The expense accounts and withdrawal account will now also be zero. The accounts that need to start with a clean or $0 balance going into the next accounting period are revenue, income, and any dividends from January 2019. To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019.

In contrast, temporary accounts capture transactions and activities for a specific period and require resetting to zero with closing entries. If a company’s revenues are greater than its expenses, the closing https://www.bookstime.com/ entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit.

Understanding Closing Entries

This is no different from what will happen to a company at the
end of an accounting period. A company will see its revenue and
expense accounts set back to zero, but its assets and liabilities
will maintain a balance. In summary, the accountant resets the
temporary accounts to zero by transferring the balances to
permanent accounts.

• Understanding the accounting cycle and preparing trial balances
  is a practice valued internationally.
• When making closing entries, the revenue, expense, and dividend account balances are moved to the retained earnings permanent account.
• The four-step method described above works well because it provides a clear audit trail.
• The remaining balance in Retained Earnings is $4,565 the following Figure 5.6.
• If your business is a sole proprietorship or a partnership, your next step will be to close your income summary account.

At the end of a financial period, businesses will go through the process of detailing their revenue and expenses. Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand. Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future.

What Is a Closing Entry?

The first entry requires revenue accounts close to the Income Summary account. To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance. The closing entry will debit both interest revenue and service revenue, and credit Income Summary.

Temporary accounts include revenue, expenses, and dividends, and these accounts must be closed at the end of the accounting year. The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance. The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings.

Closing Entries

These ending balances will carry forward and become the beginning balances in the next period. The income and expenses accounts, on the other hand, will have a zero ending balance and will start the next year with a zero balance. The income summary account is an intermediary between revenues and expenses, and the what does a closing entry look like 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.

Notice that the Income Summary account is now zero and is ready for use in the next period. The Retained Earnings account balance is currently a credit of $4,665. 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.

Unusual Cash Withdrawals

Prepaid Expense is where the Expense is paid in advance before the expense transaction even happens; since it is paid beforehand, the account is viewed as an asset account. Operating expenses include employee salaries and office supplies incurred by a firm to maintain it. The cost of goods sold (materials, direct labor, manufacturing overhead) and capital expenditures are not included in operating expenses (larger expenses such as buildings or machines). The cost of Good Sold is an account that displays the balance of the total cost amount that the company used to produce the products sold. To find the Expenses, just like for Revenue, you would also find it in the Income Statement.

• Income and expenses are closed to a temporary clearing account, usually Income Summary.
• In other words, it contains net income or the earnings figure that remains after subtracting all business expenses, depreciation, debt service expense, and taxes.
• When the income statement is published at the end of the year, the balances of these accounts are transferred to the income summary, which is also a temporary account.
• Only income
  statement accounts help us summarize income, so only income
  statement accounts should go into income summary.
• But Citi and Bank of America were happy to continue to do business with them.
• Once all of the required entries have been made, you can run your post-closing trial balance, as well as other reports such as an income statement or statement of retained earnings.

The $10,000 of revenue generated through the accounting period will be shifted to the income summary account. Any account listed on the balance sheet, barring paid dividends, is a permanent account. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent. Income and expenses are closed to a temporary clearing account, usually Income Summary. Afterwards, withdrawal or dividend accounts are also closed to the capital account. To close the drawing account to the capital account, we credit the drawing account and debit the capital account.

Step 4: Transfer Balance

The closing entry will credit Supplies Expense, Depreciation Expense–Equipment, Salaries Expense, and Utility Expense, and debit Income Summary. The second entry requires expense accounts close to the Income
Summary account. To get a zero balance in an expense account, the
entry will show a credit to expenses and a debit to Income Summary.

In this example, the business will have made $10,000 in revenue over the accounting period. In this example, it is assumed that there is just one expense account. A net loss would decrease retained earnings so we would do the opposite in this journal entry by debiting Retained Earnings and crediting Income Summary. As mentioned above, Temporary Accounts are closed, and their balances are transferred into a Permanent Account. During the process of closing accounts, there are multiple steps and information that you must remember.

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. 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. After the closing entry is made, Bill’s balance sheet would list $8,000 of assets, $3,000 of liabilities, and $5,000 of equity.