After this closing entry has been posted, each of these revenue accounts has a zero balance, whereas the Income Summary has a credit balance of $7,400. Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company.

Trial Balance

Check out this articletalking about the seminars on the accounting cycle and thispublic pre-closing trial balance presented by the PhilippinesDepartment of Health. Now, all the temporary accounts have their respective figures allocated, showcasing the revenue the bakery has generated, the expenses it has incurred, and the dividends declared throughout the past year. Expense accounts have a debit balance, so you’ll have to credit their respective balances and debit income summary in order to close them.

Financial Accounting

• In this example, the business will have made $10,000 in revenue over the accounting period.
• Printing Plus has $100 ofdividends with a debit balance on the adjusted trial balance.
• We do not need to show accounts with zero balances on the trial balances.
• Let’s investigate an example of how closing journal entries impact a trial balance.
• Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow.

From this trial balance, as we learned in the prior section, you make your financial statements. After the financial statements are finalized and you are 100 percent sure that all the adjustments are posted and everything is in balance, you create and post the closing entries. The closing entries are the last journal entries that get posted to the ledger.

Closing Journal Entries Process

The closing entries are the journal entry form of the Statement of Retained Earnings. The goal is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts. This is no different from what will happen to a company at theend of an accounting period. A company will see its revenue andexpense accounts set back to zero, but its assets and liabilitieswill maintain a balance. In summary, the accountant resets thetemporary accounts to zero by transferring the balances topermanent accounts.

Opening Entries in Accounting Ledgers

It’s not necessarily a process meant for the faint of heart because it involves identifying and moving numerous data from temporary to permanent accounts on the income statement. The income summary account serves as a temporary account used only during the closing process. It contains all the company’s revenues and expenses for the current accounting time period. In other words, it contains net income or the earnings figure that remains after subtracting all business expenses, depreciation, debt service expense, and taxes. The income summary account doesn’t factor in when preparing financial statements because its only purpose is to be used during the closing process. The permanent accounts in which balances are transferred depend upon the nature of business of the entity.

We don’t want the 2015 revenue account to show 2014 revenue numbers. After preparing the closing entries above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. 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 making closing entries, the revenue, expense, and dividend account balances are moved to the retained earnings permanent account. If you own a sole proprietorship, you have to close temporary accounts to the owner’s equity instead of retained earnings. Temporary (nominal) accounts are accounts thatare closed at the end of each accounting period, and include incomestatement, dividends, and income summary accounts. 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.

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. The retained earnings account is reduced by the amount paid out in dividends through a debit and the dividends expense is credited. ‘Retained earnings‘ account is credited to record the secure cash box cash boxes and security boxes for income summary. In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company.