Closing Entry Definition, Explanation, and Examples

To close expenses, we simply credit the expense accounts and debit Income Summary. Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet. Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided. The fourth entry requires Dividends to close to the Retained Earnings account. Remember from your past studies that dividends are not expenses, such as salaries paid to your employees or staff. Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits generated by the company to the owners of the company—in this case, its shareholders.

Part 2: Your Current Nest Egg

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. The Printing Plus adjusted trial balance for January 31, 2019, is presented in Figure 5.4. State whether each account is a permanent or temporary account.

Step #1: Close Revenue Accounts

In this case, we can see the snapshot of the opening trial balance below. Let’s move on to learn about how to record closing those temporary accounts. Any account listed on the balance sheet is a permanent account, barring paid dividends. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent.

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. The next and final step in the accounting cycle is to prepare one last post-closing trial balance. Closing entries are put into action on the last day of an accounting period.

1. The Income Summary account has a credit balance of $10,240 (the revenue sum).
2. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account.
3. Expense accounts have a debit balance, so you’ll have to credit their respective balances and debit income summary in order to close them.
4. We can also see that the debit equals credit; hence, it adheres to the accounting principle of double-entry accounting.
5. In just a few clicks, the entire financial year closing is streamlined for you.

By debiting the revenue account and crediting the dividend and expense accounts, the balance of $3,450,000 is credited to retained earnings. The first entry closes revenue accounts to the Income Summary account. The second entry closes expense accounts to the Income Summary account. The third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings. The information needed to prepare closing entries comes from the adjusted trial balance.

On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account.

Step #2: Close Expense Accounts

Accountants may perform the closing process monthly or annually. The closing entries are the journal entry form of the Statement of Retained Earnings. The statement of retained earnings doctrine of capital maintenance shows the period-ending retained earnings after the closing entries have been posted.

In essence, we are updating the capital balance and resetting all temporary account balances. Automation transforms the process of closing entries in accounting, making it more efficient and accurate. By deducting business expenses leveraging automated systems, businesses can ensure that all tasks related to closing entries are handled seamlessly, reducing manual effort and minimizing errors. Manually creating your closing entries can be a tiresome and time-consuming process. And unless you’re extremely knowledgeable in how the accounting cycle works, it’s likely you’ll make a few accounting errors along the way.