Closing Entries Definition, Examples, and Recording

The third entry requires Income Summary to close to the RetainedEarnings account. To get a zero balance in the Income Summaryaccount, there are guidelines to closing entries accounting consider. QuickBooks Online offers features such as automatic bank feeds, which will greatly reduce the number of journal entries that need to be created.

That’s where automation tools like Autonomous Accounting come in. It effortlessly sifts through large amounts of data and generates closing entries automatically. This ensures that your financial operations infrastructure can scale with your business’s growth. If your expenses for December had exceeded your revenue, you would have a net loss. When closing expenses, you should list them individually as they appear in the trial balance.

Trial Balance

The first entrycloses revenue accounts to the Income Summary account. The secondentry closes expense accounts to the Income Summary account. A sole proprietor or partnership often uses a separate drawings account to record withdrawals of cash by the owners. Although the drawings account is not an income statement account, it is still classified as a temporary account and needs a closing journal entry to zero the balance for the next accounting period.

Now that we have closed the temporary accounts, let’s review what the post-closing ledger (T-accounts) looks like for Printing Plus. The first entry closes revenue accounts to the Income Summary account. The second entry closes expense accounts to the Income Summary account. The third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings. The information needed to prepare closing entries comes from the adjusted trial balance.

Practice Question: Preparing a Closing Entry

We do not need to show accounts with zerobalances on the trial balances. When making closing entries, the revenue, expense, and dividend account balances are moved to the retained earnings permanent account. If you own a sole proprietorship, you have to close temporary accounts to the owner’s equity instead of retained earnings. Temporary (nominal) accounts are accounts thatare closed at the end of each accounting period, and include incomestatement, dividends, and income summary accounts.

AccountEdge Pro does not include a bank feed, but you can download your bank statement for reconciliation within the application. Journal entries are used to record the financial activity of your business. Journal entries are either recorded in subsidiary ledgers if you’re keeping your books manually, or they’re recorded directly into the general ledger (G/L) if you use accounting software. In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. In addition, if the company uses several sets of books for its subsidiaries, the results of each subsidiary must first be transferred to the books of the parent company and all intercompany transactions eliminated.

Step 3: Closing the income summary account

This is no different from what will happen to a company at theend of an accounting period. A company will see its revenue andexpense accounts set back to zero, but its assets and liabilitieswill maintain a balance. In summary, the accountant resets thetemporary accounts to zero by transferring the balances topermanent accounts. The closing entries are the journal entry formof the Statement of Retained Earnings. The goal is to make theposted balance of the retained earnings account match what wereported on the statement of retained earnings and start the nextperiod with a zero balance for all temporary accounts. The closing entries are the journal entry form of the Statement of Retained Earnings.

Whichever way they’re recorded, they are a necessity for any business. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own.