The
closing entry will credit Dividends and debit Retained
Earnings. Notice that the balances in the expense accounts are now zero
and are ready to accumulate expenses in the next period. The Income
Summary account has a new credit balance of $4,665, which is the
difference between revenues and expenses (Figure
5.5). The balance in Income Summary is the same figure as what
is reported on Printing Plus’s Income Statement.

1. Closing entry to account for draws taken for the month, for sole proprietors and partnerships.
2. Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step.
3. Journal entries are an essential part of the accounting process for any business.
4. Closing Entries are not needed with accounting software because the work of the Closing Entries is done behind the scenes.
5. One of the most important steps in the accounting cycle is creating and posting your closing entries.

Now that the journal entries are prepared and posted, you are almost ready to start next year. Remember, modern computerized accounting systems go through this process in preparing financial statements, but the system does not actually create or post journal entries. The purpose of closing entries is to merge your accounts so you can determine your retained earnings.

Journal Entries for Closing Using Income Summary

To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019. Instead, the basic closing step is to access an option in the software to close the reporting period. Doing so automatically populates the retained earnings account for you, and prevents any further transactions from being recorded in the system for the period that has been closed. Once adjusting entries have been made, closing entries are used to reset temporary accounts and transfer their balances to permanent accounts. 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.

In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company. The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet. These permanent accounts form the foundation of your business’s balance sheet. The trial balance is like a snapshot of your business’s financial health at a specific moment.

Our discussion here begins with journalizing and posting the
closing entries (Figure
5.2). These posted entries will then translate into a
post-closing trial balance, which is a trial
balance that is prepared after all of the closing entries have been
recorded. The next day, January 1, 2019, you get ready for work, but before you go to the office, you decide to review your financials for 2019. What are your total expenses for rent, electricity, cable and internet, gas, and food for the current year? You have also not incurred any expenses yet for rent, electricity, cable, internet, gas or food.

Close all revenue and gain accounts

As you will see later, Income Summary is eventually closed to capital. Accruing tax liabilities in accounting involves recognizing and recording taxes that a company owes but has not yet paid. This is important for accurate financial reporting and compliance with… After Closing Entries in the accounting cycle, a Post-Closing Trial Balance would be created. Just like a normal Trial Balance, it will contain and display all accounts that have non-zero balances and see if the debits and credits will balance. This entry zeros out dividends and reduces retained earnings by total dividends paid.

Closing Entries Accounting with Automation

A process where all temporary accounts opened in the fiscal year are transferred and closed to a permanent arrangement. Doing so will give zero balance to the brief history to use for the next fiscal year. Only income
statement accounts help us summarize income, so only income
statement accounts should go into income summary.

The fourth entry requires Dividends to close to the Retained
Earnings account. Remember from your past studies that dividends
are not expenses, such as salaries paid to your employees or staff. Instead, declaring and paying dividends is a method utilized by
corporations to return part of the profits generated by the company
to the owners of the company—in this case, its shareholders. Understanding the accounting cycle and preparing trial balances
is a practice valued internationally.

The income statement summarizes your income, as does income summary. If both summarize your income in the same period, then they must be equal. Below are the T accounts with the journal entries already posted. From the Deskera “Financial Year Closing” tab, you can easily choose the duration of your accounting closing period and the type of permanent account you’ll be closing your books to.

This is an optional step
in the accounting cycle that you will learn about in future
courses. Steps 1 through 4 were covered in
Analyzing and Recording Transactions and Steps 5 through 7
were covered in
The Adjustment Process. In this segment, we complete the final steps (steps 8 and 9) of the accounting cycle, the closing process. This is an optional step in the accounting cycle that you will learn about in future courses. HighRadius Autonomous Accounting Application consists of End-to-end Financial Close Automation, AI-powered Anomaly Detection and Account Reconciliation, and Connected Workspaces. Delivered as SaaS, our solutions seamlessly integrate bi-directionally with multiple systems including ERPs, HR, CRM, Payroll, and banks.

The income statement
summarizes your income, as does income summary. If both summarize
your income in the same period, then they must be equal. The eighth step in the accounting cycle is preparing closing
entries, which includes journalizing and posting the entries to the
ledger. The
business has been operating for several https://simple-accounting.org/ years but does not have the
resources for accounting software. This means you are preparing all
steps in the accounting cycle by hand. Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet.

It lists the current balances in all your general ledger accounts. In this case, since it’s an opening trial balance, we’re just getting started with the accounting cycle (Step 1). Let’s investigate an example of how closing journal entries impact a trial balance. Imagine you own a bakery business, and you’re starting a new financial year on March 1st. This time period, called the accounting period, usually reflects one fiscal year. However, your business is also free to handle closing entries monthly, quarterly, or every six months.

Prepare the closing entries for Frasker Corp. using the adjusted
trial balance provided. 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. Printing nonprofit statement of cash flows Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings. We’ll use a company called MacroAuto that creates and installs specialized exhaust systems for race cars.

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. All the temporary accounts, including revenue, expense, and dividends, have been reset to zero. The balances from these temporary accounts have been transferred to the permanent account, retained earnings. In summary, permanent accounts hold balances that persist from one period to another.

They are created to hold the accumulated balances from entries/transactions in the general ledger. Because you paid dividends, you will need to reduce your retained earnings account, which is what this entry accomplishes. For sole proprietorships and partnerships, you’ll close your drawing account to your capital account, because you will need to reduce your capital account by the draws taken for the month. This transaction increases your capital account and zeros out the income summary account. Revenue is one of the four accounts that needs to be closed to the income summary account.

Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings. In other words, they represent the long-standing finances of your business. Notice that the balance of the Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses. To begin the process, you must have prepared three crucial pieces of information.