Closing Entry Definition, Explanation, and Examples

The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company’s financial data. Permanent accounts are accounts that show the long-standing financial position of a company. These accounts carry forward their balances throughout multiple accounting periods. However, some corporations use a temporary clearing account for dividends declared (let’s use “Dividends”). They’d record declarations by debiting Dividends Payable and crediting Dividends.

To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019. After preparing the closing entries above, Service Revenue will now be zero. closing entries accounting The expense accounts and withdrawal account will now also be zero. After this closing entry has been posted, each of these revenue accounts has a zero balance, whereas the Income Summary has a credit balance of $7,400.

What is the closing entry process?

Printing Plus has $100 of supplies expense, $75 of depreciation
expense–equipment, $5,100 of salaries expense, and $300 of utility
expense, each with a debit balance on the adjusted trial balance. The closing entry will credit Supplies Expense, Depreciation
Expense–Equipment, Salaries Expense, and Utility Expense, and debit
Income Summary. You might be asking yourself, “is the Income Summary account
even necessary? ” Could we just close out revenues and expenses
directly into retained earnings and not have this extra temporary
account? We could do this, but by having the Income Summary
account, you get a balance for net income a second time. This gives
you the balance to compare to the income statement, and allows you
to double check that all income statement accounts are closed and
have correct amounts.

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. All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary. The end result is equally accurate, with temporary accounts closed to the retained earnings account for presentation in the company’s balance sheet.

Practice Questions: Types of Accounts

Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero. Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. 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
third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings. The information needed to prepare closing entries comes from the
adjusted trial balance. The first entry closes revenue accounts to the Income Summary account.

Example of closing entries

On the statement of retained earnings, we reported the
ending balance of retained earnings to be $15,190. We need to do
the closing entries to make them match and zero out the temporary
accounts. Only income
statement accounts help us summarize income, so only income
statement accounts should go into income summary. Permanent (real) accounts are accounts that
transfer balances to the next period and include balance sheet
accounts, such as assets, liabilities, and stockholders’ equity. These accounts will not be set back to zero at the beginning of the
next period; they will keep their balances.