Accountants perform closing entries to return the revenue, expense, and drawing temporary account balances to zero in preparation for the new accounting period. Closing your accounting books consists of making closing entries to transfer temporary account balances into the business’ permanent accounts. When you close your books at year-end, the accounts aren’t erased; instead, their balances are transferred to a permanent retained earnings account. Occasionally, revenue and expenses are transferred to an intermediate account called an income summary. Dividends are always transferred directly to retained earnings. We see from the adjusted trial balance that our revenue accounts have a credit balance.

Financial Accounting

• All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary.
• That way, your next accounting period does not have a balance in your revenue or expense account from the previous period.
• Remember, dividends are a contra stockholders’ equity account.It is contra to retained earnings.
• Notice that the balances in interest revenue and service revenueare now zero and are ready to accumulate revenues in the nextperiod.

Notice that revenues, expenses, dividends, and income summaryall have zero balances. The post-closing T-accounts will be transferred to thepost-closing trial balance, which is step 9 in the accountingcycle. The second entry requires expense accounts close to the IncomeSummary guide to the nanny tax for babysitters and employers account. To further clarify this concept, balances are closed to assureall revenues and expenses are recorded in the proper period andthen start over the following period. A term often used for closing entries is “reconciling” the company’s accounts.

Step #3: Close Income Summary

Get started here if you want to speak to a professional about your business cash flow. Answer the following questions on closing entries and rate your confidence to check your answer. For partnerships, each partners’ capital account will be credited based on the agreement of the partnership (for example, 50% to Partner A, 30% to B, and 20% to C). For corporations, Income Summary is closed entirely to “Retained Earnings”.

Step 2: Close all expense accounts to Income Summary

You might be asking yourself, “is the Income Summary accounteven necessary? ” Could we just close out revenues and expensesdirectly into retained earnings and not have this extra temporaryaccount? We could do this, but by having the Income Summaryaccount, you get a balance for net income a second time. This givesyou the balance to compare to the income statement, and allows youto double check that all income statement accounts are closed andhave correct amounts. If you put the revenues and expenses directlyinto retained earnings, you will not see that check figure. Nomatter which way you choose to close, the same final balance is inretained earnings.

Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account.

Transferred to the Balance Sheet

” All you have to do is click the magic wand tool in the Inbox, check the response, make any necessary changes, and hit send. Notice that the Income Summary account is now zero and is readyfor use in the next period. The Retained Earnings account balanceis currently a credit of $4,665.

To make the balance zero, debit the revenue account and credit the Income Summary account. Simultaneously, the Income Summary account is credited for the same amount, effectively transferring the total expenses from the expense account. Subsequently, another journal entry is created to close the Income Summary account. The Income Summary account is debited for its balance, representing the total expenses transferred from the expense account.

They’d record declarations by debiting Dividends Payable and crediting Dividends. If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings. Next, transfer the $2,500 in your expense account to your income summary account.

The income summary account doesn’t factor in when preparing financial statements because its only purpose is to be used during the closing process. This means thatit is not an asset, liability, stockholders’ equity, revenue, orexpense account. First, all the various revenue account balances are transferred to the temporary income summary account. This is done through a journal entry that debits revenue accounts and credits the income summary. 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.