Closing Entries: Definition, Types, and Examples

closing journal entries

The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. This balance is then transferred to the Retained Earnings account.

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The income summary account then transfers the net balance of all the temporary accounts to retained earnings, which is a permanent account on proper use of trademarks and trademark symbols the balance sheet. A sole proprietor or partnership often uses a separate drawings account to record withdrawals of cash by the owners. Although the drawings account is not an income statement account, it is still classified as a temporary account and needs a closing journal entry to zero the balance for the next accounting period. Although it is not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period. Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account. The first entry closes revenue accounts to the Income Summary account.

As the drawings account is a contra equity account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account. 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. What are your 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. 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.

closing journal entries

Time Value of Money

  1. Understanding the accounting cycle and preparing trial balances is a practice valued internationally.
  2. Temporary accounts are used to record accounting activity during a specific period.
  3. They’re housed on the balance sheet, a section of financial statements that gives investors an indication of a company’s value including its assets and liabilities.
  4. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7.
  5. It is permanent because it is not closed at the end of each accounting period.

These accounts carry forward their balances throughout multiple accounting periods. The purpose of the income summary is to show the net income (revenue less expenses) of the business in more detail before it becomes part of the retained earnings account balance. These entries are made to update retained earnings to reflect the results of operations and to eliminate the balances in the revenue and expense accounts, enabling them to be used again in a subsequent period. All of these entries have emptied the revenue, expense, and income summary accounts, and shifted the net profit for the period to the retained earnings account. Accounts are considered “temporary” when they only accumulate transactions over one single accounting period.

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The second entry closes expense accounts to the Income Summary account. The third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings.

Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. However, if the company also wanted to keep year-to-date information from month to month, a separate set of records could be kept as the company progresses through the remaining months in the year. For our purposes, assume that we are closing the books at the end of each month unless otherwise noted.

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The total debit to income summary should match total expenses from the income statement. We see from the adjusted trial balance that cost accounting vs retail accounting our revenue accounts have a credit balance. 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. The purpose of closing entries is to prepare the temporary accounts for the next accounting period.

It is permanent because it is not closed at the end of each accounting period. At the start of the new accounting period, the closing balance from the previous accounting period is brought forward and becomes the new opening balance on the account. Other than the retained earnings account, closing journal entries do not affect permanent accounts.

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