{"id":74,"date":"2015-03-18T23:09:01","date_gmt":"2015-03-18T23:09:01","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&#038;p=74"},"modified":"2017-08-22T16:28:04","modified_gmt":"2017-08-22T16:28:04","slug":"journalizing-and-posting-closing-entries","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/journalizing-and-posting-closing-entries\/","title":{"raw":"Closing Entries","rendered":"Closing Entries"},"content":{"raw":"Let's review our accounting cycle again.\u00a0 We have completed the first two columns and now we have the final column which represents the closing (or archive) process.\r\n<table style=\"background-color: #e8d3e4\">\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: center\" colspan=\"3\"><strong>Accounting Cycle\u00a0\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>1.\u00a0 Analyze Transactions<\/td>\r\n<td>5.\u00a0 Prepare Adjusting Journal Entries<\/td>\r\n<td><strong>9.\u00a0 Prepare Closing Entries<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>2.\u00a0 Prepare Journal Entries<\/td>\r\n<td>6.\u00a0 Post Adjusting Journal Entries<\/td>\r\n<td><strong>10.\u00a0 Post Closing Entries<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>3.\u00a0 Post journal Entries<\/td>\r\n<td>7.\u00a0 Prepare Adjusted Trial Balance<\/td>\r\n<td><strong>11. Prepare Post-Closing Trial Balance<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>4.\u00a0 Prepare Unadjusted Trial Balance<\/td>\r\n<td>8.\u00a0 Prepare Financial Statements<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAccounts are two different groups:\r\n<ul>\r\n \t<li><strong>Permanent<\/strong> - balance sheet accounts including assets, liabilities, and most equity accounts.\u00a0 These account balances roll over into the next period.\u00a0 So, the ending balance of this\u00a0period will be the beginning balance for next period.<\/li>\r\n \t<li><strong>Temporary<\/strong> - revenues, expenses, dividends (or withdrawals) account.\u00a0 These account balances do not roll over into the next period after closing.\u00a0 The closing process reduces revenue, expense, and dividends account balances (temporary accounts)\u00a0to zero so they are ready to receive data for the next accounting period.<\/li>\r\n<\/ul>\r\nAccountants may perform the closing process monthly or annually.\u00a0 The closing entries are the journal entry form of the Statement of Retained Earnings.\u00a0 The goal is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts.\r\n\r\nRemember how at the beginning of the course we learned that net income is added to equity.\u00a0 This is the process to make that happen!\r\n\r\nThe following video summarizes how to prepare closing entries.\r\n\r\nhttps:\/\/youtu.be\/4H_ImqWR5f4?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1\r\n<p class=\"GTtextbody\">In accounting, we often refer to the process of closing as closing the books. Only revenue, expense, and dividend accounts are closed\u2014not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are:<\/p>\r\n\r\n<ul>\r\n \t<li class=\"GTtextbody\"><strong>Closing the revenue accounts<\/strong>\u2014transferring the credit\u00a0balances in the revenue accounts to a clearing account called Income Summary.<\/li>\r\n \t<li class=\"GTtextbody\"><strong>Closing the expense accounts<\/strong>\u2014transferring the debit\u00a0balances in the expense accounts to a clearing account called Income Summary.<\/li>\r\n \t<li class=\"GTtextbody\"><strong>Closing the Income Summary account<\/strong>\u2014transferring the balance of the Income Summary account to the Retained Earnings account.<\/li>\r\n \t<li class=\"GTtextbody\"><strong>Closing the Dividends account<\/strong>\u2014transferring the debit balance of the Dividends account to the Retained Earnings account.<\/li>\r\n<\/ul>\r\n<p class=\"GTtextbody\">\u00a0Let's review what we know about these accounts:<\/p>\r\n\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td style=\"text-align: center\">Increase with<\/td>\r\n<td style=\"text-align: center\">Decrease with<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Revenue<\/td>\r\n<td style=\"text-align: center\">Credit<\/td>\r\n<td style=\"text-align: center\">Debit<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Expense<\/td>\r\n<td style=\"text-align: center\">Debit<\/td>\r\n<td style=\"text-align: center\">Credit<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Dividends<\/td>\r\n<td style=\"text-align: center\">Debit<\/td>\r\n<td style=\"text-align: center\">Credit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p class=\"GTtextbody\">If we want to make the account balance zero, we will decrease the account.\u00a0 We use a new temporary closing account called <strong>income summary<\/strong> to store the closing items until we get close income summary into Retained Earnings.\u00a0 To close means to make the balance zero.\u00a0 We will look at the following information for MicroTrain from the adjusted trial balance:<\/p>\r\n\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained Earnings<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0 $\u00a0 6,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Service Revenue<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0 36,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Interest Revenue<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Salaries Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 18,360<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Rent Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,200<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Utilities Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Insurance Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplies Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0 7,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Depreciation Expense<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 750<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice how the retained earnings balance is $6,100?\u00a0 On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190.\u00a0 We need to do the closing entries to make them match and zero out the temporary accounts.\r\n\r\n<strong>Step 1:\u00a0 Close Revenue accounts<\/strong>\r\n\r\nClose means to make the balance zero.\u00a0 We see from the adjusted trial balance that our revenue accounts have a credit balance.\u00a0 To make them zero we want to decrease the balance or do the opposite.\u00a0 We will debit the revenue accounts and credit the Income Summary account.\u00a0 The credit to income summary should equal the total revenue from the income statement.\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><strong>Debit<\/strong><\/td>\r\n<td><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Service Revenue<\/td>\r\n<td>\u00a0 36,500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Interest Revenue<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0 600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Income Summary<\/td>\r\n<td><\/td>\r\n<td>\u00a0 37,100<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<strong>Step 2:\u00a0 Close\u00a0Expense accounts<\/strong>\r\n\r\nThe expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts.\u00a0 Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary.\u00a0 The total debit to income summary should match total expenses from the income statement.\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><strong>\u00a0Debit<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income Summary<\/td>\r\n<td>\u00a028,010<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Salaries Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">\u00a018,360<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Rent Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">1,200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Utilities Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Insurance Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">200<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Supplies Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">7,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Depreciation Expense<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">750<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<strong>Step 3:\u00a0 Close\u00a0Income Summary\u00a0account<\/strong>\r\n\r\nAt this point, you have closed the revenue and expense accounts into income summary.\u00a0 The balance in income summary now represents $37,100 credit - $28,010 debit or $9,090 credit balance...does that number seem familiar?\u00a0 It should -- income summary should match net income from the income statement.\u00a0 We want to remove this credit balance by debiting income summary.\u00a0 What did we do with net income?\u00a0 We added it to retained earnings in the statement of retained earnings.\u00a0 How do we increase an equity account in a journal entry?\u00a0 We credit!\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><strong>Debit<\/strong><\/td>\r\n<td><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income Summary (37,100 - 28,010)<\/td>\r\n<td>\u00a0 9,090<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Retained Earnings<\/td>\r\n<td><\/td>\r\n<td>\u00a0 9,090<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nIf expenses were greater than revenue, we would have net loss.\u00a0 A net loss would decrease retained earnings so we would do the opposite in this journal entry\u00a0by debiting Retained Earnings and crediting Income Summary.\r\n\r\n<strong>Step 4:\u00a0 Close\u00a0Dividends (or withdrawals) account<\/strong>\r\n\r\nAfter we add net income (or subtract net loss) on the statement of retained earnings, what do we do next?\u00a0 We subtract any dividends to get the ending retained earnings.\u00a0 This will be the journal entry form of doing this calculation but be careful because you do not want to use the amount of retained earnings but DIVIDENDS.\u00a0 <strong>We want to decrease retained earnings (debit) and remove the balance in dividends (credit) for the amount of the dividends.\u00a0 <\/strong>MicroTrain did not pay dividends this year but the entry would appear as:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><strong>Debit<\/strong><\/td>\r\n<td><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained Earnings<\/td>\r\n<td>Div Amt<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 Dividends<\/td>\r\n<td><\/td>\r\n<td>Div Amt<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nDiv Amt means we will use the DIVIDEND amount and not the\u00a0balance in retained earnings.\r\n\r\nAnytime we complete journal entries, we always need to post to the same ledger cards or T-accounts we have been using all along.\u00a0 When we post, we do not change anything from the journal entries -- we debit (left side) where we did in the entries and credit (right side) wherever we did in the entries.\u00a0 The ledger card for income summary and retained earnings would look like this:\r\n<table style=\"background-color: #d8e3e1\">\r\n<tbody>\r\n<tr>\r\n<td>Account: Income Summary<\/td>\r\n<td>Debit<\/td>\r\n<td>Credit<\/td>\r\n<td>Balance<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>(1) Close Revenues<\/td>\r\n<td><\/td>\r\n<td>\u00a037,100<\/td>\r\n<td>\u00a037,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>(2) Close Expenses<\/td>\r\n<td>28,010<\/td>\r\n<td><\/td>\r\n<td>\u00a0 9,090<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>(3) Close Income Summary<\/td>\r\n<td>\u00a0 9,090<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0 0<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n<table style=\"background-color: #d8e3e1\">\r\n<tbody>\r\n<tr>\r\n<td>Account: Retained Earnings<\/td>\r\n<td>Debit<\/td>\r\n<td>Credit<\/td>\r\n<td>Balance<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Beginning Balance<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td>6,100<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>(3) Close Income Summary<\/td>\r\n<td><\/td>\r\n<td>9,090<\/td>\r\n<td>15,190<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>(4) Close Dividends<\/td>\r\n<td>0<\/td>\r\n<td><\/td>\r\n<td>15,190<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance.\u00a0 The trial balance shows the ending balances of all asset, liability and equity accounts remaining.\u00a0 The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings.\u00a0 We do not\u00a0need to show\u00a0accounts with zero balances on the trial balances.\r\n\r\nMicroTrain's post closing trial balance would be:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cash<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Accounts Receivable<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Interest Receivable<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Supplies<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,500<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Prepaid Insurance<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,200<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Trucks<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Accum. Depreciation-Trucks<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 750<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Accounts Payable<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Unearned Revenue<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 3,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Salaries Payable<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 360<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Common Stock<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Retained Earnings<\/td>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,190<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>TOTALS<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 79,300<\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 79,300<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet.\r\n\r\nCongratulations!\u00a0 You made it through the complete accounting cycle.\r\n\r\nAnswer the following questions on closing entries and rate your confidence to check your answer.\r\n\r\nhttp:\/\/www.openassessments.org\/assessments\/1262","rendered":"<p>Let&#8217;s review our accounting cycle again.\u00a0 We have completed the first two columns and now we have the final column which represents the closing (or archive) process.<\/p>\n<table style=\"background-color: #e8d3e4\">\n<tbody>\n<tr>\n<td style=\"text-align: center\" colspan=\"3\"><strong>Accounting Cycle\u00a0\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td>1.\u00a0 Analyze Transactions<\/td>\n<td>5.\u00a0 Prepare Adjusting Journal Entries<\/td>\n<td><strong>9.\u00a0 Prepare Closing Entries<\/strong><\/td>\n<\/tr>\n<tr>\n<td>2.\u00a0 Prepare Journal Entries<\/td>\n<td>6.\u00a0 Post Adjusting Journal Entries<\/td>\n<td><strong>10.\u00a0 Post Closing Entries<\/strong><\/td>\n<\/tr>\n<tr>\n<td>3.\u00a0 Post journal Entries<\/td>\n<td>7.\u00a0 Prepare Adjusted Trial Balance<\/td>\n<td><strong>11. Prepare Post-Closing Trial Balance<\/strong><\/td>\n<\/tr>\n<tr>\n<td>4.\u00a0 Prepare Unadjusted Trial Balance<\/td>\n<td>8.\u00a0 Prepare Financial Statements<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Accounts are two different groups:<\/p>\n<ul>\n<li><strong>Permanent<\/strong> &#8211; balance sheet accounts including assets, liabilities, and most equity accounts.\u00a0 These account balances roll over into the next period.\u00a0 So, the ending balance of this\u00a0period will be the beginning balance for next period.<\/li>\n<li><strong>Temporary<\/strong> &#8211; revenues, expenses, dividends (or withdrawals) account.\u00a0 These account balances do not roll over into the next period after closing.\u00a0 The closing process reduces revenue, expense, and dividends account balances (temporary accounts)\u00a0to zero so they are ready to receive data for the next accounting period.<\/li>\n<\/ul>\n<p>Accountants may perform the closing process monthly or annually.\u00a0 The closing entries are the journal entry form of the Statement of Retained Earnings.\u00a0 The goal is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings and start the next period with a zero balance for all temporary accounts.<\/p>\n<p>Remember how at the beginning of the course we learned that net income is added to equity.\u00a0 This is the process to make that happen!<\/p>\n<p>The following video summarizes how to prepare closing entries.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"How to Prepare Closing Entries (Financial Accounting Tutorial #27)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/4H_ImqWR5f4?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p class=\"GTtextbody\">In accounting, we often refer to the process of closing as closing the books. Only revenue, expense, and dividend accounts are closed\u2014not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are:<\/p>\n<ul>\n<li class=\"GTtextbody\"><strong>Closing the revenue accounts<\/strong>\u2014transferring the credit\u00a0balances in the revenue accounts to a clearing account called Income Summary.<\/li>\n<li class=\"GTtextbody\"><strong>Closing the expense accounts<\/strong>\u2014transferring the debit\u00a0balances in the expense accounts to a clearing account called Income Summary.<\/li>\n<li class=\"GTtextbody\"><strong>Closing the Income Summary account<\/strong>\u2014transferring the balance of the Income Summary account to the Retained Earnings account.<\/li>\n<li class=\"GTtextbody\"><strong>Closing the Dividends account<\/strong>\u2014transferring the debit balance of the Dividends account to the Retained Earnings account.<\/li>\n<\/ul>\n<p class=\"GTtextbody\">\u00a0Let&#8217;s review what we know about these accounts:<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td style=\"text-align: center\">Increase with<\/td>\n<td style=\"text-align: center\">Decrease with<\/td>\n<\/tr>\n<tr>\n<td>Revenue<\/td>\n<td style=\"text-align: center\">Credit<\/td>\n<td style=\"text-align: center\">Debit<\/td>\n<\/tr>\n<tr>\n<td>Expense<\/td>\n<td style=\"text-align: center\">Debit<\/td>\n<td style=\"text-align: center\">Credit<\/td>\n<\/tr>\n<tr>\n<td>Dividends<\/td>\n<td style=\"text-align: center\">Debit<\/td>\n<td style=\"text-align: center\">Credit<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p class=\"GTtextbody\">If we want to make the account balance zero, we will decrease the account.\u00a0 We use a new temporary closing account called <strong>income summary<\/strong> to store the closing items until we get close income summary into Retained Earnings.\u00a0 To close means to make the balance zero.\u00a0 We will look at the following information for MicroTrain from the adjusted trial balance:<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings<\/td>\n<td><\/td>\n<td>\u00a0\u00a0 $\u00a0 6,100<\/td>\n<\/tr>\n<tr>\n<td>Service Revenue<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0 36,500<\/td>\n<\/tr>\n<tr>\n<td>Interest Revenue<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/td>\n<\/tr>\n<tr>\n<td>Salaries Expense<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 18,360<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Rent Expense<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,200<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Utilities Expense<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Insurance Expense<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 200<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Supplies Expense<\/td>\n<td>\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0 7,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Depreciation Expense<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 750<\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice how the retained earnings balance is $6,100?\u00a0 On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190.\u00a0 We need to do the closing entries to make them match and zero out the temporary accounts.<\/p>\n<p><strong>Step 1:\u00a0 Close Revenue accounts<\/strong><\/p>\n<p>Close means to make the balance zero.\u00a0 We see from the adjusted trial balance that our revenue accounts have a credit balance.\u00a0 To make them zero we want to decrease the balance or do the opposite.\u00a0 We will debit the revenue accounts and credit the Income Summary account.\u00a0 The credit to income summary should equal the total revenue from the income statement.<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><strong>Debit<\/strong><\/td>\n<td><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Service Revenue<\/td>\n<td>\u00a0 36,500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Interest Revenue<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0 600<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Income Summary<\/td>\n<td><\/td>\n<td>\u00a0 37,100<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>Step 2:\u00a0 Close\u00a0Expense accounts<\/strong><\/p>\n<p>The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts.\u00a0 Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary.\u00a0 The total debit to income summary should match total expenses from the income statement.<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><strong>\u00a0Debit<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Income Summary<\/td>\n<td>\u00a028,010<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Salaries Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">\u00a018,360<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Rent Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">1,200<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Utilities Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">500<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Insurance Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">200<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Supplies Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">7,000<\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Depreciation Expense<\/td>\n<td><\/td>\n<td style=\"text-align: center\">750<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>Step 3:\u00a0 Close\u00a0Income Summary\u00a0account<\/strong><\/p>\n<p>At this point, you have closed the revenue and expense accounts into income summary.\u00a0 The balance in income summary now represents $37,100 credit &#8211; $28,010 debit or $9,090 credit balance&#8230;does that number seem familiar?\u00a0 It should &#8212; income summary should match net income from the income statement.\u00a0 We want to remove this credit balance by debiting income summary.\u00a0 What did we do with net income?\u00a0 We added it to retained earnings in the statement of retained earnings.\u00a0 How do we increase an equity account in a journal entry?\u00a0 We credit!<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><strong>Debit<\/strong><\/td>\n<td><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Income Summary (37,100 &#8211; 28,010)<\/td>\n<td>\u00a0 9,090<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Retained Earnings<\/td>\n<td><\/td>\n<td>\u00a0 9,090<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>If expenses were greater than revenue, we would have net loss.\u00a0 A net loss would decrease retained earnings so we would do the opposite in this journal entry\u00a0by debiting Retained Earnings and crediting Income Summary.<\/p>\n<p><strong>Step 4:\u00a0 Close\u00a0Dividends (or withdrawals) account<\/strong><\/p>\n<p>After we add net income (or subtract net loss) on the statement of retained earnings, what do we do next?\u00a0 We subtract any dividends to get the ending retained earnings.\u00a0 This will be the journal entry form of doing this calculation but be careful because you do not want to use the amount of retained earnings but DIVIDENDS.\u00a0 <strong>We want to decrease retained earnings (debit) and remove the balance in dividends (credit) for the amount of the dividends.\u00a0 <\/strong>MicroTrain did not pay dividends this year but the entry would appear as:<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><strong>Debit<\/strong><\/td>\n<td><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings<\/td>\n<td>Div Amt<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 Dividends<\/td>\n<td><\/td>\n<td>Div Amt<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Div Amt means we will use the DIVIDEND amount and not the\u00a0balance in retained earnings.<\/p>\n<p>Anytime we complete journal entries, we always need to post to the same ledger cards or T-accounts we have been using all along.\u00a0 When we post, we do not change anything from the journal entries &#8212; we debit (left side) where we did in the entries and credit (right side) wherever we did in the entries.\u00a0 The ledger card for income summary and retained earnings would look like this:<\/p>\n<table style=\"background-color: #d8e3e1\">\n<tbody>\n<tr>\n<td>Account: Income Summary<\/td>\n<td>Debit<\/td>\n<td>Credit<\/td>\n<td>Balance<\/td>\n<\/tr>\n<tr>\n<td>(1) Close Revenues<\/td>\n<td><\/td>\n<td>\u00a037,100<\/td>\n<td>\u00a037,100<\/td>\n<\/tr>\n<tr>\n<td>(2) Close Expenses<\/td>\n<td>28,010<\/td>\n<td><\/td>\n<td>\u00a0 9,090<\/td>\n<\/tr>\n<tr>\n<td>(3) Close Income Summary<\/td>\n<td>\u00a0 9,090<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0 0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<table style=\"background-color: #d8e3e1\">\n<tbody>\n<tr>\n<td>Account: Retained Earnings<\/td>\n<td>Debit<\/td>\n<td>Credit<\/td>\n<td>Balance<\/td>\n<\/tr>\n<tr>\n<td>Beginning Balance<\/td>\n<td><\/td>\n<td><\/td>\n<td>6,100<\/td>\n<\/tr>\n<tr>\n<td>(3) Close Income Summary<\/td>\n<td><\/td>\n<td>9,090<\/td>\n<td>15,190<\/td>\n<\/tr>\n<tr>\n<td>(4) Close Dividends<\/td>\n<td>0<\/td>\n<td><\/td>\n<td>15,190<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance.\u00a0 The trial balance shows the ending balances of all asset, liability and equity accounts remaining.\u00a0 The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings.\u00a0 We do not\u00a0need to show\u00a0accounts with zero balances on the trial balances.<\/p>\n<p>MicroTrain&#8217;s post closing trial balance would be:<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Cash<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 10,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Accounts Receivable<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Interest Receivable<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 600<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Supplies<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 1,500<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Prepaid Insurance<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 2,200<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Trucks<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 40,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Accum. Depreciation-Trucks<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 750<\/td>\n<\/tr>\n<tr>\n<td>Accounts Payable<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 25,000<\/td>\n<\/tr>\n<tr>\n<td>Unearned Revenue<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 3,000<\/td>\n<\/tr>\n<tr>\n<td>Salaries Payable<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 360<\/td>\n<\/tr>\n<tr>\n<td>Common Stock<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 35,000<\/td>\n<\/tr>\n<tr>\n<td>Retained Earnings<\/td>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 15,190<\/td>\n<\/tr>\n<tr>\n<td>TOTALS<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 79,300<\/td>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 79,300<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet.<\/p>\n<p>Congratulations!\u00a0 You made it through the complete accounting cycle.<\/p>\n<p>Answer the following questions on closing entries and rate your confidence to check your answer.<\/p>\n<p><iframe src=\"https:\/\/lumenoea.herokuapp.com\/assessments\/load?src_url=https:\/\/lumenoea.herokuapp.com\/api\/assessments\/1262.xml&#38;results_end_point=https:\/\/lumenoea.herokuapp.com\/api&#38;assessment_id=1262&#38;confidence_levels=true&#38;enable_start=true&#38;eid=https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/journalizing-and-posting-closing-entries\/\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-74\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgia State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project   . <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>How to Prepare Closing Entries (Financial Accounting Tutorial #27). <strong>Authored by<\/strong>: NotePirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/4H_ImqWR5f4?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1\">https:\/\/youtu.be\/4H_ImqWR5f4?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard Youtube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":276,"menu_order":7,"template":"","meta":{"_candela_citation":"[{\"type\":\"copyrighted_video\",\"description\":\"How to Prepare Closing Entries (Financial Accounting Tutorial #27)\",\"author\":\"NotePirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/4H_ImqWR5f4?list=PL_PmoCeUoNMIX3zP2yYSAq8gi6irBVh-1\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard Youtube License\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project   \",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-74","chapter","type-chapter","status-web-only","hentry"],"part":67,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/74","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/users\/276"}],"version-history":[{"count":19,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/74\/revisions"}],"predecessor-version":[{"id":2191,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/74\/revisions\/2191"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/67"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/74\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/media?parent=74"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=74"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/contributor?post=74"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/license?post=74"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}