Closing entries transfer the revenue, expense, and withdrawals balances to what other account?
What are Closing Entries?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. This is commonly referred to as closing the books. Show
Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company. We don’t want the 2015 revenue account to show 2014 revenue numbers. Permanent accounts are balance sheet accounts that track the activities that last longer than an accounting period. For example, a vehicle account is a fixed asset account that is recorded on the balance. The vehicle will provide benefits for the company in future years, so it is considered a permanent 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 other words, revenue, expense, and withdrawal accounts always have a zero balance at the start of the year because they are always closed at the end of the previous year. This concept is consistent with the matching principle. Closing Entry TypesTemporary 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. Both ways have their advantages. Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period. Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step. There is no need to close temporary accounts to another temporary account (income summary account) in order to then close that again. Both closing entries are acceptable and both result in the same outcome. All temporary accounts eventually get closed to retained earnings and are presented on the balance sheet. In this example we will close Paul’s Guitar Shop, Inc.’s temporary accounts using the income summary account method from his financial statements in the previous example. There are three general closing entries that must be made. Close all revenue and gain accountsAll of Paul’s revenue or income accounts are debited and credited to the income summary account. This resets the income accounts to zero and prepares them for the next year. Remember that all revenue, sales, income, and gain accounts are closed in this entry. Paul’s business or has a few accounts to close. Close all expense and loss accountsAll expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary. Close all dividend or withdrawal accounts Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account. These accounts are closed directly to retained earnings by recording a credit to the dividend account and a debit to retained earnings. Now that all the temporary accounts are closed, the income summary account should have a balance equal to the net income shown on Paul’s income statement. Now Paul must close the income summary account to retained earnings in the next step of the closing entries. Contents
Closing Entries Revenue, expense, and capital withdrawal (dividend) accounts are temporary accounts that are reset at the end of the accounting period so that they will have zero balances at the start of the next period. Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts. After the closing entries have been made, the temporary account balances will be reflected in the Retained Earnings (a capital account). However, an intermediate account called Income Summary usually is created. Revenues and expenses are transferred to the Income Summary account, the balance of which clearly shows the firm's income for the period. Then, Income Summary is closed to Retained Earnings. The sequence of the closing process is as follows:
The closing journal entries associated with these steps are demonstrated below. The closing entries may be in the form of a compound journal entry if there are several accounts to close. For example, there may be dozens or more of expense accounts to close to Income Summary. 1. Close Revenue to Income SummaryThe balance of the revenue account is the total revenue for the accounting period. Since revenue is one of the components of the income calculation (the other component being expenses), in the last day of the accounting period it is closed to the Income Summary account as follows: Closing Entry : Revenue to Income Summary
Once this closing entry is made, the revenue account balance will be zero and the account will be ready to accumulate revenue at the beginning of the next accounting period. 2. Close Expenses to Income SummaryExpenses are the other component of the income calculation and like revenue, are closed to the Income Summary account: Closing Entry : Expenses to Income Summary
After closing, the balance of Expenses will be zero and the account will be ready for the expenses of the next accounting period. At this point, the credit column of the Income Summary represents the firm's revenue, the debit column represents the expenses, and balance represents the firm's income for the period. 3. Close Income Summary to Retained EarningsThe income or loss for the period ultimately adds to or subtracts from the firm's capital. The Retained Earnings account is a capital account that accumulates the income from each accounting period. The Income Summary account is closed to Retained Earnings as follows: Closing Entry : Income Summary to Retained Earnings
4. Close Dividends to Retained EarningsAny capital withdrawals (e.g. dividends paid) during the period will reduce the capital account balance, so the withdrawal is closed to Retained Earnings: Closing Entry : Dividends to Retained Earnings
After closing, the dividend account will have a zero balance and be ready for the next period's dividend payments. Posting of the Closing EntriesAs with other journal entries, the closing entries are posted to the appropriate general ledger accounts. After the closing entries have been posted, only the permanent accounts in the ledger will have non-zero balances. Post-Closing Trial BalanceOnce the closing entries have been posted, the trial balance calculation is performed to help detect any errors that may have occurred in the closing process. Recommended Reading Schaum's Outline of Bookkeeping and Accounting The articles on this website are copyrighted material and may not be reproduced, What do closing entries transfer?A closing entry is a journal entry made at the end of the accounting period. It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. All income statement balances are eventually transferred to retained earnings.
What account is used to close the revenue and expense accounts?Revenues and expense are closed to the income summary account.
What happens to the revenue and expense accounts after the closing process?End Result
Revenue accounts and expense accounts have zero balance at the end of closing entries. All revenue, income or dividends that a company earns are transferred into retained earnings.
What accounts go on a closing entry?The four closing entries are, generally speaking, revenue accounts to income summary, expense accounts to income summary, income summary to retained earnings, and dividend accounts to retained earnings.
What is an account to which the revenue and expense account balances are transferred at the end of a reporting period?The income summary account is a temporary account into which all income statement revenue and expense accounts are transferred at the end of an accounting period.
What are closing transfers in accounting?A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account. Companies use closing entries to reset the balances of temporary accounts − accounts that show balances over a single accounting period − to zero.
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