Notice that the balances in interest revenue and service revenue are now zero and are ready to accumulate revenues in the next period. The Income Summary account has a credit balance of $10,240 (the revenue sum). Understanding the accounting cycle and preparing trial balances is a practice valued internationally. The Philippines Center for Entrepreneurship and the government of the Philippines hold regular seminars going over this cycle with small business owners. They are also transparent with their internal trial balances in several key government offices.

1. The assumption is that all income from the company in one year is held onto for future use.
2. 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.
3. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
4. 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.
5. The income summary is a temporary account used to make closing entries.

Whether you’re processing closing entries manually, or letting your accounting software do the work, closing entries are perhaps the most important part of the accounting cycle. 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. To close that, we debit Service Revenue for the full amount and credit Income Summary for the same. In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year.

At this point, the accounting cycle is complete, and the business can begin a new cycle in the next accounting period. It is worth mentioning that there is one step in the process that a business may or may not include, step 10, reversing entries. Reversing entries reverse an adjusting entry made in a prior period at the start of a new period.

These permanent accounts show a company’s long-standing financials. You begin the closing process by transferring revenue and expense account balances to the income summary account, a temporary account used specifically to transfer revenue and expense account balances. A sole proprietor or partnership often uses a separate drawings account to record withdrawals of cash by the owners. Although the drawings account is not an income statement account, it is still classified as a temporary account and needs a closing journal entry to zero the balance for the next accounting period.

You should recall from your previous material that retained earnings are the earnings retained by the company over time—not cash flow but earnings. Now that we have closed the temporary accounts, let’s review what the post-closing ledger (T-accounts) looks like for Printing Plus. The first entry closes revenue accounts to the Income Summary account.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the in preparing closing entries CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Answer the following questions on closing entries
and rate your confidence to check your answer. Answer the following questions on closing entries and rate your confidence to check your answer. The income statement reflects your net income for the month of December. An accounting year-end which is not the calendar year end is sometimes referred to as a fiscal year end. The third entry requires Income Summary to close to the Retained Earnings account. To get a zero balance in the Income Summary account, there are guidelines to consider.

How, when and why do you prepare closing entries?

Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent. If your expenses for December had exceeded your revenue, you would have a net loss. KLO’s adjusted trial balance for the current month is presented below and the temporary accounts are highlighted to demonstrate how these accounts will be closed. 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.

Understanding Closing Entries

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. To further clarify this concept, balances are closed to assure
all revenues and expenses are recorded in the proper period and
then start over the following period. 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.

As mentioned, temporary accounts in the general ledger consist of income statement accounts such as sales or expense accounts. 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. Closing your accounting books consists of making closing entries to transfer temporary account balances into the business’ permanent accounts. Although it is not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period.

Journalizing and Posting Closing Entries

This gives
you the balance to compare to the income statement, and allows you
to double check that all income statement accounts are closed and
have correct amounts. If you put the revenues and expenses directly
into retained earnings, you will not see that check figure. No
matter which way you choose to close, the same final balance is in
retained earnings. All temporary accounts must be reset to zero at the end of the accounting period.

These accounts will not be set back to zero at the beginning of the
next period; they will keep their balances. Understanding the accounting cycle and preparing trial balances
is a practice valued internationally. The Philippines Center for
Entrepreneurship and the government of the Philippines hold regular
seminars going over this cycle with small business owners. They are
also transparent with their internal trial balances in several key
government offices. Check out this article
talking about the seminars on the accounting cycle and this
public pre-closing trial balance presented by the Philippines
Department of Health.

Drawings Accounts and Closing Journals

The process of preparing the post-closing trial balance is the same as you have done when preparing the unadjusted trial balance and adjusted trial balance. Only permanent account balances should appear on the post-closing trial balance. These balances in post-closing T-accounts are transferred over to either the debit or credit column on the post-closing trial balance. When all accounts have been recorded, total each column and verify the columns equal each other.

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Companies are required to close their books at the end of each
fiscal year so that they can prepare their annual financial
statements and tax returns. Close the income https://simple-accounting.org/ summary account by debiting income summary and crediting retained earnings. Clear the balance of the revenue account by debiting revenue and crediting income summary.