Arab British Academy for Higher Education. Closing Entries
At the end of the accounting period, the balances in temporary accounts are transferred to
an income summary account and a retained earnings account, thereby resetting the
balance of the temporary accounts to zero to begin the next accounting period.
First, the revenue accounts are closed by transferring their balances to the income
summary account. Consider the following example for which September 30 is the end of
the accounting period. If the revenue account balance is $1100, then the closing journal
entry would be:
Date
9/30
Accounts
Revenue
Income Summary
Debit
1100
Credit
1100
Next, the expense accounts are closed by transferring their balances to the income
summary account. If the expense account balance is $1275, then the closing entry would
be:
Date
9/30
Accounts
Income Summary
Expenses
Debit
1275
Credit
1275
At this point, the net balance of the income summary account is a $175 debit (loss). The
income summary account then is closed to retained earnings:
Date
9/30
Accounts
Retained Earnings
Income Summary
Debit
175
Credit
175
Finally, the dividends account is closed to retained earnings. For example, if $50 in
dividends were paid during the period, the closing journal entry would be as follows:
Date
9/30
Accounts
Retained Earnings
Dividends
Debit
50
Credit
50
Once posted to the ledger, these journal entries serve the purpose of setting the temporary
revenue, expense, and dividend accounts back to zero in preparation for the start of the
next accounting period.
1 www.abahe.co.uk Arab British Academy for Higher Education. Note that the income summary account is not absolutely necessary - the revenue and
expense accounts could be closed directly to retained earnings. The income summary
account offers the benefit of indicating the net balance between revenue and expenses
(i.e. net income) during the closing process.
2 www.abahe.co.uk