of the following year will have capitalized cost a clean balance to start with. In other words, revenue, expense, and withdrawal accounts always have a zero balance at the start of the year because they are always closed at the end of the previous year. The next day, January 1, 2019, you get ready for work, but before you go to the office, you decide to review your financials for 2019.

These permanent accounts show a company’s long-standing financials. The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts. Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary. The total debit to income summary should match total expenses from the income statement. Notice that revenues, expenses, dividends, and income summary all have zero balances.

What do closing entries include?

What are your xero accounting software review for 2021 total expenses for rent, electricity, cable and internet, gas, and food for the current year? 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. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2).

The balances from these temporary accounts have been transferred to the permanent account, retained earnings. This process ensures that your temporary accounts are properly closed out sequentially, and the relevant balances are transferred to the income summary and ultimately to the retained earnings account. 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.

Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5). The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. To close revenue accounts, you first transfer their balances to the income summary account.

1. The first part is the date of declaration, which creates the obligation or liability to pay the dividend.
2. Both closing entries are acceptable and both result in the same outcome.
3. 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.
4. Now that we have closed the temporary accounts, let’s review what the post-closing ledger (T-accounts) looks like for Printing Plus.
5. The business has been operating for several years but does not have the resources for accounting software.

The closing journal entries example comprises of opening and closing balances. Opening entries include revenue, expense, Depreciation etc., while closing entries include closing balance of revenue, liability, Depreciation etc. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account. Let’s investigate an example of how closing journal entries impact a trial balance.

Permanent accounts are accounts that show the long-standing financial position of a company. These accounts carry forward their balances throughout multiple accounting periods. All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary.