When closing the revenue account, you will take the revenue listed in the trial balance and debit it, to reduce it to zero. As a corresponding entry, you will credit the income summary account, which we mentioned earlier. From this trial balance, as we learned in the prior section, you make your financial statements.
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If we had not used the Income Summary account, we would not have this figure to check, ensuring that we are on the right path. The first is to close all of the temporary accounts in order to start with zero balances for the next year. The second is to update the balance in Retained Earnings to agree to the Statement of Retained Earnings. Transferring the expense account to the account is similar to the revenue account process. However, rather than credit the expense balance to transfer it, businesses must debit it, given that expenses are already credited. In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner.
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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 Income Summary. You might be asking yourself, “is the Income Summary account even necessary?
#2. Close Expense Accounts
Let’s look at the trial balance we used in the Creating Financial Statements post. Without these accounts, accounting errors from transitioning the revenue and expense balances would be significantly more frequent. Additionally, all the information is condensed into one location, making it a fantastic tax tool. This indicates that a profit was made because a credit balance must be debited to the income summary. In essence, we are updating the capital balance and resetting all temporary account balances.
The income summary account is a temporary account into which all income statement revenue and expense accounts are placed at the end of an accounting period. The net amount put into this account equals the business’s net profit or loss for the period. Shifting revenue out of the income statement, therefore, entails debiting the revenue account for the total amount of revenue recorded in the period https://www.online-accounting.net/ and crediting the income summary account. The income summary account is a temporary account into which all income statement revenue and expense accounts are transferred at the end of an accounting period. The income summary account is an intermediate point at which revenue and expense totals are accumulated before the resulting profit or loss passes through to the retained earnings account.
- If the balance on the final account is a loss (debit balance), companies have to credit the lost amount to the retained earnings.
- The closing entry will debit both interest revenue and service revenue, and credit Income Summary.
- All revenue accounts will become zero after this entry is completed.
- This is an optional step in the accounting cycle that you will learn about in future courses.
A, E, and F are temporary; B, C, D, G, and H are permanent. This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes. Our T-account for Retained Earnings now has the desired balance. The balance in Retained Earnings was $8,200 before completing the Statement of Retained Earnings.
These posted entries will then translate into a post-closing trial balance, which is a trial balance that is prepared after all of the closing entries have been recorded. Corporations will close the income summary account to the retained earnings account. Closing entries are completed at the end of each https://www.online-accounting.net/what-is-a-credit-memo/ accounting period after your adjusted trial balance has been run. The next and final step in the accounting cycle is to prepare one last post-closing trial balance. You record the income summary amount by adding the total expenses and total income and then transferring them to the balance sheet.
To update the balance in Retained Earnings, we must transfer net income and dividends/distributions to the account. By closing revenue, expense and dividend/distribution accounts, we get the desired balance in Retained Earnings. Now that the revenue account is closed, next we close the expense accounts.
The statement of retained earnings shows the period-ending retained earnings after the closing entries have been posted. When you compare the retained earnings ledger (T-account) to the statement of retained earnings, the figures must match. It is important to understand retained earnings ex-dividend dates and how to find them is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close. You should recall from your previous material that retained earnings are the earnings retained by the company over time—not cash flow but earnings.