1. O.E. = Capital – Drawings + Revenue - Expenses
Closing Entries
A Step-by-Step Guide
by Mr. Meechem
We must close accounts to update capital balance and reset temporary accounts for next fiscal period.
O.E. = Capital – Drawings + Revenue - Expenses

2. Real Accounts Have balances that continue into the next fiscal period
Ex. Bank, Accounts Receivable, Truck, Supplies, Loan Payable etc

3. Nominal/Temporary Accounts
Have balances that do not continue into the next fiscal period
Revenues
Expenses
Drawings

4. Income Summary
In order to do closing entries and update our capital balance, we create a new temporary account called Income Summary just for the closing process.

5. Steps for Closing Close Revenue Accounts to Income Summary.
Close Expense Accounts to Income Summary
Close Income Summary to Capital
Close Drawings to Capital