Closing entries are made at the end of an accounting period to transfer balances from temporary accounts such as revenues, expenses, and dividends to permanent accounts such as retained earnings. This procedure resets the balance of the temporary accounts to zero for the next accounting period.
Here are some detailed examples of closing entries:
Example 1: Closing Revenue Accounts
Scenario: At the end of the accounting period, your business has a total revenue of $100,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Sales Revenue A/c Debit | 100,000 | |
| 12-31-2024 | To Income Summary A/c | 100,000 |
Explanation:
- Sales Revenue will debited to close the account and bring the balance to zero.
- Income Summary will credited to transfer the revenue to the income summary account.
Example 2: Closing Expense Accounts
Scenario: At the end of the accounting period, your business total expenses of $70,000, including rent, salaries, and utilities.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Income Summary A/c Debit | 70,000 | |
| 12-31-2024 | To Rent Expense A/c | 20,000 | |
| 12-31-2024 | To Salaries Expense A/c | 40,000 | |
| 12-31-2024 | To Utility Expense A/c | 10,000 |
Explanation:
- Income Summary will debited to transfer the total expenses to the income summary account.
- Rent expenses, salary expenses, and utility expenses are credited to close these accounts and bring their balances to zero.
Example 3: Closing the Income Summary Account
Scenario: After closing the revenue and expense accounts, the balance in the income summary account shows a net income of $30,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Income Summary A/c Debit | 30,000 | |
| 12-31-2024 | To Retained Earnings A/c | 30,000 |
Explanation:
- Income Summary will debited to close the account.
- Retained earnings will be credited to be transferred to the retained earnings account, which will increase the equity of the business.
Example 4: Closing Dividends (if any)
Scenario: During the year, your business declared dividends of $5,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Retained Earnings A/c Debit | 5,000 | |
| 12-31-2024 | To Dividends A/c | 5,000 |
Explanation:
- Retained earnings will be debited to transfer the dividends declared to the retained earnings account.
- Dividends will be credited to close the dividends account and bring its balance to zero.
These closing entries ensure temporary accounts are reset to zero and the net income or loss is transferred to the retained earnings account. This prepares the accounts for the next accounting period and helps in maintaining accurate financial records.