Closing Entries in Accounting - Closing Journal

Why Closing Entries are made?

Closing entries are made to produce a zero balance in temporary accounts by transferring their balances to permanent accounts because company carries forward the balances of permanent accounts into the next accounting period.

Pre-requirement of making closing entries?

To make closing entries it is necessary to distinguish between temporary and permanent accounts.

What are the Temporary Accounts?

Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner’s drawings account.

·         All revenue accounts

·         All expense accounts

·         Owner’s drawings account

What are the Permanent Accounts?

Permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner’s capital account.

·         All asset accounts

·         All liability accounts

·         Owner’s capital account

How Closing Entries are made?

Four entries are made for closing entries:

1. Debit each revenue account for its balance, and credit Income Summary for total revenues.

2. Debit Income Summary for total expenses, and credit each expense account for its balance.

3. Debit Income Summary and credit Owner’s Capital for the amount of net income.

4. Debit Owner’s Capital for the balance in the Owner’s Drawings account, and credit Owner’s Drawings for the same amount.

Summary:

Close Revenues to Income Summary.

Close Expenses to Income Summary.

Close Income Summary to Owner’s Capital.

Close Owner’s Drawings to Owner’s Capital.

Problem:

For the Month Ended October 31, 2012

Income Statement For the Year Ended 31st December, 2016
Revenues:
Service revenue		Tk 10,600
Expenses:
Salaries and wages expense	Tk 5,200
Supplies expense	1,500
Rent expense	900
Insurance expense	50
Interest expense	50
Depreciation expense	40
Total expenses		7,740
Net income		Tk 2,860

Solution:

Closing Entries
Date	Account Titles and Explanation	Ref.	Debit	Credit
2017 Dec. 31	Service Revenue     Income Summary (To close revenue account)		10,600	10,600
Dec. 31	Income Summary     Salaries and wages expense     Supplies Expense     Depreciation Expense     Insurance Expense     Salaries and Wages Expense     Rent Expense     Interest Expense (To close expense accounts)		7,740	5,200 1,500 40 50 5,200 900 50
Dec. 31	Income Summary     Owner’s Capital (To close net income to capital)		2,860	2,860
Dec. 31	Owner’s Capital     Owner’s Drawings (To close drawings to capital)		500	500