Opening entries include revenue, expense, Depreciation etc., while closing entries include closing balance of revenue, liability, Depreciation etc. As the drawings account is a contra equity account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account.
Let’s Recap Accounting Closing Entries:
Both closing entries are acceptable and both result in the same outcome. All temporary accounts eventually get closed to retained earnings and are presented on the balance sheet. Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step. There is no need to close temporary accounts to another temporary account (income summary account) in order to then close that again. Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period.
Step 3: Close Income Summary account
Organizations can achieve a 40% increase in close productivity, resulting in a more streamlined financial close process and allowing your team to focus on more strategic activities. Wehave completed the first two columns and now we have the finalcolumn which represents the closing (or archive) process. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7. Notice that the Income Summary account is now zero and 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.
Trial Balance
- The income summary account is a temporary account solely for posting entries during the closing process.
- According to the statement, the balance in Retained Earnings should be $13,000.
- 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.
- To make the balance zero, debit the revenue account and credit the Income Summary account.
- The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5).
- We know the change in the balance includes net income and dividends.
Even then you can get a bit of help or an accountant to sort you out. Retained earnings are defined as a portion of a business’s profits that isn’t paid out to shareholders but is rather reserved to meet ongoing expenses of operation. My Accounting Course is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.
The term can also mean whatever they receive in their paycheck after taxes have been withheld. The term “net” relates to what’s left of a balance after deductions have been made from it. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. Since QuickBooks automates the year-end close, you don’t have to get caught up with all of these manual entries unless something was to go wrong.
This process helps owners stay on track with business goals and prepare for filing their income tax returns. Regularly closing your books will prevent unwanted changes from occurring to your accounting data after you generate important financial reports for your accountant or tax professional. A net loss would decrease retained earnings so wewould do the opposite in this journal entry by debiting RetainedEarnings and crediting Income Summary. On the statement of retained earnings, we reported theending balance of retained earnings to be $15,190. We need to dothe closing entries to make them match and zero out the temporaryaccounts.
These entries help businesses track their performance over time and provide valuable insights to stakeholders. Then you are going to create a journal entry to transfer the balance of each temporary account closing entries to the appropriate permanent account. For example, the balance of a revenue account will go to the income summary. Permanent accounts, also known as real accounts, do not require closing entries.
Preparing a Closing Entry
- The income summary account acts as a temporary holding place for the net income or loss for the period.
- Closing entries in accounting are something you are certainly going to run across if you take a position in internal accounting.
- These accounts must be closed at the end of the accounting year.
- If your expenses for December had exceeded your revenue, you would have a net loss.
- To close revenue accounts, you first transfer their balances to the income summary account.
- If both summarize your income in the same period, then they must be equal.