Closing Entries Types Example

For our purposes, assume that we are closing the books at the end of each month unless otherwise noted. That’s where automation tools like Autonomous Accounting come in. It effortlessly sifts through large amounts of data and generates closing entries automatically. This ensures that your financial operations infrastructure can scale with your business’s growth. With the use of modern accounting software, this process often takes place automatically.

Prepare the closing entries for Frasker Corp. using the adjusted
trial balance provided. Notice that the Income Summary account is now zero and is ready
for use in the next period. The Retained Earnings account balance
is currently a credit of $4,665. 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.

  1. 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.
  2. At the end of the year, all the temporary accounts must be closed or reset, so the beginning of the following year will have a clean balance to start with.
  3. All temporary accounts must be reset to zero at the end of the accounting period.
  4. No, closing entries are performed after adjusting entries in the accounting cycle.

As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI. One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors.

They are housed on the balance sheet, a section of the financial statements that gives investors an indication of a company’s value, including its assets and liabilities. Total revenue of a firm at the end of an accounting period is transferred to the income summary account to ensure that the revenue account begins with zero balance in the following accounting period. All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary. In this example we will close Paul’s Guitar Shop, Inc.’s temporary accounts using the income summary account method from his financial statements in the previous example. Temporary accounts are used to record accounting activity during a specific period. 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.

How to Post Closing Entries

They are special entries posted at the end of an accounting period. Adjusting entries are used to modify accounts so that they’re in compliance with the accrual concept of recording income and expenses. 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. We at Deskera offer the best accounting software for small businesses today. Our program is specifically developed for you to easily set up your closing process and initiate book closing within seconds – no prior technical knowledge necessary. Manually creating your closing entries can be a tiresome and time-consuming process.

Permanent (real) accounts are accounts that
transfer balances to the next period and include balance sheet
accounts, such as assets, liabilities, and stockholders’ equity. These accounts will not be set back to zero at the beginning of the
next period; they will keep their balances. 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?

Closing Entries: Definition, Types, and Examples

You might be asking yourself, “is the Income Summary account even necessary? ” Could we just close out revenues and expenses directly into retained earnings and not have this extra temporary account? We could do this, but by having the Income Summary account, you get a balance for net income a second time.

These permanent accounts form the foundation of your business’s balance sheet. Income and expenses are closed to a temporary clearing account, usually Income Summary. Afterwards, withdrawal or dividend accounts are also closed to the capital account. To close the drawing account to the capital account, we credit the drawing account and debit the capital account. This is closed by doing the opposite – debit the capital account (decreasing the capital balance) and credit Income Summary. Let’s move on to learn about how to record closing those temporary accounts.

Step 4: Close withdrawals account

The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings. We do not need to show accounts with zero balances on the trial balances. This is no different from what will happen to a company at the
end of an accounting period. A company will see its revenue and
expense accounts set back to zero, but its assets and liabilities
will maintain a balance. Stockholders’ equity accounts will also
maintain their balances.

The Printing Plus
adjusted trial balance for January 31, 2019, is presented in

Figure 5.4. However, if the company also wanted to keep year-to-date
information from month to month, a separate set of records could be
kept as the company progresses through the remaining months in the
year. For our purposes, assume that we are closing the books at the
end of each month unless otherwise noted. That’s why most business owners avoid the struggle by investing in cloud accounting software instead. Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings.

The second entry requires expense accounts close to the Income
Summary account. To get a zero balance in an expense account, the
entry will show a credit to expenses and a debit to Income Summary. 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. The closing entry will credit Supplies Expense, Depreciation
Expense–Equipment, Salaries Expense, and Utility Expense, and debit
Income Summary. The first entry requires revenue accounts close to the Income
Summary account. To get a zero balance in a revenue account, the
entry will show a debit to revenues and a credit to Income Summary.

The general journal is used to record various types of accounting entries, including closing entries at the end of an accounting period. The general ledger is the central repository of all accounts and their balances, including the closing entries. The trial balance is like a snapshot of your business’s financial health at a specific moment. It lists the current balances in all your general ledger accounts.

On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts. We see from the adjusted trial balance that our revenue account has a credit balance.

Automating accounting management to increase projection velocity

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. Closing entries are journal entries made at the end of an accounting period, that transfer temporary account balances into a permanent account. Whether you’re posting entries manually or using accounting software, all revenue and expenses for each accounting period are stored in temporary accounts such as revenue and expenses. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period.

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. Well, dividends are not part of the income statement compare and contrast job-order and process costing systems because they are not considered an operating expense. 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. This entry zeros out dividends and reduces retained earnings by total dividends paid.