5 1: Describe and Prepare Closing Entries for a Business Business LibreTexts

Income summary is a holding account used to aggregate all income accounts except for dividend expenses. It’s not reported on any financial statements because it’s only used during the closing process and the account balance is zero at the end of the closing process. The purpose of the closing entry is to reset temporary account balances to zero on the general ledger, the record-keeping system for a company’s financial data.

Accounts that are Debited in the Closing Entries

Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7were covered in The Adjustment Process. Thus, the income summary temporarily holds only revenue and expense balances. All modern accounting software automatically generates closing entries, so these entries are no longer required of the accountant; it is usually not even apparent that these entries are being made. Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided. The income statement summarizes your income, as does income summary.

Everything You Need To Build Your Accounting Skills

Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account. These accounts are closed directly to retained earnings by recording a credit to the dividend account and a debit to retained earnings. Closing journal entries are made at the end of an which of the following accounts will be debited in the closing entry at the end of the year? accounting period to prepare the accounting records for the next period. They zero-out the balances of temporary accounts during the current period to come up with fresh slates for the transactions in the next period. The balance sheet’s assets, liabilities, and owner’s equity accounts, however, are not closed.

1: Describe and Prepare Closing Entries for a Business

Notice that revenues, expenses, dividends, and income summaryall have zero balances. The post-closing T-accounts will be transferred to thepost-closing trial balance, which is step 9 in the accountingcycle. You might be asking yourself, “is the Income Summary accounteven necessary?

What are Closing Entries and How to Record them in Accounting?

That’s exactly what we will be answering in this guide –  along with the basics of properly creating closing entries for your small business accounting. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings. 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. Wehave completed the first two columns and now we have the finalcolumn which represents the closing (or archive) process. We have completed the first two columns and now we have the final column which represents the closing (or archive) process.

• A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account.
• Keep in mind, however, that this account is only purposeful for closing the books, and thus, it is not recorded into any accounting reports and has a zero balance at the end of the closing process.
• The credit to income summary should equal the total revenue from the income statement.
• The third entry closes the Income Summary account to Retained Earnings.
• Temporary accounts are accounts in the general ledger that are used to accumulate transactions over a single accounting period.

To further clarify this concept, balances are closed to assure all revenues and expenses are recorded in the proper period and then start over the following period. The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period. However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period. As mentioned, temporary accounts in the general ledger consist of income statement accounts such as sales or expense accounts.

Example of Where Closing Entries Are

• To find the Expenses, just like for Revenue, you would also find it in the Income Statement.
• The credit to income summary should equalthe total revenue from the income statement.
• However, your business is also free to handle closing entries monthly, quarterly, or every six months.
• Operating expenses include employee salaries and office supplies incurred by a firm to maintain it.
• The Retained Earnings account balanceis currently a credit of $4,665.