Let’s evaluation our accounting cycle again. We have actually completed the very first two columns and now we have the final column which to represent the close up door (or archive) process.
You are watching: The accumulated depreciation account is closed to the income summary account.
|1. Analysis Transactions||5. Prepare Adjusting newspaper Entries||9. Prepare close up door Entries|
|2. Prepare journal Entries||6. Short article Adjusting newspaper Entries||10. Article Closing Entries|
|3. Write-up journal Entries||7. Prepare changed Trial Balance||11. Prepare Post-Closing attempt Balance|
|4. Prepare Unadjusted psychological Balance||8. Prepare gaue won Statements|
Accounts are two different groups:Permanent – balance paper accounts consisting of assets, liabilities, and most equity accounts. This account balances role over into the next period. So, the finishing balance the this period will be the start balance for following period.Temporary – revenues, expenses, dividend (or withdrawals) account. These account balances perform not role over right into the next period after closing. The closing process reduces revenue, expense, and dividends account balances (temporary accounts) to zero so they are prepared to obtain data for the next audit period.
Accountants may perform the closing procedure monthly or annually. The closeup of the door entries room the newspaper entry form of the explain of preserved Earnings. The goal is to make the posted balance that the retained revenue account match what we reported top top the declare of retained earnings and also start the next duration with a zero balance because that all short-term accounts.
Remember how at the beginning of the course us learned the net earnings is included to equity. This is the process to make the happen!
The following video clip summarizes how to prepare closing entries.
In accounting, we frequently refer to the process of closing together closing the books. Just revenue, expense, and dividend accounts are closed—not asset, liability, common Stock, or Retained revenue accounts. The four an easy steps in the closing procedure are:Closing the revenue accounts—transferring the credit balances in the revenue account to a clearing account referred to as Income Summary.Closing the price accounts—transferring the debit balances in the price accounts to a clearing account referred to as Income Summary.Closing the Income an overview account—transferring the balance the the Income review account to the Retained revenue account.Closing the dividend account—transferring the debit balance that the dividends account come the Retained income account.
Let’s evaluation what we know around these accounts:
|Increase with||Decrease with|
If we desire to make the account balance zero, we will decrease the account. We usage a new temporary closing account called income summary to save the close up door items till we gain close income an introduction into retained Earnings. To close way to do the balance zero. We will certainly look at the following information because that MicroTrain native the readjusted trial balance:
|Retained Earnings||$ 6,100|
Notice exactly how the retained revenue balance is $6,100? on the statement of kept earnings, we reported the finishing balance that retained earnings to it is in $15,190. We must do the closing entries to do them match and zero the end the short-lived accounts.
Step 1: nearby Revenue accounts
Close way to do the balance zero. We check out from the adjusted trial balance the our revenue accounts have actually a credit transaction balance. To do them zero we desire to to decrease the balance or carry out the opposite. We will certainly debit the revenue accounts and credit the Income review account. The credit transaction to income an overview should equal the full revenue native the earnings statement.
Step 2: Close Expense accounts
The price accounts have actually debit balances so to get rid of their balances us will execute the the opposite or credit transaction the accounts. Similar to in step 1, us will use Income an overview as the offset account but this time we will certainly debit revenue summary. The total debit to income review should match total costs from the income statement.
|insurance allowance Expense||200|
Step 3: Close Income Summary account
At this point, you have closed the revenue and expense accounts into revenue summary. The balance in income an overview now represents $37,100 credit – $28,010 debit or $9,090 credit balance…does that number seem familiar? It have to — income an overview should enhance net revenue from the earnings statement. We desire to eliminate this credit transaction balance through debiting earnings summary. What did we do with net income? We included it come retained income in the explain of kept earnings. How do we increase an same account in a newspaper entry? we credit!
|Income summary (37,100 – 28,010)||9,090|
If prices were greater than revenue, us would have actually net loss. A network loss would decrease retained earnings so we would perform the the contrary in this newspaper entry by debiting preserved Earnings and crediting revenue Summary.
Step 4: Close Dividends (or withdrawals) account
After we add net income (or subtract network loss) top top the explain of preserved earnings, what execute we perform next? us subtract any kind of dividends to get the ending retained earnings. This will be the journal entry type of doing this calculation but be careful since you execute not desire to usage the amount of preserved earnings yet DIVIDENDS. We desire to diminish retained revenue (debit) and remove the balance in dividends (credit) for the lot of the dividends. MicroTrain did no pay dividends this year but the entrance would show up as:
|Retained Earnings||Div Amt|
Div Amt means we will usage the DIVIDEND amount and not the balance in maintained earnings.
Anytime we finish journal entries, we constantly need to article to the same ledger cards or T-accounts we have been using all along. When we post, we carry out not adjust anything from the newspaper entries — us debit (left side) whereby we walk in the entries and also credit (right side) wherever we did in the entries. The ledger map for income summary and retained revenue would look prefer this:
|Account: earnings Summary||Debit||Credit||Balance|
|(1) close Revenues||37,100||37,100|
|(2) near Expenses||28,010||9,090|
|(3) Close earnings Summary||9,090||0|
|Account: kept Earnings||Debit||Credit||Balance|
|(3) Close income Summary||9,090||15,190|
|(4) nearby Dividends||0||15,190|
The balance in dividends, revenues and also expenses would certainly all it is in zero leaving only the long-term accounts for a article closing psychological balance. The attempt balance shows the finishing balances of all asset, liability and also equity accounts remaining. The main change from an changed trial balance is revenues, expenses, and dividends are all zero and also their balances have been rolled into retained earnings. We execute not need to show accounts through zero balances ~ above the trial balances.
MicroTrain’s short article closing attempt balance would certainly be:
Notice exactly how only the balance in retained revenue has adjusted and it now matches what to be reported as ending retained revenue in the explain of retained earnings and the balance sheet.
Congratulations! You made it through the complete accounting cycle.
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Answer the complying with questions on closing entries and also rate her confidence to examine your answer.