How to Post Closing Entries in Accounting

For our purposes, assume that we are closing the books at the end of each month unless otherwise noted. It is important to note that the balancing of the trial balance columns does not ensure the accuracy of accounts. This is because there are some errors that do not have an impact on the equality of the debit and the credit columns. Therefore, Trial Balance is an important accounting statement as it showcases the final status of each of your ledger accounts at the end of the financial year.

• He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.
• At the end of the cycle, an unadjusted trial balance and adjusted trial balance are created, before closing entries are posted and a post closing trial balance is prepared.
• It is the end of the year,December 31, 2018, and you are reviewing your financials for theentire year.
• Temporary accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts.
• Both the debits and credit totals are calculated at the end, and if these are not equal, one can know there must have been some mistake in preparing the trial balance.
• They provide a clear picture of a company’s performance over the period and set the stage for the next.

These accounts are credited when income is generated and are used to determine profitability. Their balances are reset to accurately reflect revenue earned only within a specific period. We need to do the closing entries to make them match and zero out the temporary accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business.

To further clarify this concept, balances are closed to assure all revenues and expenses are recorded in the proper period and then start over the following period. The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period. However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period.

Income Summary Account

It consists of several columns that show the trial balance, adjustments, adjusted trial balance, income statement, and balance sheet. The second entry requires expense accounts close to the Income Summary account. To get a zero balance in an expense account, the entry will show a credit to expenses and a debit to Income Summary. Printing Plus has $100 of supplies expense, $75 of depreciation expense–equipment, $5,100 of salaries expense, and $300 of utility expense, each with a debit balance on the adjusted trial balance. The closing entry will credit Supplies Expense, Depreciation Expense–Equipment, Salaries Expense, and Utility Expense, and debit closing entries and post Income Summary.

Is Debit Positive or Negative in Accounting?

By leveraging advanced workflow management, the no-code platform, LiveCube ensures that all closing tasks are completed on time and accurately, reducing the manual effort and the risk of errors. 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. To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle. For instance, you may debit a correct balance in an incorrect account while passing a journal entry. If both summarizeyour income in the same period, then they must be equal.

Analyzing the opening trial balance:

The interplay between closing entries and retained earnings is a testament to the dynamic nature of accounting. It underscores the importance of meticulous record-keeping and strategic financial planning. As businesses strive to balance growth with profitability, the management of retained earnings remains a testament to their enduring commitment to fiscal responsibility and shareholder value.

• The information in the unadjusted entries normally including company name, accounting period, account name, unadjusted amount, adjusting entries , and adjusting entries.
• The trial balance is like a snapshot of your business’s financial health at a specific moment.
• Closing entries are performed after adjusting entries in the accounting cycle.
• Closing entries, often considered the final act in the accounting cycle, are like the closing curtain on a theatrical production.

Step 2 – closing the expense accounts:

A corresponding credit entry is made to the Income Summary account, transferring the total revenue for the period into this temporary clearing account. All the temporary accounts, including revenue, expense, and dividends, have now been reset to zero. The balances from these temporary accounts have been transferred to the permanent account, retained earnings.

These final balances help you to prepare final accounts like the Profit and Loss Statement and Balance Sheet. Now that the post closing trial balance is prepared and checked for errors, Paul can start recording any necessary reversing entries before the start of the next accounting period. Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period. For example, the revenues account records the amount of revenues earned during an accounting period—not during the life of the company. Thebalance in the Income Summary account equals the net income or lossfor the period. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account.

They are an unadjusted trial balance, adjusted trial balance, and post-closing trial balance. As the next accounting period starts, reopen the permanent accounts by placing their balance to their normal sides. After all income statement accounts are closed to the income and expense summary account, the latter’s balance will determine whether there is net income or net loss.

In summary, the accountant resets thetemporary accounts to zero by transferring the balances topermanent accounts. A temporary account is an income statement account, dividend account or drawings account. At the end of the accounting period, the balance is transferred to the retained earnings account, and the account is closed with a zero balance. The closing process involves a sequence of journal entries designed to transfer temporary account balances to permanent accounts, ultimately resetting them to zero. This systematic approach prepares financial records for the next accounting cycle.

Printing Plus has $100 ofdividends with a debit balance on the adjusted trial balance. If dividends were not declared, closing entries would cease at this point. If dividends are declared, to get a zero balance in the Dividends account, the entry will show a credit to Dividends and a debit to Retained Earnings. As you will learn in Corporation Accounting, there are three components to the declaration and payment of dividends. The first part is the date of declaration, which creates the obligation or liability to pay the dividend.