Connect with us

Closing Entries

Published

on

Closing entries are used to close out (or bring the balance to $0) temporary accounts (nominal accounts) to Retained Earnings. Basically, closing entries are journal entries to transfer the nominal accounts to the real accounts. For the accounting period being closed, temporary accounts are: revenue, expense, income summary and dividends paid/declared accounts.

For easier understanding and more clearly figure, here is an “Income Statement” example:

Advertisement

Income Statement Example - Closing Entries 

 

Closing Revenues

Revenues reported on the income statement are closed to the income summary account. Since Revenues are posted to the General Ledger as a credit, debiting the Revenue accounts for the total balance will zero them out. The entry to close Revenues to the Income Summary account is as follows:

[Debit]. Revenues = $4,960
[Credit]. Income Summary = 4,960

 

Closing Expenses

Expenses reported on the income statement are closed to the income summary account. Since Expenses are posted to the General Ledger as a debit, crediting the Expense accounts for the total balance will zero them out. The entry to close Expenses to the Income Summary account is as follows:

[Debit]. Income Summary = $4,423
[Credit]. Expenses = 4,423

 

Closing Income Summary

The income summary account is used as a check figure because the balance in the account, after Revenues and Expenses are closed out, should be equal to Net Income or Net Loss for the period being closed. A Net Income for an accounting period creates a credit balance in the income summary account, and a Net Loss creates a debit balance. Now close the Income Summary account to Retained Earnings (debiting or crediting the account depending on the ending balance):

[Debit]. Income Summary = $537
[Credit]. Retained Earnings = 537

 

Closing Dividends

If Dividends were paid or declared during the accounting period in questions, the account will need to be closed out to Retained Earnings. Since Dividends have a debit balance, and reduce Retained Earnings, the account will be credited in order to close it out:

[Debit]. Retained Earnings XXXo
[Credit]. Dividends XXX

 

Finally, the balance in the Retained Earnings account will be the ending retained earnings for the accounting period in question and go on the balance sheet in its proper place.

 

Note: As with other journal entries, closing entries are posted to the right general ledger.

1 Comment

1 Comment

  1. Sep 18, 2009 at 3:13 am

    this is a wonderful reference! Thanks

Leave a Reply

Your email address will not be published. Required fields are marked *




Are you looking for easy accounting tutorial? Established since 2007, centre-potential.ru hosts more than 1300 articles (still growing), and has helped millions accounting student, teacher, junior accountants and small business owners, worldwide.

Trending


Related pages


calculating reorder levelamortisation of intangible assetsbank reconciliation deposit in transitsampling techniques in auditingaudit exam cpabecker cpa bookthe expense recognitioncircular references excel 2010ebit equationmulti step income statement template excelaccumulated impairment lossfictitious synonymsthe expense recognition principle matchesunder the allowance method of accounting for uncollectible accountspartnership goodwill method9 steps of accounting cyclegaap definition of an assettreasury stock account typedefine notes payablegaap rules for capitalization of fixed assetssales allowance journal entryeup accountingrestricted cash balance sheet presentationjournal entries for dummiesfactoring accounting treatmenthow to find annual depreciation ratelinear depreciation formulaage of accounts receivable formulahow to calculate the taxable incomeaccounts receivable templatenotes payable current liabilityebit interest coverage ratiojudgemental forecastingamortization of fixed assetsifrs cash and cash equivalentspassing audit cpa examasset turnover ratio calculationaccounting transposition errorengagement letter for review of financial statementswhat is liquidity ratio formulaelectricity expense journal entryhow to prepare a schedule of accounts receivableexplanation of accounting cycleunit contribution margin formulafactoring expensehow to calculate break even sales revenuecapital lease templatedept of treasury and financeias for leasesdiminishing depreciationexamples of income statementsbudgeted income statement templateirs standard mileage rate 2012initial measurement of property plant and equipmentprocurement process flow chart templatebook reconciling itemslimitation of standard costingbook income vs taxable incomecapitalize or expensedays payable outstanding calculationupkeep definitiondefinition gimmickpbo accountingprepaid rent asset or liabilitymonthly closing entrieshow to calculate forex gain or lossexamples of indirect labor costssunk cost and relevant costaudit of debtorsinstalment sales accountingfactoring accounts receivable with recoursewhat does it mean to capitalize an expendituretally leasing corptotal asset turnover calculationhow to calculate cash coverage ratiotax reconciliation templatehow is roce calculated