We see from the adjusted trial balance that our revenue accounts have a credit balance. To make them zero we want to product quality in operations and supply chains decrease the balance or do the opposite. We will debit the revenue accounts and credit the Income Summary account.
Recording a Closing Entry
The process of closing entries in accounting ensures the temporary accounts have a balance of zero at the end of the period. The funds must be transferred into another account, the income summary account, to bring each account balance down to zero. The statement of retained earnings shows the period-endingretained earnings after the closing entries have been posted. Whenyou compare the retained earnings ledger (T-account) to thestatement of retained earnings, the figures must match. It isimportant to understand retained earnings is not closed out, it is only updated.
What are the transactions made at the end of an accounting period?
The fourth entry requires Dividends to close to the RetainedEarnings account. Thebusiness has been operating for several years but does not have theresources for accounting software. This means you are preparing allsteps in the accounting cycle by hand. Closing entries are the journal entries used at the end of an accounting period. Do you want to learn more about debit, credit entries, and how to record your journal entries properly?
What Is an Accounting Period?
What is the current book value ofyour electronics, car, and furniture? Are the value of your assets andliabilities now zero because of the start of a new year? Your car,electronics, and furniture did not suddenly lose all their value,and unfortunately, you still have outstanding debt. Therefore,these accounts still have a balance in the new year, because theyare not closed, and the balances are carried forward from December31 to January 1 to start the new annual accounting period. Our discussion here begins with journalizing and posting theclosing entries (Figure5.2).
- The $10,000 of revenue generated through the accounting period will be shifted to the income summary account.
- Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step.
- Now that we have closed thetemporary accounts, let’s review what the post-closing ledger(T-accounts) looks like for Printing Plus.
- The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period.
- The balances from these temporary accounts have been transferred to the permanent account, retained earnings.
By leveraging automated systems, businesses can ensure that all tasks related to closing entries are handled seamlessly, reducing manual effort and minimizing errors. Once we have made the adjusting entries for the entire accounting year, we have obtained the adjusted trial balance, which reflects an accurate and fair view of the bakery’s financial position. 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 that, we debit Service Revenue for the full amount and credit Income Summary for the same.
Get Started
These accounts, including examples like cash, accounts receivable, accounts payable, and retained earnings, carry their ending balances into the next accounting period and are not reset to zero, unlike temporary accounts. Closing entries are a necessary part of the accounting cycle as they allow businesses to generate financial statements and file tax returns every month and year accurately. It is important to note that previous accounting period data should not be carried over into a new period, as it can greatly skew information and negatively impact businesses. Each period must use fresh accounts to begin recording transactions anew and start the process all over again.
The month-end close is when a business collects financial accounting information. Using the above steps, let’s go through an example of what the closing entry process may look like. Below are the T accounts with the journal entries already posted. We’ll use a company called MacroAuto that creates and installs specialized exhaust systems for race cars.
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. After the posting of this closing entry, the income summary now has a credit balance of $14,750 ($70,400 credit posted minus the $55,650 debit posted).
