Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used https://www.kelleysbookkeeping.com/ during the closing process, and at the end of the closing process the account balance is zero. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2).

Four Steps in Preparing Closing Entries

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. These permanent accounts form the foundation of your business’s balance sheet. Close the income summary account by debiting income summary and crediting retained earnings. The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet.

Preparing a Closing Entry

1. What are your total expenses for rent, electricity, cable and internet, gas, and food for the current year?
2. Most organizations appear to be doing well on the surface while underlying accounting management issues silently sabotage.
3. A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account.
4. Take note that closing entries are prepared only for temporary accounts.

Companies are required to close their books at the end of each fiscal year so that they can prepare their annual financial statements and tax returns. Below are the T accounts with the journal entries already posted. Now for this step, we need to get the balance of the Income Summary account.

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Imagine you own a bakery business, and you’re starting a new financial year on March 1st. Clear the balance of the expense accounts by debiting income summary and crediting the corresponding expenses. Temporary accounts are notes payable definition accounts in the general ledger that are used to accumulate transactions over a single accounting period. The balances of these accounts are eventually used to construct the income statement at the end of the fiscal year.

How to Prepare Your Closing Entries

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. Closing journal entries are made at the end of an accounting period to prepare the accounting records for the next period.

No matter which way you choose to close, the same final balance is in retained earnings. Notice that the effect of this closing journal entry is to credit the retained earnings account with https://www.kelleysbookkeeping.com/fall-2021-reconciliation/ the amount of 1,400 representing the net income (revenue – expenses) of the business for the accounting period. The income summary account is only used in closing process accounting.

Basically, the income summary account is the amount of your revenues minus expenses. You will close the income summary account after you transfer the amount into the retained earnings account, which is a permanent account. The purpose of closing entries is to prepare the temporary accounts for the next accounting period. In other words, the income and expense accounts are “restarted”. If a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit.