The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5). The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. 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. To determine the income (profit or loss) from the month of January, the store needs to close the income statement information from January 2019. After preparing the closing entries above, Service Revenue will now be zero.

Step 3: Closing the income summary account

Once all of the required entries have been made, you can run your post-closing trial balance, as well as other reports such as an income statement or statement of retained earnings. When closing the revenue account, you will take the revenue listed in the trial balance and debit it, to reduce effective annual rate ear it to zero. As a corresponding entry, you will credit the income summary account, which we mentioned earlier. In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner. In a partnership, a drawing account is maintained for each partner.

Step 1: Close all income accounts to Income Summary

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 is not closed out, it is only updated. Retained Earnings is the only account that appears in the closing entries that does not close.

Step #2: Close Expense Accounts

All drawing accounts are closed to the respective capital accounts at the end of the accounting period. After the posting of this closing entry, the income summary now has a credit balance of $14,750 ($70,400 credit posted minus the $55,650 debit posted). After the closing journal entry, the balance on the drawings account is zero, and the capital account has been reduced by 1,300. What is the current book value of your electronics, car, and furniture? Are the value of your assets and liabilities now zero because of the start of a new year? Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt.

Step 4: Close withdrawals to the capital account

Now, if you realize from steps 1 & 2, the balance of the Income Summary is also the same amount as the Net Income. As stated before, Income Summary is a temporary account and would also be closed. A revenue account is a financial account that records the monetary balances that the business has generated through its sales/services during the fiscal year without considering expenses, taxes, and deductions.

Closing entries, on the other hand, are entries that close temporary ledger accounts and transfer their balances to permanent accounts. A process where all temporary accounts https://www.kelleysbookkeeping.com/home-office-tax-deductions-for-small-business/ opened in the fiscal year are transferred and closed to a permanent arrangement. Doing so will give zero balance to the brief history to use for the next fiscal year.

Expense accounts have a debit balance, so you’ll have to credit their respective balances and debit income summary in order to close them. This time period, called the accounting period, usually reflects one fiscal year. However, your business is also free to handle closing https://www.kelleysbookkeeping.com/ entries monthly, quarterly, or every six months. As mentioned above, Temporary Accounts are closed, and their balances are transferred into a Permanent Account. During the process of closing accounts, there are multiple steps and information that you must remember.

To make the balance zero, debit the revenue account and credit the Income Summary account. The income summary account is an intermediary between revenues and expenses, and the Retained Earnings account. It stores all of the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period. The balance in the Income Summary account equals the net income or loss for the period. This balance is then transferred to the Retained Earnings account. On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190.

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. You begin the closing process by transferring revenue and expense account balances to the income summary account, a temporary account used specifically to transfer revenue and expense account balances. Closing your accounting books consists of making closing entries to transfer temporary account balances into the business’ permanent accounts. Although it is not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period.

1. It shows the Revenue, Expenses, and, most importantly, the Net Income the company generated during the fiscal year.
2. We at Deskera offer the best accounting software for small businesses today.
3. No matter which way you choose to close, the same final balance is in retained earnings.
4. By doing so, the company moves these balances into permanent accounts on the balance sheet.

The Income Summary balance is ultimately closed to the capital account. Adjusting entries are used to modify accounts so that they’re in compliance with the accrual concept of recording income and expenses. Well, dividends are not part of the income statement because they are not considered an operating expense. After Closing Entries in the accounting cycle, a Post-Closing Trial Balance would be created.

Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.