The resulting balance of Income Summary account will show the financial returns for the period. If the ending balance is credit, the Company has earned net income; otherwise, the net loss is recognized. The ending balance of the Income Summary is closed to the credit or debit side of Retained Earnings.

In this chapter, we complete the final steps of the accounting cycle, the closing process. You will notice that we do not cover step 10, reversing entries. This is an optional step in the accounting cycle that you will learn about in future courses. Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 Closing Entries And Post through 7 were covered in The Adjustment Process. For example, an unadjusted trial balance is always run before recording any month-end adjustments. Once the adjustments have been posted, you would then run an adjusted trial balance. To make sure the General Ledger is in balance after the adjusting and closing entries are posted.

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Doing so automatically populates the retained earnings account for you, and prevents any further transactions from being recorded in the system for the period that has been closed. Preparing a post-closing trial balance is an important step in the accounting cycle. Used to make sure that beginning balances are correct, the post-closing trial balance is also used to ensure that debits and credits remain in balance after closing entries have been completed. Or would I need to start a new general journal and a new ledger for my temporary accounts? The problem that I need to do is all by hand, not computerized. A term often used for closing entries is “reconciling” the company’s accounts. Accountants perform closing entries to return the revenue, expense, and drawing temporary account balances to zero in preparation for the new accounting period.

• You’ll also notice that the owner’s capital account has a new balance based on the closing entries you made earlier.
• The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement.
• As such, the beginning- of-period retained earnings amount remains in the ledger until the closing process “updates” the Retained Earnings account for the impact of the period’s operations.
• If expenses were more than revenues, the retained earnings account would be debited by the difference to reflect the loss for the year.

Before closing entries can be made, all transactions that took place before the end of the accounting period must be accounted for and posted to the general ledger. Posting closing entries, then, clears the way for financial statements to be made. The balance in the income summary account, representing net income, is transferred to retained earnings by debiting income summary and crediting retained earnings. KLO’s adjusted trial balance for the current month is presented below and the temporary accounts are highlighted to demonstrate how these accounts will be closed. However, some corporations use a temporary clearing account for dividends declared (let’s use “Dividends”). They’d record declarations by debiting Dividends Payable and crediting Dividends. If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings.

Income Summary Account

This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period. If this amount is accurate, you’ll then close Income Summary and transfer the balance to permanent accounts. Most often, this means transferring profit into the retained earnings account. Permanent accounts, like the balance sheet that they feed, show the cumulative total of past efforts. So when you close out a temporary account, you add from the totals shown in the permanent accounts.

This transfer to retained earnings is required for three main reasons. During the closing entries process, an accountant would close revenue and close expenses by transferring those https://simple-accounting.org/ balances to permanent accounts. Temporary accounts, also referred to as nominal accounts or income statement accounts, start each accounting period with a balance of zero.

What are closing entries?

These account balances do not roll over into the next period after closing. The closing process reduces revenue, expense, and dividends account balances to zero so they are ready to receive data for the next accounting period. When the time comes to make closing entries, an accountant will transfer all the balances in the temporary accounts to the Income Summary Account. This account works as a holding account for these balances so that the accountant can then make fewer entries to transfer the balance to the permanent accounts. Reveals the balance of accounts after the closing process, and consists of balance sheet accounts only. The post-closing trial balance is a tool to demonstrate that accounts are in balance; it is not a formal financial statement. All of the revenue, expense, and dividend accounts were zeroed away via closing, and do not appear in the post-closing trial balance.

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