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

Below are the T accounts with the journal entries already posted. LiveCube Task Automation is designed to automate repetitive tasks, improve efficiency, and facilitate real-time collaboration across teams. By leveraging advanced workflow management, the no-code platform, LiveCube ensures that all closing tasks are completed on time and accurately, reducing the manual effort and the risk of errors.

Closing Entry for Expense Account

We do not need to show accounts with zero balances on the trial balances. Closing entries are posted in the general ledger by transferring all revenue and expense account balances to the income summary account. Then, transfer the balance of the income summary account to the retained earnings account. Finally, transfer any dividends to the retained earnings account. Accountants may perform the closing process monthly or annually. The closing entries are the journal entry form of the Statement of Retained Earnings.

Temporary accounts:

All generated revenue of a period is transferred to retained earnings so that it is stored there for business use whenever needed. 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. Now that the journal entries are prepared and posted, you are almost ready to start next year.

In step 1, we credited it for $9,850 and debited it in step 2 for $8,790. To close that, we debit Service Revenue for the full amount and credit Income Summary for the same. Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided.

AccountingTools

Examples are cash, accounts receivable, accounts payable, and retained earnings. These accounts carry their ending balances into the next accounting period and are not reset to zero. For example, closing an income summary involves transferring its balance to retained earnings.

Closing entries are typically recorded in the general journal. Closing entries are journal entries used to empty temporary accounts at the end of a reporting period and transfer their balances into permanent accounts. Temporary accounts are used to accumulate income statement activity during a reporting period. The use of closing entries resets the temporary accounts to begin accumulating new transactions in the next period. Otherwise, the accounting for startups balances in these accounts would be incorrectly included in the totals for the following reporting period. Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts.

1. Remember, dividends are a contra stockholders’ equity account.
2. They are special entries posted at the end of an accounting period.
3. The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts.
4. The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement.

Step 4: Closing the drawing/dividends account

Retained earnings are defined as a portion of a business’s profits that isn’t paid out to shareholders but is rather reserved to meet ongoing expenses of operation. The term “net” relates to what’s left of a balance after deductions have been made from it.

These accounts were reset to zero at the end of the previous year to start afresh. On expanding the view of the opening trial balance snapshot, we can view them as temporary accounts, as can be seen in the snapshot below. 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.

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. When closing the what’s with the xero revenue account, you will take the revenue listed in the trial balance and debit it, to reduce it to zero. As a corresponding entry, you will credit the income summary account, which we mentioned earlier. The purpose of the closing entry is to reset temporary account balances to zero on the general ledger, the record-keeping system for a company’s financial data.