Month END Closing Entries

Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7were covered in The Adjustment Process. Regardless of size or structure, closing entries are essential for accurate period-to-period financial reporting. While petty cash understanding the manual process provides essential accounting knowledge, modern businesses benefit significantly from automating these procedures.

Close Income Summary

By transferring the net income (or loss) and any dividends paid to the retained earnings account, closing entries keep the retained earnings balance up to date. This ensures that the company’s accumulated profits or losses are accurately reported in the financial statements. The permanent accounts in which balances are transferred depend upon the nature of business of the entity.

Capital Account and Owner’s Equity

They get deducted, representing the share of profits distributed to the shareholders, again affecting the overall equity of the company. Remember, dividends are paid out from net income after taxes, thus affecting the amount transferred to Retained Earnings. It’s a cyclical journey—starting with transactions, passing through the Income Summary, and ending in Retained Earnings, ready to begin anew.

• Adjusted trial balance – This is prepared after adjusting entries are made and posted.
• Temporary accounts are closed or zero-ed out so that their balances don’t get mixed up with those of the next year.
• Dividends, representing earnings distributed to shareholders, are closed to the Retained Earnings account.
• Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account.
• Accounts are considered “temporary” when they only accumulate transactions over one single accounting period.
• Any remaining balances will now be transferred and a post-closing trial balance will be reviewed.

FAQs on Closing Entries

• In step 1, we credited it for $9,850 and debited it in step 2 for $8,790.
• And just like any other trial balance, total debits and total credits should be equal.
• 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.
• A post-closing trial balance is, as the term suggests, prepared after closing entries are recorded and posted.
• 9.4 Retained Earnings, Stock Splits, and Dividends This final amount is reported in the shareholders’ equity section of the balance sheet.

We have completed the first two columns and now we have the final column which represents the closing (or archive) process. Income summary account is a temporary account which facilitates the closing process. Notice that the Income Summary account is now zero and closing entires is ready for use in the next period. 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.

Adjusting for Supplies Expense

Then, transfer the balance of the income summary account to the retained earnings account. A closing entry is a journal entry that’s made at the end of the accounting period that a business elects to use. It’s not necessarily a process meant for the faint of heart because it involves identifying and moving numerous data from temporary to permanent accounts on the income statement. The closing entries are the journal entry form of the Statement of Retained Earnings. The goal is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts. In summary, the closing process only applies to temporary accounts found in the income statement.

Once all the adjusting entries are made the temporary accounts reflect the correct entries for revenue, expenses, and dividends for the accounting year. We can also see that the debit equals credit; hence, it adheres to the http://yummy.ir/index.php/2023/03/15/cash-flow-101-how-to-calculate-your-company-s-cash/ accounting principle of double-entry accounting. This step initially closes all revenue accounts to the income summary account, which is further closed to the retained earnings account in step 3 below.