Closing Entry: What It Is and How to Record One

Theclosing entry will credit Dividends and debit RetainedEarnings. Notice that the balances in the expense accounts are now zeroand are ready to accumulate expenses in the next period. The IncomeSummary account has a new credit balance of $4,665, which is thedifference between revenues and expenses (Figure5.5). The balance in Income Summary is the same figure as whatis reported on Printing Plus’s Income Statement.

• Now that we have closed the temporary accounts, let’s review what the post-closing ledger (T-accounts) looks like for Printing Plus.
• Conversely, if the income summary account has a net debit balance i.e. when the sum of the debit side is greater than the sum of the credit side, it represents a net loss.
• When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match.
• Manually creating your closing entries can be a tiresome and time-consuming process.
• After Paul’s Guitar Shop prepares its closing entries, the income summary account has a balance equal to its net income for the year.
• Alright, so those are temporary accounts being our income statement accounts plus dividends that are permanent accounts.
• The company can make the income summary journal entry for the expenses by debiting the income summary account and crediting the expense account.

Streamlined closing process

This way each accounting period starts with a zero balance in all the temporary accounts, so revenues and expenses are only recorded for current years. Accountants may perform the closing process monthly or annually. The closing entries are the journal entry form of the Statement of Retained Earnings. The goal is Bakery Accounting to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts.

Example 7: Closing Cost of Goods Sold (COGS)

Income summary account is a temporary account used to make closing entries. All temporary accounts must be reset to zero at the end of the accounting period. In this way, the balances are emptied into the income summary account. The income summary account then transfers the net balance of all the temporary accounts to retained earnings, which is a permanent account on the balance sheet. Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts. The new account, Income Summary, will be discussed shortly.

• There was a revenue account with a balance in it; we just negated that balance down to 0.
• 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.
• These entries ensure all temporary accounts are closed, and the balances are transferred to retained earnings, updating the equity section of the balance sheet.
• All of Paul’s revenue or income accounts are debited and credited to the income summary account.

Cash Flow Statement

The $5,000 credit entry illustrates an increase in the company’s retained earnings account. The company can make the income summary journal entry by debiting the income summary account and crediting the retained earnings if the company makes a net income. Dividends are close to the income summary and retained earnings. Therefore, the retained earnings account shows the earnings that are kept, net income fewer dividends in the business. Moreover, the What is bookkeeping closing procedure shows that revenue, expense, and dividend accounts are retained earnings subcategories. The income summary is a temporary account where all the temporary accounts, such as revenues and expenses, are recorded.

• Thebalance in the Income Summary account equals the net income or lossfor the period.
• In order to cancel out the credit balance, we would need to debit the account.
• Carter earned his Bachelor of Science in accounting from Eastern Illinois University.
• We know the change in the balance includes net income and dividends.
• Once we have obtained the opening trial balance, the next step is to identify errors if any, make adjusting entries, and generate an adjusted trial balance.
• It also helps the company keep thorough records of account balances affecting retained earnings.

So to get rid of the expenses with debit balances, we’re going to need to credit all those expenses. I’m pulling all these expenses from that adjusted trial balance, and it’s just going to go down the income summary account line. Supplies expense was 300, depreciation 400, utilities 500, and income tax 600. These were all the expenses from the adjusted trial balance and now they’ve been zeroed out, right? Because they had a debit balance, we credited them the same amount, so that negates it down to 0.

An income summary is a summary of income and expenses for a certain period, with the result being profit or loss. It is a necessary instrument for the preparation of financial statements. It acts as a checkpoint and reduces errors in financial statement preparation by directly transferring the balance from revenue and spending accounts. Permanent accounts, also known as real accounts, do not require closing entries.

We now close the Distributions account to Retained Earnings. Distributions has a debit balance so we credit the account to close it. Our debit, reducing the balance in the account, is Retained Earnings.