Closing entries take place at the end of an accounting cycle as a set of journal entries. The closing entries serve to transfer these temporary account balances to permanent entries on the company's balance sheet. This resets the balance of the temporary accounts to zero, ready to begin the next accounting period. Show
The balance sheet's assets, liabilities, and owner's equity accounts, however, are not closed. These permanent accounts and their ending balances act as the beginning balances for the next accounting period. Key Takeaways
The Purpose of Closing EntriesA term often used for closing entries is "reconciling" the company's accounts. Accountants perform closing entries to return the revenue, expense, and drawing temporary account balances to zero in preparation for the new accounting period. The closing entries are also recorded so that the company's retained earnings account shows any actual increase in revenues from the prior year and also shows any decreases from dividend payments and expenses. Retained earnings are those earnings not distributed to shareholders as dividends, but retained for further investment, often in advertising, sales, production, and equipment. The Income Summary AccountThe income summary account serves as a temporary account used only during the closing process. It contains all the company's revenues and expenses for the current accounting time period. In other words, it contains net income or the earnings figure that remains after subtracting all business expenses, depreciation, debt service expense, and taxes. The income summary account doesn't factor in when preparing financial statements because its only purpose is to be used during the closing process. Four Steps to Complete Closing EntriesComplete the closing entries using the following steps:
For most companies, this completes the accounting cycle for the current time period. Closing Entry Shortcuts and Software HandlingThe four-step method described above works well because it provides a clear audit trail. For smaller businesses, it might make sense to bypass the income summary account and instead close temporary entries directly to the retained earnings account. The end result is equally accurate, with temporary accounts closed to the retained earnings account for presentation in the company's balance sheet. In some cases, accounting software might automatically handle the transfer of balances to an income summary account, once the user closes the accounting period. The entries take place "behind the scenes," often with no income summary account showing in the chart of accounts or other transaction records. Frequently Asked Questions (FAQs)What are closing entries?Closing entries are journal entries you make at the end of an accounting cycle that movie temporary account balances to permanent entries on your company's balance sheet. What are the four closing entries in order?The four closing entries are, generally speaking, revenue accounts to income summary, expense accounts to income summary, income summary to retained earnings, and dividend accounts to retained earnings. Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. What is the closing entry for an income statement account with a credit balance?Close the income statement accounts with credit balances (normally revenue accounts) to a special temporary account named income summary. Close the income statement accounts with debit balances (normally expense accounts) to the income summary account.
What is the closing entry for income accounts?A closing entry is a journal entry made at the end of the accounting period. It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. All income statement balances are eventually transferred to retained earnings.
What accounts are closed with a credit to income summary?Only revenue, expense, and dividend accounts are closed—not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are: Closing the revenue accounts—transferring the credit balances in the revenue accounts to a clearing account called Income Summary.
Which entry is required to close income summary when it has a credit balance after revenues and expenses have been closed?Answer and Explanation: If Income Summary has a credit balance after revenues and expenses have been closed into it, the closing entry for Income Summary will include a D) credit to the owner's capital account.
|