Closing Entries
When one Fiscal Period ends and a new one begins, the revenue, expense, and drawings should show zero balances so that in the new Fiscal Period, these accounts only contain data pertaining to that period.
Purpose of Closing Entries
It reduces the revenue, expense, and drawings accounts to zero so that they are ready for the next fiscal period. Closing entries update the owner’s equity account in the General Ledger.
When we close the books we update the capital account in the ledger based on the net income/loss and/or drawings for that period of time. By doing this we bring the capital ledger account into agreement with the amount indicated on the balance sheet.
Income Summary
The account in which the balance of the Revenue and expense accounts are transferred to It is the Net Income/Loss
Temporary/Nominal Accounts
Accounts that only contain information for the current Fiscal Period. They are closed or reduced to zero (Revenue, Expenses, Drawings)
Permanent Accounts
Accounts with balances that are carried from Fiscal Period to the next. They are never closed or reduced to zero (Assets, Liabilities, Owner’s Equity)
Steps in Closing Entries
- Close all Expense accounts into the Income Summary
- Close all Revenue accounts into the Income Summary
- Close the Income Summary account into the Capital Account
- Close the Drawings account into the Capital Account
- Make a Post Closing Trial Balance
Close all Expense accounts into the Income Summary
A compound journal entry can be used to close all the expense accounts at once
Close all Revenue accounts into the Income Summary
A compound journal entry can be used to close all the revenue accounts at once
Close the Income Summary account into the Capital Account
Make a Quick T-Account
The account balance in the income summary account is not the net income/loss for the Fiscal Period and it will affect the closing entry
Close the Drawings account into the Capital Account
This entry decreases the capital account and while at the same time reduces the drawings account to zero
DOUBLE UNDERLINE THE LEDGER ACCOUNTS WITH A ZERO BALANCE
Post Closing Trial Balance
This serves as a check on the accuracy of the ledger after the adjusting and closing entries have been made. Does not include Revenue, Expenses, or Drawings