đ DEFINITION
Closing entries are journal entries made at the end of an accounting period to transfer temporary account balances (income, expense, and withdrawal/dividend accounts) to permanent accounts (typically retained earnings or capital accounts).
đŻ PURPOSE
The main objective of closing entries is to reset the balances of temporary accounts to zero for the next accounting period, ensuring that income and expense accounts begin with zero balances in the new period.
đ TYPES OF TEMPORARY ACCOUNTS
Revenue Accounts: Include all income generated from business activities (e.g., sales revenue, service revenue).
Expense Accounts: Encompass all expenses incurred during the period (e.g., rent, utilities, wages).
Income Summary Account: Used as an intermediary account to summarize revenues and expenses before closing to retained earnings.
Dividends/Drawings Accounts: For businesses distributing profits or withdrawals by owners.
đ STEPS IN CLOSING ENTRIES
1. Close Revenue Accounts: Debit revenue accounts and credit the income summary account.
2. Close Expense Accounts: Debit the income summary account and credit all expense accounts.
3. Close the Income Summary Account: Transfer the net income or loss from the income summary to the retained earnings or capital account.
4. Close Dividends/Drawings Accounts: Transfer dividends or withdrawals to the retained earnings account by debiting retained earnings and crediting dividends or withdrawals.
đ IMPACT ON FINANCIAL STATEMENTS
Balance Sheet: Only permanent accounts (assets, liabilities, and equity) appear on the balance sheet, as closing entries transfer temporary accounts to permanent ones.
Income Statement: Revenue and expense accounts, closed to income summary, reflect the companyâs performance during the period.
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