Completing the
Accounting Cycle for a
Sole Proprietorship
Making Accounting Relevant
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Section 1 Preparing Closing
Entries
What You’ll Learn
 Why temporary capital accounts are
closed at the end of the fiscal year.
 The purpose of the Income Summary
account.
 The relationship between the Income
Summary account and the capital
account.
 How to analyze and journalize
closing entries.
Section 1 Preparing Closing Entries (cont'd.)
Why It’s Important
Closing entries are made to prepare
the financial records for the next fiscal
year.
Key Terms
 closing entries
 Income Summary account
 compound entry
Section 1 Preparing Closing Entries (cont'd.)
Starting the Eighth Step in the
Accounting Cycle: Journalizing
the Closing Entries
Closing entries are journal entries
made to close, or reduce to zero, the
balances in the temporary capital
accounts and to transfer the net
income or net loss for the period to
the capital account.
Section 1 Preparing Closing Entries (cont'd.)
The Income Summary Account
The Income Summary account is
used to accumulate and summarize the
revenue and expenses for the period.
Income Summary
Debit
Credit
Expenses
Revenue
If Revenue > Expenses
If Revenue < Expenses
Balance is net income
Balance is net loss
Section 1 Preparing Closing Entries (cont'd.)
Preparing Closing Entries
1. The balance of the revenue
account is transferred to the
credit side of the Income
Summary account.
2. The expense account balances
are transferred to the debit side
of the Income Summary account.
Section 1 Preparing Closing Entries (cont'd.)
Preparing Closing Entries (cont'd.)
3. The balance of the Income
Summary account is transferred to
the capital account (net income to
the credit side; net loss to the debit
side).
4. The balance of the withdrawals
account is transferred to the debit
side of the capital account.
Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry
Closing Entry
First Closing Entry—Close Revenue to Income Summary
ANALYSIS Identify
Classify
+/–
1. Roadrunner has only one revenue
account, Delivery Revenue. The
accounts affected are Delivery
Revenue and Income Summary.
2. Delivery Revenue is a revenue
account. Income Summary is a
temporary capital account.
3. The Delivery Revenue account
balance is decreased by $2,650 to
zero. That amount, $2,650, is
transferred to the Income
Summary account.
Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry
(cont'd.)
Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
DEBIT-CREDIT RULE
4. Decreases in revenue accounts
are recorded as debits. Debit
Delivery Revenue for $2,650.
5. To transfer the revenue to the
Income Summary account,
credit Income Summary for
$2,650.
Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry
(cont'd.)
Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
T ACCOUNTS 6.
Delivery
Equipment
Income
Summary
Debit
Credit
–
+
Closing 2,650
Balance 2,650
Debit
Credit
Closing 2,650
Section 1 Preparing Closing Entries (cont'd.)
First Closing Entry
(cont'd.)
Closing Entry (cont'd.)
First Closing Entry—Close Revenue to Income Summary
JOURNAL ENTRY
Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry
Closing Entry
Second Closing Entry—Close Expenses to Income Summary
ANALYSIS Identify
Classify
+/–
1. The accounts affected by the second
closing entry are Advertising
Expense, Maintenance Expense,
Rent Expense, Utilities Expense, and
Income Summary.
2. Advertising Expense, Maintenance
Expense, Rent Expense, and Utilities
Expense are expense accounts.
Income Summary is a temporary
capital account.
3. The balances of the four expense
accounts are decreased to zero; the
total decrease is $1,500. The total
amount, $1,500, is transferred to the
Income Summary account.
Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Second Closing Entry—Close Expenses to Income Summary
DEBIT-CREDIT RULE 4. To transfer the expenses to the
Income Summary account, debit
Income Summary for $1,500.
5. Decreases in expense accounts
are recorded as credits. Credit
Advertising Expense, $75;
Maintenance Expense, $600;
Rent Expense, $700; Utilities
Expense, $125.
Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Second Closing Entry—Close Expenses to Income Summary
T ACCOUNTS 6.
Income Summary
Debit
Credit
Advertising Expense
Debit
Credit
–
+
–
Closing 1,500
Balance 75
Closing 75
Maintenance Expense
Rent Expense
Debit
Credit
Debit
Credit
+
–
+
–
Balance 600
Closing 600
Balance 700
Closing 700
Utilities Expense
Debit
Credit
+
–
Balance 125
Closing 125
Section 1 Preparing Closing Entries (cont'd.)
Second Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Second Closing Entry—Close Expenses to Income Summary
JOURNAL ENTRY
7.
Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry
Closing Entry
Third Closing Entry—Close Income Summary to Capital
ANALYSIS Identify
1. The accounts Income Summary
and Maria Sanchez, Capital are
affected.
Classify 2. Income Summary is a temporary
capital account. Maria Sanchez,
Capital is an owner’s capital
account.
+/–
3. The Income Summary account
balance is reduced to zero by
transferring $1,150, the net income
amount, to the capital account.
Maria Sanchez, Capital is
increased by $1,150.
Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Third Closing Entry—Close Income Summary to Capital
DEBIT-CREDIT RULE 4. To reduce the Income Summary
balance to zero, debit Income
Summary for $1,150.
5. Net income is recorded as a credit
to the owner’s capital account.
Credit Maria Sanchez, Capital for
$1,150.
Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Third Closing Entry—Close Income Summary to Capital
T ACCOUNTS
6.
Income Summary
Debit
Closing 1,150
Credit
Balance 1,150
Maria Sanchez
Capital
Debit
Credit
–
+
Balance 25,400
Closing 1,150
Section 1 Preparing Closing Entries (cont'd.)
Third Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Third Closing Entry—Close Income Summary to Capital
JOURNAL ENTRY
7.
Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry
Closing Entry
Fourth Closing Entry—Close Withdrawals to Capital
ANALYSIS Identify
1. The accounts affected by the fourth
closing entry are Maria Sanchez,
Withdrawals and Maria Sanchez,
Capital.
Classify 2. Maria Sanchez, Withdrawals is a
temporary capital account. Maria
Sanchez, Capital is an owner’s
capital account.
+/–
3. Maria Sanchez, Withdrawals is
decreased by $500. Maria
Sanchez, Capital is decreased by
$500.
Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Fourth Closing Entry—Close Withdrawals to Capital
DEBIT-CREDIT RULE 4. Decreases in owner’s capital
accounts are recorded as debits.
Debit Maria Sanchez, Capital for
$500.
5. Decreases in owner’s withdrawal
accounts are recorded as credits.
Credit Maria Sanchez,
Withdrawals for $500.
Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Fourth Closing Entry—Close Withdrawals to Capital
T ACCOUNTS
6.
Maria Sanchez
Capital
Maria Sanchez
Withdrawals
Debit
Credit
Debit
Credit
–
+
+
–
Closing 500
Balance 26,550
Balance 500
Closing 500
Section 1 Preparing Closing Entries (cont'd.)
Fourth Closing Entry
(cont'd.)
Closing Entry (cont'd.)
Fourth Closing Entry—Close Withdrawals to Capital
JOURNAL ENTRY
7.
Section 1 Preparing Closing Entries (cont'd.)
Check Your Understanding
What is the purpose of the
Income Summary account?