This is done through a journal entry that debits revenue accounts and credits the income summary. Companies use closing entries to reset the balances of temporary accounts − accounts that show balances over a single accounting period − to zero. By doing so, the company moves these balances into permanent accounts on the balance sheet.

Which types of accounts do not require closing entries?

So, even though the process today is slightly (or completely) different than it was in the days of manual paper systems, the basic process is still important to understand. After preparing the closing entries above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. As the drawings account is a contra equity https://www.quick-bookkeeping.net/can-freshbooks-do-taxes/ account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account. If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings.

What Are Closing Entries?

1. This means you are preparing all steps in the accounting cycle by hand.
2. Mary Girsch-Bock is the expert on accounting software and payroll software for The Ascent.
3. All of these entries have emptied the revenue, expense, and income summary accounts, and shifted the net profit for the period to the retained earnings account.
4. It is a holding account for revenues and expenses before they are transferred to the retained earnings account.

To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019. All the temporary accounts, including revenue, expense, and dividends, have been reset to zero. The balances from these temporary accounts have been transferred to the permanent account, retained earnings. Other accounting software, such as Oracle’s PeopleSoft™, post closing entries to a special accounting period that keeps them separate from all of the other entries.

Step #1: Close Revenue Accounts

After Closing Entries in the accounting cycle, a Post-Closing Trial Balance would be created. Just like a normal Trial Balance, it will contain and display all accounts that have non-zero balances and see if the debits and credits will balance. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. 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. Let’s explore each entry in more detail using Printing Plus’s information from Analyzing and Recording Transactions and The Adjustment Process as our example.

Step 2: Close Expense accounts

Now, it’s time to close the income summary to the retained earnings (since we’re dealing with a company, not a small business or sole proprietorship). Expense accounts have a debit balance, https://www.quick-bookkeeping.net/ so you’ll have to credit their respective balances and debit income summary in order to close them. This time period, called the accounting period, usually reflects one fiscal year.

At the end of an accounting period when the books of accounts are at finalization stage, some special journal entries are required to be passed. In accounting terms, these journal entries are termed as closing entries. The main purpose of these closing entries is to bring the temporary journal account balances to zero for the next accounting period, which keeps the accounts reconciled.

The Final Step of Closing Entries is closing the Dividends account. Then, making sure Dividends is paid to shareholders at the end of the fiscal year, net fixed assets formula the Dividends account would be credited, and Retained Earnings would be debited. The Second Step of Closing Entries is closing the Expense Account.

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. In this case, since it’s an opening trial balance, we’re just getting started with the accounting cycle (Step 1). Closing entries are completed at the end of each accounting period after your adjusted trial balance has been run.

When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings. Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry. To close the drawing account to the capital account, we credit the drawing account and debit the capital account. Take note that closing entries are prepared only for temporary accounts.

The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. 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. 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.

To do this, their balances are emptied into the income summary account. The income summary account then transfers the net balance of all the temporary accounts to retained earnings, which is a permanent account on the balance sheet. Although it is amending your return (form 8888) not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period. The first entry requires revenue accounts close to the Income Summary account.