CLOSING ENTRIES

We are at the last step of the accounting cycle!! Last step is the closing process The purpose of the Closing Entries is to close, or zero out, the balances of certain accounts at the end of the fiscal period Closing is one after adjustments have been made

Not all accounts are closed There are two kinds of accounts  Permanent Accounts  Temporary Accounts Permanent Accounts: accounts who maintain their balance from one accounting period to the next

Permanent Accounts include: Assets Liabilities Capital These are NOT closed because their balance carries forward into the next period Note that these are all Balance Sheet accounts

Temporary Accounts: accounts used for one accounting period. They must be closed out to zero to measure net income for the next accounting period. Temporary Accounts include: Revenue Expenses Drawings

In order to start closing, we have to set up a temporary account called Income Summary Summarizes all the revenue and expenses into one account This amount will tell us whether we have a net income or net loss

Remember Remembering REID may help you remember the types of accounts that are temporary and the closing order process: 1. Revenue 2. Expenses 3. Income Summary 4. Drawings 4 steps in the closing process

Step 1: Closing the Revenue Account to Income Summary Debit all revenue accounts and credit Income Summary

Step 2: Closing the Expense Account to Income Summary Credit expense accounts and debit Income Summary

Step 3: Closing Income Summary to Capital Debit Income Summary* account and credit Capital *if Net Income; if Net Loss you would do the opposite to credit Income Summary and debit Capital

Step 4: Closing Drawings to Capital Credit drawings and debit capital

Post-Closing Trial Balance After closing entries are journalized, a post-closing trial balance is prepared Lists all permanent accounts and their closing balances Since temporary accounts are closed, they will not be included in the post-closing trial balance