How do you close an expense account?
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At the end of the account period, you close certain accounts so you can prepare financial statements like the Post-Closing Trial Balance, Balance Sheet and Income Statement. Along with revenue accounts, which typically are closed first, you'll close the expense accounts to a temporary account called "Income Summary," which eventually also gets closed. Though many
businesses often have many expense accounts, you may only have one or two if you're a very small business. Since closing an expense account returns it to a zero balance, this can be a good way to compare expenses from year to year. Calculate the total of all your expense account balances. Typical expense accounts include Advertising Expense, Supplies Expense, Insurance, Wages and Rent Expense. You may have other types of expense accounts, depending on your business. Make a debit entry in the General Journal to the Income Summary account equal to the total of all the expense accounts. Credit each individual expense account equal to its own debit balance. Post the closing journal entry to the ledger accounts. For example, debit the Income Summary ledger account for the amount you debited it in the journal entry. For each expense account, transfer its credit amount from the journal entry to its account in the ledger
so that the account returns to a zero balance. You can compile a list of all your expense accounts and their balances from the Trial Balance, accounting worksheet or the general ledger. If you're using a physical journal, write and center the words "Closing Entries" before making any closing entries. What are Closing Entries?Closing journal entries are made at the end of an accounting period to prepare the accounting records for the next period. 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. What are Temporary Accounts?Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations). Take note that closing entries are prepared only for temporary accounts. Permanent accounts are never closed. Four Steps in Preparing Closing Entries
Closing Entries: ExamplePrepare the closing entries using the following information:
Step 1: Close all income accounts to Income Summary
In the given data, there is only 1 income account, i.e. Service Revenue. It has a credit balance of $9,850. To close that, we debit Service Revenue for the full amount and credit Income Summary for the same. The Income Summary account is temporary. It is used to close income and expenses. As you will see later, Income Summary is eventually closed to capital. Step 2: Close all expense accounts to Income Summary
To close expenses, we simply credit the expense accounts and debit Income Summary. Step 3: Close Income Summary to the appropriate capital accountNow for this step, we need to get the balance of the Income Summary account. In step 1, we credited it for $9,850 and debited it in step 2 for $8,790. It would then have a credit balance of $1,060. Notice that the balance of the Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses. The Income Summary balance is ultimately closed to the capital account.
For partnerships, each partners' capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C). For corporations, Income Summary is closed entirely to "Retained Earnings". What if Income Summary had a debit balance? It means that the company had a net loss. This is closed by doing the opposite – debit the capital account (decreasing the capital balance) and credit Income Summary. Step 4: Close withdrawals to the capital accountFor sole proprietorships and partnerships:In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner. In a partnership, a drawing account is maintained for each partner. All drawing accounts are closed to the respective capital accounts at the end of the accounting period. Our example is a sole proprietorship business. Mr. Gray's withdrawals are recorded in Mr. Gray, Drawing. To close the drawing account to the capital account, we credit the drawing account and debit the capital account. Notice that drawings decrease capital.
For corporations: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. However, some corporations use a temporary clearing account for dividends declared (let's use "Dividends"). They'd record declarations by debiting Dividends Payable and crediting Dividends. If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings.
ConclusionThe purpose of closing entries is to prepare the temporary accounts for the next accounting period. In other words, the income and expense accounts are "restarted". After preparing the closing entries above, Service Revenue will now be zero. The expense accounts and withdrawal account will now also be zero. Effectively, the balances of these accounts have been absorbed by the capital account – Mr. Gray, Capital, which now has a balance of $7,260 ($13,200 beginning balance + $1,060 in step #3 for net income - $7,000 in step #4 for withdrawals). Key Takeaways Temporary, or nominal accounts, are measured periodically. And so, the amounts in one accounting period should be closed so that they won't get mixed with those in the next period. Income and expenses are closed to a temporary clearing account, usually Income Summary. Then, Income Summary is closed to the capital account. Afterwards, withdrawal or dividend accounts are also closed to the capital account. In essence, we are updating the capital balance and resetting all temporary account balances. Web link APA format Closing Entries (2022). Accountingverse. Next Chapter → Previous Chapter ← Course Outline ≡ How is an expense account normally closed?Recording a Closing Entry
This is done through a journal entry debiting all revenue accounts and crediting income summary. Next, the same process is performed for expenses. All expenses are closed out by crediting the expense accounts and debiting income summary.
Do expense accounts get closed?As with the revenue accounts, expense accounts are closed into Income Summary. Again, the purpose of the closing entries is to “close” the balance of the temporary accounts. Since expense accounts have a normal debit balance, they will be credited in the closing entry and Income Summary will therefore be debited.
How do you close an expense ledger account?How to Close a General Ledger. Debit the revenue account by the amount of its balance at the end of the accounting period to reduce it to zero. ... . Credit each expense account by the amount of its balance to reduce each account's balance to zero.. How do you close an expense account with a debit balance?The basic sequence of closing entries is as follows: Debit all revenue accounts and credit the income summary account, thereby clearing out the balances in the revenue accounts. Credit all expense accounts and debit the income summary account, thereby clearing out the balances in all expense accounts.
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