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Accounting Examples - End of Month Closing

 

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Closing the Accounts

At the end of the period, temporary or nominal accounts are closed; these include expense, revenue, and owner withdrawing accounts. This process zeros out the account balances so that the balance of the transactions in each account reflects only the transactions of a particular period. This is normally done only at the end of the year.

To facilitate closing, a clearing account called Income Summary is used. The Income Summary account is used only momentarily; revenue and expensed are closed into it and then that balance is immediately closed out to Owner's Equity (or Retained Earnings). The four steps in closing the accounts are:

  1. Close revenue accounts by debiting each for its credit balance and crediting Income Summary.

  2. Close expense accounts by crediting each for its debit balance and debiting Income Summary.

  3. Income Summary is closed into the Capital account by debiting (for a net income) or crediting (for a net loss) the balance.

  4. Close the Withdrawals account by crediting it by its balance and debiting the Capital account.

In the example of closing journal entries below, assume that revenue, expense, and owner equity accounts have the following balances.

Account

Balance

Account

Balance

Expenses

Revenue

Rent Expense

1,400

Sales Revenue

6,000

Salary Expense

1,200

Owner's Equity

Office Supplies Expense

400

Capital Account

9,000

Utilities Expense

320

Withdrawals

1,000

The entries below depict a net income for the period. Read below how the entries differ for a net loss.

General Journal

Page: 1

Date

Account Titles/Explanation

Ref

Debit

Credit

20XX
Jan

31

(1)

Sales Revenue

Income Summary

To close revenue account

 

6000


6000

 

31

(2)

Income Summary

Rent Expense

Salary Expense

Office Supplies Expense

Utilities Expense

To close expense accounts

  3320
 


1400

1200

400

320

 

31

(3)

Income Summary

Owner, Capital

To close net income to Capital

 

2680
 

 

2680

 

31

(4)

Owner, Capital

Owner, Withdrawals

To close drawing account to Capital

 

1000

 

1000

Here is how the transactions above effect the Income Summary and Capital accounts. The number in parenthesis indicates which of the transactions results in the account's entry:

Income Summary

(2)  3320

(3)  2680

(1)  6000

Owner's Equity

(4)  1000

Bal   9000

(3)  2680

When the revenue and expense accounts are closed to Income Summary and a credit balance exists, a net income is the result.  The opposite is true for a net loss; the Income Summary account has a debit balance. In the case of a net loss, the third entry above would contain a debit to Owner's Capital and a credit to Income Summary.

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