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. In other words, the temporary accounts are closed or reset at the end of the year. 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.
Example 2: Closing Expense Accounts
After the closing journal entry, the balance on the dividend account is zero, and the retained earnings account has been reduced by 200. If the year end is 31 December 2021 then the balance sheet, which is drawn up at a point in time, will be headed ‘Balance Sheet at 31 December 2021’, and the income statement, which is for an accounting period will be headed ‘Income Statement for the year ended 31 which of the following accounts will be debited in the closing entry at the end of the year? December 2021’. Remember that all revenue, sales, income, and gain accounts are closed in this entry. In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year. Such periods are referred to as interim periods and the accounts produced as interim financial statements. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account.
Accounts that are Debited in the Closing Entries
- The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet.
- These entries ensure all temporary accounts are closed, and the balances are transferred to retained earnings, updating the equity section of the balance sheet.
- 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.
- Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account.
- The use of closing entries resets the temporary accounts to begin accumulating new transactions in the next period.
- This process resets these accounts to zero in preparation for the next accounting period and updates the retained earnings account with the net income or loss for the year.
These entries ensure all temporary accounts are closed, and the balances are transferred to retained earnings, updating the equity section of the balance sheet. This process prepares accounts for the next financial year, allowing the business to start fresh with zero balances in its income and expense accounts. The retained earnings account balance of 6,800 is the amount brought forward from the previous accounting period, and for the sake of this example, the other balance sheet (permanent accounts) are shown as one balance, as they are not part of the closing journal entries process.
Closing Journal Entries Process
He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University. Welcome to AccountingJournalEntries.com, your ultimate resource for mastering journal entries in accounting. Enhance your accounting skills and knowledge with our comprehensive resources tailored for professionals and students alike. The process of using of the income summary account is shown in the diagram below.
- Suppose a business had the following trial balance before any closing journal entries at the end of an accounting period.
- The income summary account is in itself a temporary account and an additional closing journal entry is made to zero the account at the end of the accounting period, and transfer the balance (the net income for the period) to the retained earnings account as before.
- As the drawings account is a contra equity account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account.
- At the end of the year, all the temporary accounts must be closed or reset, so the beginning of the following year will have a clean balance to start with.
In addition, if the accounting system uses subledgers, it must close out each Online Accounting subledger for the month prior to closing the general ledger for the entire company. In addition, if the company uses several sets of books for its subsidiaries, the results of each subsidiary must first be transferred to the books of the parent company and all intercompany transactions eliminated. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company. 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.
It is permanent because it is not closed at the end of each accounting period. At the start of the new accounting period, the closing balance from the previous accounting period is brought forward and becomes the new opening balance on the account. Other than the retained earnings account, closing journal entries do not affect permanent accounts. A sole proprietor or partnership often uses a separate drawings account to record withdrawals of cash by the owners. Although the drawings account is not an income statement account, it is still classified as a temporary Bakery Accounting account and needs a closing journal entry to zero the balance for the next accounting period. The retained earnings account balance has now increased to 8,000, and forms part of the trial balance after the closing journal entries have been made.
