
At the end of each fiscal period, the
company wants to clear out certain
accounts, so that they have zero
balances carrying forward
› This is done after financial statements have
been prepared (there must be totals in all
accounts to do this process)

The business will clear out the Nominal
Accounts and leave the Real Accounts
alone
WHY DO WE CLOSE OUT ACCOUNTS? Closing
various accounts allows us to plainly
observe the previous year's effect on our
revenue, expense, and drawings accounts.
 You can well imagine that if we did not
close these accounts, their balances would
build to outrageous amounts.
› Easier to analyze the numbers if we know we
made x amount of money in 2011 and spent y.

REAL ACCOUNTS – balances that
continue into the next fiscal period
ex. Bank, trucks, accounts payable etc.

NOMINAL ACCOUNTS – have balances
that do not continue into the next fiscal
period
ONLY Expenses, drawing and revenue

CLOSING OUT AN ACCOUNT – means to make
it have no balance. Nominal accounts are
closed out at the end of the fiscal period.

INCOME SUMMARY ACCOUNT – summarizes
the revenues and expenses of the period.
Represents either the net income or net loss for
the fiscal period
› A temporary account that aids us in the closing entry
process
› This will never have a balance at the end of the
month, therefore is not necessary to classify as an
asset, liability, expense or revenue account
HOW DO WE DO THIS?
At the end of each month, there is an order in which
we close out accounts
1. Close out all the accounts that have credit
balances by debiting them and crediting the
Income Summary account
2. Close out all the accounts that have debit
balances by crediting them and debiting the
Income Summary account
3. Close out the Income Summary account to
the Capital account
4. Close out the Drawing account to the Capital
account

Closing Entry #1: Close out the debit
account(s) to the Income Summary
account
Date
1
2
3
DEC
Particulars
Debit
P.R.
Credit
XX
31 Sales
Purchase Discounts
XX
Purchase Returns and
Allowances
XX
Ending Inventory
XX
Income Summary
XX
To close income statement
accounts with a credit balance,
and establish ending inventory
Because sales, purchase discounts, purchase returns and allowances and ending
inventory is a CR balance account, a DR entry is needed to close it off

Closing Entry #2: Close out the debit
account(s) to the Income Summary
account
Date
1
2
3
DEC
P.
R.
Particulars
31 Income Summary
Debit
Credit
XX
Sales Discounts
XX
Sales Returns and
Allowances
XX
Purchases
XX
Freight-In
XX
Freight-Out
XX
Any Other Expenses
XX
Beginning Inventory
XX
To close income statement accounts with
a debit balance, and remove the
beginning inventory balance

Closing Entry #3: Close out the Income
Summary account to the Capital
account
Date
1
2
DEC
Particulars
31
Income Summary
K. Smith Capital
Debit
P.R.
Credit
XX
1
XX
If the Income Summary account has a CR balance, then a DR
entry is needed to close it. (profit  capital increases)
If the Income Summary account has a DR balance, then a CR
entry is needed to close it. (loss  capital decreases)
2

Closing Entry #4: Close out the Drawing
account to the Capital account
Because Drawings is a DR balance account, a CR entry is needed
to close it
HOW DO WE DO THIS?
At the end of each month, there is an order in which
we close out accounts
1. Close out the sales account that has a credit
balance by debiting it and crediting the
Income Summary account
2. Close out all the accounts that have debit
balances by crediting them and debiting the
Income Summary account
3. Close out the Income Summary account to
the Capital account
4. Close out the Drawing account to the Capital
account

Closing Entry #1: Close out the sales
account to the Income Summary account
Date
1
DEC
Particulars
Debit
P.R.
Credit
XX
31 Sales
Income Summary
XX
To close income statement
accounts with a credit balance
Because sales is a CR balance account, a DR entry is needed to close it
off

Closing Entry #2: Close out the debit
account(s) to the Income Summary
account
Date
1
2
3
DEC
P.
R.
Particulars
Debit
Credit
XX
31 Income Summary
Sales Discounts
XX
Sales Returns and
Allowances
XX
COGS
XX
Freight-Out
XX
Any Other Expenses
XX
Inventory Shortage
XX
To close income statement accounts with
a debit balance

Closing Entry #3: Close out the Income
Summary account to the Capital
account
Date
1
2
DEC
Particulars
31
Income Summary
K. Smith Capital
Debit
P.R.
Credit
XX
1
XX
If the Income Summary account has a CR balance, then a DR
entry is needed to close it. (profit  capital increases)
If the Income Summary account has a DR balance, then a CR
entry is needed to close it. (loss  capital decreases)
2

Closing Entry #4: Close out the Drawing
account to the Capital account
Because Drawings is a DR balance account, a CR entry is needed
to close it

Homework
› Page 254- #15 a, #16
› Page 312 #12b, c, d