Closing Entries

The Why and the How….

Closing Temporary Accounts

Income Summary

Revenue Expenses

We close revenue and expense accounts into a temporary account called “Income Summary”

Actual Transaction-Close Revenue

Debit Revenue Credit Income Summary The Revenue account normally has a credit

balance, once you debit the account -- it will go down to 0

POST TO LEDGER ACCOUNTS

Actual Transaction-Close Expenses

Debit Income Summary Credit All Expenses Expenses have a normal debit balance, once

they are credited -- the balance will be 0. POST TO LEDGER ACCOUNTS

What happens next?

Income SummaryExpensesRevenue

Profitor

Loss

Income Summary Balance recorded: in the Capital Account….If the Income Summary has a credit balance - profitIf the Income Summary has a debit balance - loss

In Summary

Temporary account balances must be reduced to 0 at the end of each period.

You then start the next fiscal period with revenue at 0 and all expenses at 0. If you did not do this, you

would not be able to determine the revenue earned/and expenses incurred for a period.