It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. This balance is then transferred to the Retained Earnings account. We see from the adjusted trial balance that our revenue account has a credit balance. To make the balance zero, debit the revenue account and credit the Income Summary account. From this trial balance, as we learned in the prior section, you make your financial statements.

Closing Entry Definition, Types & Examples

A Closing Entry is one of the types of journal entries that is executed at the end of the accounting period to transfer balances to permanent accounts from temporary accounts. One of the types of journal entries that is executed at the end of the accounting period to transfer balances to permanent accounts from temporary accounts. The first entry requires revenue accounts close to the Income Summary account. To get a zero balance in a revenue account, the entry will show a debit to revenues and a credit to Income Summary. Printing Plus has $140 of interest revenue and $10,100 of service revenue, each with a credit balance on the adjusted trial balance.

Link to Learning

Dividends are paid by Cash, so the transaction balance of paid tips would be demonstrated under Financial Activities. The cost of goods sold is an account that displays the balance closing entries of the total cost amount that the company used to produce the products sold. To find the Expenses, just like for Revenue, you would also find it in the Income Statement.

Year End in Accounting

Only income statement accounts help us summarize income, so only income statement accounts should go into income summary. After the posting of this closing entry, the income summary now has a credit balance of $14,750 ($70,400 credit posted minus the $55,650 debit posted). The purpose of closing entries is to merge your accounts so you can determine your retained earnings. Retained earnings represent the amount your business owns after paying expenses and dividends for a specific time period. Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand.

Practice Question: Preparing a Closing Entry

Once all of the required entries have been made, you can run your post-closing trial balance, as well as other reports such as an income statement or statement of retained earnings. In this case, if you paid out a dividend, the balance would be moved to retained earnings from the https://www.bookstime.com/articles/bench-accounting dividends account. Once this has been completed, a post-closing trial balance will be reviewed to ensure accuracy. 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.

A net loss would decrease owner’s capital, so we would do the opposite in this journal entry by debiting the capital account and crediting Income Summary. 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. All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary.

Step 2: Close Expense accounts

Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account. Close the income summary account by debiting income summary and crediting retained earnings.

Learning Outcomes

• The accounts that need to start with a clean or $0 balance going into the next accounting period are revenue, income, and any dividends from January 2019.
• 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.
• If a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings.
• This is an optional step in the accounting cycle that you will learn about in future courses.
• All revenue accounts will be zero after debiting the revenue account and crediting the income summary account, and the revenue account will be closed at the same time.

This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2). These posted entries will then translate into a post-closing trial balance, which is a trial balance that is prepared after all of the closing entries have been recorded. Accounts are considered “temporary” when they only accumulate transactions over one single accounting period. Temporary accounts are closed or zero-ed out so that their balances don’t get mixed up with those of the next year. 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.