What Are Closing Entries and How Do You Record Them?

” 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. Nomatter which way you choose to close, the same final balance is inretained earnings.

Process of preparing closing entries

To make them zero we want to decrease the balance or do the opposite. We will debit the revenue accounts and credit the Income Summary account. The credit to income summary should equal the total revenue from the income statement. A term often used for closing entries is “reconciling” the company’s accounts.

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Printing Plus has $100 ofdividends with a debit balance on the adjusted trial balance. Theclosing entry will credit Dividends and debit RetainedEarnings. If the income summary account has a credit balance, it means the business has earned a profit during the period and increased its retained earnings. The income summary account is, therefore, closed by debiting the income summary account and crediting the retained earnings account.

Account

• The Retained Earnings account balanceis currently a credit of $4,665.
• Notice that the balances in the expense accounts are now zeroand are ready to accumulate expenses in the next period.
• In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner.
• The permanent account to which the balances of all temporary accounts are closed is the retained earnings account in the case of a company and the owner’s capital account in the case of a sole proprietorship.
• We need to do the closing entries to make them match and zero out the temporary accounts.
• To make them zero we want to decrease the balance or do the opposite.
• A company will see its revenue andexpense accounts set back to zero, but its assets and liabilitieswill maintain a balance.

After the financial statements are finalized and you are 100 percent sure that all the adjustments are posted and everything is in balance, you create and post the closing entries. The closing entries are the last journal entries that get posted to the ledger. As the drawings account is a contra equity account and not an expense account, it is closed closing entries to the capital account and not the income summary or retained earnings account.

• This process confirms all temporary accounts have been closed and the books are ready for the new fiscal year.
• With the completion of step 4, the necessary closing entries are completed, and all temporary accounts (i.e., revenue, expense, dividend, and income summary) are closed to a permanent account (i.e., retained earnings account).
• What are your total expenses forrent, electricity, cable and internet, gas, and food for thecurrent year?
• If both summarizeyour income in the same period, then they must be equal.
• Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

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Let’s explore each entry in more detail using Printing Plus’sinformation from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plusadjusted trial balance for January 31, 2019, is presented inFigure 5.4. The flux analysis serves as a final check to ensure the completeness and accuracy https://www.bookstime.com/articles/internal-vs-external-audit of your financial records.

For corporations, Income Summary is closed entirely 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. The T-account summary for Printing Plus CARES Act after closing entriesare journalized is presented in Figure 5.7.