Closing entries Closing procedure

how to close expense accounts

The Philippines Center for Entrepreneurship and the government of the Philippines hold regular seminars going over this cycle with small business owners. They are also transparent with their internal trial balances in several key government offices. Check out this article talking about the seminars on the accounting cycle and this public pre-closing trial balance presented by the Philippines Department of Health. In order to produce more timely information some businesses issue financial statements for periods shorter than a full fiscal or calendar year.

Use of an Income Summary Account

Answer the following questions on closing entriesand rate your confidence to check your answer. Wehave completed the first two columns and now we have the finalcolumn which represents the closing (or archive) process. Answer the following questions on closing entries and rate your confidence to check your answer. We have completed the first two columns and now we have the final column which represents the closing (or archive) process. This challenge becomes even more daunting as your business expands.

how to close expense accounts

How to close revenue accounts?

  1. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings.
  2. Other than the retained earnings account, closing journal entries do not affect permanent accounts.
  3. If your business is a sole proprietorship or a partnership, your next step will be to close your income summary account.
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The general journal is used to record various types of accounting entries, including closing entries at the end of an accounting period. The general ledger is the central repository of all accounts and their balances, including the closing entries. The next and final step in the accounting cycle is to prepare one last post-closing trial balance. Close the income summary account by debiting income summary and crediting retained earnings. Clear the balance of the revenue account by debiting revenue and crediting income summary. Instead the balances in these accounts are moved at month-end to either the capital account or the retained earnings account.

Temporary and Permanent Accounts

how to close expense accounts

Printing Plus has $100 of supplies expense, $75 of depreciation expense–equipment, $5,100 of salaries expense, and $300 of utility expense, each with a debit balance on the adjusted trial balance. The closing entry will credit Supplies Expense, Depreciation Expense–Equipment, Salaries Expense, and Utility Expense, and debit Income Summary. We see fromthe adjusted trial balance that our revenue accounts have a creditbalance. To make them zero we want to decrease the balance or dothe opposite. We will debit the revenue accounts and credit theIncome Summary account. The credit to income summary should equalthe total revenue from the income statement.

As a corresponding entry, you will credit the income summary account, which we mentioned earlier. The remaining balance in Retained Earnings is $4,565 (Figure 5.6). This is the same figure found on the statement of retained earnings. What is the current book value of your electronics, car, and furniture?

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. It is the end of the year, December 31, 2018, and you are reviewing your financials for the entire year. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000. However, if the company also wanted to keep year-to-date information from month to month, a separate set of records could be kept as the company progresses through the remaining months in the year. For our purposes, assume that we are closing the books at the end of each month unless otherwise noted.

In step 1, we credited it for $9,850 and debited it in step 2 for $8,790. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand. In this chapter, we complete the final steps (steps 8 and 9) of the accounting cycle, the closing process.

After the closing journal entry, the balance on the drawings account is zero, and the capital account has been reduced by 1,300. The purpose of the income summary is to show the net income (revenue less expenses) of the business in more detail before it becomes part of the retained earnings account balance. No, closing entries are performed after adjusting entries in the accounting cycle. Adjusting entries ensure that revenues and expenses are appropriately recognized in the correct accounting period.

Printing Plus has $100 of dividends with a debit balance on the adjusted trial balance. The closing entry will credit Dividends and debit Retained Earnings. Once adjusting entries have been made, closing entries are used to reset temporary accounts and transfer their balances to permanent accounts.

That’s where automation tools like Autonomous Accounting come in. It effortlessly sifts through large amounts of data and generates closing entries automatically. This ensures that your financial operations infrastructure is bookkeeping hard can scale with your business’s growth. With the use of modern accounting software, this process often takes place automatically. This entry zeros out dividends and reduces retained earnings by total dividends paid.

When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match. It is important to understand retained earnings is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close. You should recall from your previous material that retained earnings are the earnings retained by the company over time—not cash flow but earnings.

You will notice that we do not cover step 10, reversing entries. This is an optional step in the accounting cycle that you will learn about in future courses. Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7 were covered in The Adjustment Process. Below are the T accounts with the journal entries already posted.

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