5 1 Describe and Prepare Closing Entries for a Business Principles of Accounting, Volume 1: Financial Accounting

You might be asking yourself, “is the Income Summary accounteven necessary? ” Could we just close out revenues and expensesdirectly into retained earnings and not have this extra temporaryaccount? We could do this, but by having the Income Summaryaccount, you get a balance for net income a second time. This givesyou the balance to compare to the income statement, and allows youto double check that all income statement accounts are closed andhave correct amounts. If you put the revenues and expenses directlyinto retained earnings, you will not see that check figure. Nomatter which way you choose to close, the same final balance is inretained earnings.

Step 1: Closing the revenue account

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. This is the adjusted trial balance that will be used to make your closing entries. Closing entries are the journal entries used at the end of an accounting period.

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• Permanent (real) accounts are accounts that transfer balances to the next period and include balance sheet accounts, such as assets, liabilities, and stockholders’ equity.
• However, most companies prepare monthly financial statements and close their books annually, so they have a clear picture of company performance during the year, and give users timely information to make decisions.
• This means that it is not an asset, liability, stockholders’ equity, revenue, or expense account.
• By maintaining your bookkeeping, you can ensure that you are constantly kept informed.

To determine the income (profit orloss) from the month of January, the store needs to close theincome statement information from January 2019. This process results in all revenues and expenses being “corralled” in Income Summary (the net of which represents the income or loss for the period). In turn, the income or loss is then swept to Retained Earnings along with the dividends.

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The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000.

• These permanent accounts form the foundation of your business’s balance sheet.
• You should recall from your previous materialthat retained earnings are the earnings retained by the companyover time—not cash flow but earnings.
• Income summary is a holding account used to aggregate all income accounts except for dividend expenses.
• This means you are preparing allsteps in the accounting cycle by hand.
• To make them zero we want to decrease the balance or do the opposite.
• Suppose a business had the following trial balance before any closing journal entries at the end of an accounting period.
• We will debit the revenue accounts and credit theIncome Summary account.

After the closing journal entry, the balance on the drawings account is zero, and the capital account has been reduced by 1,300. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2). These posted entries will closing entries 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 and final step in the accounting cycle is to prepare one last post-closing trial balance.

• If you put the revenues and expenses directly into retained earnings, you will not see that check figure.
• The T-account summary for Printing Plus after closing entriesare journalized is presented in Figure 5.7.
• This balance is then transferred to the RetainedEarnings account.
• The post-closing trial balance is a tool to demonstrate that accounts are in balance; it is not a formal financial statement.
• This involved reviewing, reconciling, and making sure that all of the details in the ledger add up.
• If the income summary account has a credit balance, it means the business has earned a profit during the period and increased its retained earnings.

The Income Summary Account