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Lecture 7 - Closing Entries

Closing entries are journal entries made at the end of an accounting period to transfer temporary accounts to permanent accounts. The purpose is to bring temporary account balances to zero for the next period. There are typically four steps to the closing process: 1) close revenue accounts to an income summary account, 2) close expense accounts to the income summary account, 3) close the income summary account to the capital account, and 4) close any drawings account by debiting capital and crediting drawings. This zeroes out all temporary accounts and leaves only permanent balance sheet accounts with balances.

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300 views

Lecture 7 - Closing Entries

Closing entries are journal entries made at the end of an accounting period to transfer temporary accounts to permanent accounts. The purpose is to bring temporary account balances to zero for the next period. There are typically four steps to the closing process: 1) close revenue accounts to an income summary account, 2) close expense accounts to the income summary account, 3) close the income summary account to the capital account, and 4) close any drawings account by debiting capital and crediting drawings. This zeroes out all temporary accounts and leaves only permanent balance sheet accounts with balances.

Uploaded by

Meer Sadaqat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Lec 7

Closing Entries
“Closing entries are journal entries made at the
end of an accounting period to transfer temporary
accounts to permanent accounts”.

• An "income summary“
account may be used to show the balance
between revenue and expenses.
Purpose of Closing entries

• The purpose of the closing entry is to bring the


temporary journal account balances to zero for
the next accounting period.
• As with all other journal entries, the closing entries are posted
in the general ledger.

• After all closing entries have been finished, only the


permanent balance sheet accounts will have balances that
are not zeroed.

• For example, revenue, dividend, or expense accounts are


temporary accounts that need to be zeroed off and the
balance transferred to permanent accounts.
The sequence of the closing process
1. Close revenue accounts to income summary, by
debiting revenue and crediting income summary.

2. Close expense accounts to income summary, by


debiting income summary and crediting expense.

3. Close income summary to Capital account, by debiting


income summary and crediting Capital.

4. Close drawings to capital, by


debiting capital and crediting the drawings.
EXAMPLE
The sequence of the closing process
1. Close revenue accounts to income summary,
by debiting revenue and crediting income
summary.
Journal
Date Description LP DEBIT CREDIT
Dec 31 Revenue 10000 Dr Cr

Income Summary 10000 A INC DEC


To close the Revenue a/c L DEC INC

C DEC INC

E INC DEC

R DEC INC
The sequence of the closing process
1. Close revenue accounts to income summary,
by debiting revenue and crediting income
summary.

2. Close expense accounts to income summary,


by debiting income summary and crediting
expense.
Journal
Date Description LP DEBIT CREDIT
Dec 31 Revenue 10000 Dr Cr

Income Summary 10000 A INC DEC


To close the Revenue a/c L DEC INC

C DEC INC
31 Income Summary 8000
Advertising exp 1000 E INC DEC

Rent exp 1000 R DEC INC


Repairs exp 2000
Salaries exp 1000
Light & Power exp 1000
Dep exp: Building 1000
Dep exp: Golf course 1000
To close the Expense a/c
The sequence of the closing process
1. Close revenue accounts to income summary,
by debiting revenue and crediting income
summary.

2. Close expense accounts to income summary,


by debiting income summary and crediting
expense.

3. Close income summary to Capital account, by


debiting income summary and crediting Capital.
Journal
Date Description LP DEBIT CREDIT
Dr Cr

Dec 31 Income Summary 2000 A INC DEC

Capital 2000 L DEC INC


To close the income summary
C DEC INC
account by transferring the
net income for the year to the E INC DEC
owner’s capital account
R DEC INC
The sequence of the closing process
1. Close revenue accounts to income summary, by
debiting revenue and crediting income summary.

2. Close expense accounts to income summary, by


debiting income summary and crediting expense.

3. Close income summary to Capital account, by


debiting income summary and crediting Capital.

4. Close drawings to capital, by debiting capital and


crediting the drawings.
Journal
Date Description LP DEBIT CREDIT
Dr Cr

Dec 31 Income Summary 2000 A INC DEC

Capital 2000 L DEC INC


To close the income summary
C DEC INC
account by transferring the
net income for the year to the E INC DEC
owner’s capital account
R DEC INC

31 Capital 500
Drawings 500
To close the owner’s drawing
account

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