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. Once adjusting entries have been made, closing entries are used to reset temporary accounts and transfer their balances to permanent accounts.

  • To close expenses, we simply credit the expense accounts and debit Income Summary.
  • 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.
  • It is
    important to understand retained earnings is not closed out, it is only updated.
  • This is no different from what will happen to a company at the
    end of an accounting period.

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. In summary, the accountant resets the
temporary accounts to zero by transferring the balances to
permanent accounts. 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.

Temporary and Permanent Accounts

Revenue and expense accounts are closed to Income Summary, and Income Summary and Dividends are closed to the permanent account, Retained Earnings. Temporary (nominal) accounts are accounts that
are closed at the end of each accounting period, and include income
statement, dividends, and income summary accounts. These accounts are
temporary because they https://www.wave-accounting.net/ keep their balances during the current
accounting period and are set back to zero when the period ends. Revenue and expense accounts are closed to Income Summary, and
Income Summary and Dividends are closed to the permanent account,
Retained Earnings. Temporary accounts are income statement accounts that start each accounting period with a zero balance.

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  • If there is a net profit, the balance of the income summary account is also zeroed by debiting the income summary account and crediting the capital account.
  • This means that
    it is not an asset, liability, stockholders’ equity, revenue, or
    expense account.
  • Because the effect of nominal accounts cannot be shown in the following year, they are closed in the year in which they are created.

The income statement
summarizes your income, as does income summary. If both summarize
your income in the same period, then they must be equal. The eighth step in the accounting cycle is preparing closing
entries, which includes journalizing and posting the entries to the
ledger.

Frequently Asked Questions on Closing Entries

Companies could close each income statement account to the owner’s capital immediately while making closing entries. Companies generally journalize and post-closing entries only at the end of the annual accounting period, in contrast to the steps in the cycle. The $1,000 net profit balance generated through the accounting period then shifts. This is from the income summary to the retained earnings account.

What are closing entries?

Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings. Balances from temporary accounts are shifted to the income https://personal-accounting.org/ summary account first to leave an audit trail for accountants to follow. Income summary is a holding account used to aggregate all income accounts except for dividend expenses.

Recording a Closing Entry

Afterwards, withdrawal or dividend accounts are also closed to the capital account. This is closed by doing the opposite – debit the capital account (decreasing the capital balance) and credit Income Summary. Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in https://online-accounting.net/ the case of sole proprietorships and partnerships (dividends for corporations). At the end of each accounting period, financial statements are prepared to determine the financial status of the company. The difference between sales and expenses, or net income, was transferred to the income summary account.

The Philippines Center for Entrepreneurship and the government of the Philippines hold regular seminars going over this cycle with small business owners. They are also transparent with their internal trial balances in several key government offices. 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 income summary is a temporary account used to make closing entries. To close the drawing account to the capital account, we credit the drawing account and debit the capital account. To close expenses, we simply credit the expense accounts and debit Income Summary.

Closing, or clearing the balances, means returning
the account to a zero balance. Having a zero balance in these
accounts is important so a company can compare performance across
periods, particularly with income. It also helps the company keep
thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings
and are closed so they can accumulate new balances in the next
period, which is an application of the time period assumption. After the closing entries have been made, the temporary account balances will be reflected in the Retained Earnings (a capital account).