Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero. Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. They are housed on the balance sheet, a section of the financial statements that gives investors an indication of a company’s value, including its assets and liabilities.

On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts. Only income statement accounts help us summarize income, so only income statement accounts should go into income summary. There are four closing entries; closing revenues to income summary, closing expenses to income summary, closing income summary to retained earnings, and close dividends to retained earnings.

How to Close Accounting Books

In other words, revenue, expense, and withdrawal accounts always have a zero balance at the start of the year because they are always closed at the end of the previous year. Clear the balance of the revenue account by debiting revenue and crediting income summary. At the end of an annual accounting period, and after financial statements are prepared, it

is necessary to prepare certain accounts (Revenues, Expenses, and Dividends) for the next

accounting period. First, transfer the $5,000 in your revenue account to your income summary account. Whether you credit or debit your income summary account will depend on whether your revenue is more than your expenses. You need to create closing journal entries by debiting and crediting the right accounts.

We could do this, but by having the Income Summary account, you get a balance for net income a second time. This gives you the balance to compare to the income statement, and allows you to double check that all income statement accounts are closed and have correct amounts. If you put the revenues and expenses directly into retained earnings, you will not see that check figure. No matter which way you choose to close, the same final balance is in retained earnings. To further clarify this concept, balances are closed to assure all revenues and expenses are recorded in the proper period and then start over the following period.

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Permanent accounts, on the other hand, include assets, liabilities, and most equity accounts. These account balances roll over into the next period and reflect the company’s financial activity in the long term. They are stored on the balance sheet, a section of the financial statements that investors can use as an indication to asset a company’s value. The adjusted trial balance lists income statement accounts, or temporary accounts, highlighted below. The accounts that need to start with a clean or $0 balance going into the next accounting period are revenue, income, and any dividends from January 2019.

When the income statement is published at the end of the year, the balances of these accounts are transferred to the income summary, which is also a temporary account. And closing entries are used to reset the balances of temporary accounting to zero so they are ready for the next accounting period. Because the sales account has a credit balance, the closing entry is made on the debit side to bring the account balance to zero. Similarly, because expense accounts have debit balances, the closing entry is made on the credit side to bring the expense account balances to zero.

Closing Entry #1 for Bob

The Retained Earnings account balance is currently a credit of $4,665. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings. If both summarize your income in the same period, then they must be equal. The completion of these steps finalizes the process of making closing entries. For sole proprietorships and partnerships, you’ll close your drawing account to your capital account, because you will need to reduce your capital account by the draws taken for the month. If your expenses for December had exceeded your revenue, you would have a net loss.

• At the end of an annual accounting period, and after financial statements are prepared, it

  is necessary to prepare certain accounts (Revenues, Expenses, and Dividends) for the next

  accounting period.

• It’s important to note that neither the drawing nor the dividends accounts need to be transferred to the income summary account.
• Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.
• They carry balances forward from previous accounting periods and do not zero out.

This is the adjusted trial balance that will be used to make your closing entries. While these accounts remain on the books, their balance is reset to zero each month, which is done using closing entries. The fourth entry requires Dividends to close to the Retained Earnings account.

Income Summary Accounts

The dividend account is a temporary account where monies to be paid to the stockholders are accounted for. At the end of the year, this account is closed out to the retained earnings account. It will decrease retained earnings by the amount of the dividend payout for the accounting period being closed. If your revenues https://turbo-tax.org/amended-tax-return/ are greater than your expenses, you will debit your income summary account and credit your retained earnings account. Closing entries may be defined as the journal entries made at the end of an accounting period to transfer the balances of various temporary ledger accounts to one or more permanent ledger accounts.

Closing entries are those journal entries made in a manual accounting system at the end of an accounting period to shift the balances in temporary accounts to permanent accounts. Temporary accounts are used to compile transactions that impact the profit or loss of a business during a year, while permanent accounts maintain an ongoing balance over time. During this closing process, a new temporary account, called income summary, is created to transfer the income and expense account balances. The balance in the income summary account equals the difference between sales and expenses, which is then transferred to owner’s equity. Transferring funds from temporary to permanent accounts also updates your small business retained earnings account.

All modern accounting software automatically generates closing entries, so these entries are no longer required of the accountant; it is usually not even apparent that these entries are being made. This entry zeros out dividends and reduces retained earnings by total dividends paid. One of the most important steps in the accounting cycle is creating and posting your closing entries. Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet. Notice that the Income Summary account is now zero and is ready for use in the next period.