Closing entries Notes accounting MBA
Definition of Closing entries
At
the end of the accounting year, the temporary account balances are transferred
to an account summary of income and retained earnings account, delivered to
zero to begin the next accounting period the balance temporary accounts to.
Firstly,
revenue accounts are closed by transferring their balances to the income
summary account. Consider the following example, for which 30 September is the
end of the accounting year. If the balance of the revenue account is $ 1100,
then the closure would be in the log entry:
Date
Accounts
Flow
Credit
9/30
Recipes
Summary of income
1100
Then,
expense accounts are closed by transferring their balances to the income
summary account. If the balance of the expense account is $1275, then the
closing entry would be:
Date
Accounts
Flow
Credit
9/30
Summary
of income
1275
Costs
1275
At
this point, the net balance of the analytical account is a debit of $175
(loss). The income summary account is then closed to retained earnings:
Date
Accounts
Flow
Credit
9/30
Retained
earnings
175
Summary
of income
175
Finally,
the dividend account is closed to the retained earnings. For example, if $50 in
dividends have been paid during the period, the entry closing journal would be
as follows:
Date
Accounts
Flow
Credit
9/30
Retained
earnings
50
Dividends
50
Once
validated in the book, these log entries serve the purpose to establish income,
expenditure and dividend temporary accounts to zero in preparation for the
beginning of the next accounting period.
Note
that the income summary account is not absolutely necessary – revenue and
expense accounts may be closed directly to retained earnings. The income
summary account offers the advantage to indicate the net balance between
revenues and expenditures (i.e. net income) during the closing process.
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