A closing entry is a journal entry made at the end of an accounting period. It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. These accounts must be closed at the end of the accounting year. Closing entries, also called closing journal entries, are entries made at the end of an accounting period to zero out all temporary accounts and transfer their balances to permanent accounts. In other words, the temporary accounts are closed or reset at the end of the year.
- The closing journal entries example comprises of opening and closing balances.
- It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period.
- Such periods are referred to as interim periods and the accounts produced as interim financial statements.
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That’s exactly what we will be answering in this guide – along with the basics of properly creating closing entries for your small business accounting. 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.
A closing entry is a journal entry lexington bookkeeping services that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account. The purpose of closing entries is to prepare the temporary accounts for the next accounting period. In other words, the income and expense accounts are «restarted».
Closing journal entries are made at the end of an accounting period to prepare the accounting records for the next period. They zero-out the balances of temporary accounts during the current period to come up with fresh slates for the transactions in the next period. If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends.
The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted. When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match. It is important to understand retained earnings is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close. 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.
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. 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. Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account. These accounts are closed directly to retained earnings by recording a credit to the dividend account and a debit to retained earnings. The first entry requires revenue accounts close to the Income Summary account.
A temporary account is an income statement account, dividend account or drawings account. It is temporary because it lasts only for the accounting period. At the end of the accounting period, the balance is transferred to the retained earnings account, and the account is closed with a zero balance. For each temporary account there will be a closing journal entry.
Clear the balance of the revenue account by debiting revenue and crediting income summary. The income summary is a temporary account used to make closing entries. Any account listed on the balance sheet is a permanent account, barring paid dividends.
Journalizing and Posting Closing Entries
Now that we know the basics of closing entries, in theory, let’s go over the step-by-step process of the entire closing procedure through a practical business example. Keep in mind, however, that this account is only purposeful for closing the books, and thus, it is not recorded into any accounting reports and has a zero balance at the end of the closing process. After most of the cycle is completed and financial statements are generated, there’s one last step in the process known as closing your books. And so, the amounts in one accounting period should be closed so that they won’t get mixed with those in the next period.
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. The next and final estate tax definition step in the accounting cycle is to prepare one last post-closing trial balance. Let’s move on to learn about how to record closing those temporary accounts.
Step 3: Close Income Summary account
To find the Expenses, just like for Revenue, you would also find it in the Income Statement. The expenses would be listed in the expense section, so you would need to find the total costs. Depending on the company, there could be many different expenses. Dividends are payments by corporations to shareholders using the extra profits they have generated during the fiscal year. Each year, the dividends could be different as the number of profits the business generates could differ depending on the industry’s performance. The abbreviation REID makes it simple to recall which accounts need to be closed and how they are completed.
Example of a Closing Entry
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. If the Post-Closing Trial Balance is not balanced and the Pre-Closing Trial Balance is balanced, then there were errors in the Closing Entry Process. The following would be an example of a trial balance; you can see that there are no temporary accounts and that all accounts have a natural number balance. The Third Step of Closing Entries is closing the Income Summary Account. Now, if you realize from steps 1 & 2, the balance of the Income Summary is also the same amount as the Net Income. As stated before, Income Summary is a temporary account and would also be closed.
In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year. Such periods are referred to as interim periods and the accounts produced as interim financial statements. Now, it’s time to close the income summary to the retained earnings (since we’re dealing with a company, not a small business or sole proprietorship).
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. Remember the income statement is like a moving picture of a business, reporting revenues and expenses for a period of time (usually a year). Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account.