5 1 Descri­be and Prepa­re Clo­sing Ent­ries for a Busi­ness Prin­ci­ples of Accoun­ting, Volu­me 1: Finan­cial Accoun­ting


which of the following accounts will be debited in the closing entry at the end of the year?

The­se pos­ted ent­ries will then trans­la­te into a post-clo­sing tri­al balan­ce, which is a tri­al balan­ce that is pre­pared after all of the clo­sing ent­ries have been recor­ded. After the clo­sing jour­nal ent­ry, the balan­ce on the dra­wings account is zero, and the capi­tal account has been redu­ced by 1,300. The retai­ned ear­nings account is redu­ced by the amount paid out in divi­dends through a debit, and the divi­dends expen­se is cre­di­ted. Accounts Paya­ble Jour­nal Ent­ries refer to the amount paya­ble accoun­ting ent­ries to the company’s cre­di­tors for the purcha­se of goods or ser­vices. They are repor­ted under the head cur­rent lia­bi­li­ties on the balan­ce sheet, and this account is debi­ted when­ever any pay­ment has been made. A net loss would decrease retai­ned ear­nings so we would do the oppo­si­te in this jour­nal ent­ry by debi­ting Retai­ned Ear­nings and cre­diting Inco­me Sum­ma­ry.

Clo­sing Ent­ries are jour­nal ent­ries neces­sa­ry to clo­se inco­me or loss for the peri­od to retai­ned ear­nings. Reve­nues or inco­me are debi­ted and expen­ses are cre­di­ted, which deter­mi­nes the amount to be clo­sed to retai­ned ear­nings at the end of an accoun­ting peri­od. The accoun­tant clo­ses ent­ries at the end of each accoun­ting peri­od invol­ving reve­nues, gains, expen­ses, and los­ses. The accoun­tant debits expen­ses, and inco­mes are cre­di­ted to the inco­me sum­ma­ry state­ment. The amount of each debit ente­red into an account will be the amount of each account’s cre­dit balan­ce. Noti­ce that the balan­ces in the expen­se accounts are now zero and are rea­dy to accu­mu­la­te expen­ses in the next peri­od.

which of the following accounts will be debited in the closing entry at the end of the year?

Any funds that are not held onto incur an expen­se that redu­ces NI. One such expen­se that is deter­mi­ned at the end of the year is divi­dends. The last clo­sing ent­ry redu­ces the amount retai­ned by the amount paid out to inves­tors. The pur­po­se of the clo­sing ent­ry is to reset the tem­po­ra­ry account balan­ces to zero on the gene­ral led­ger, the record-kee­ping sys­tem for a company’s finan­cial data. Now that the jour­nal ent­ries are pre­pared and pos­ted, you are almost rea­dy to start next year.

Per­ma­nent Accounts

Now that we have clo­sed the tem­po­ra­ry accounts, let’s review what the post-clo­sing led­ger (T‑accounts) looks like for Prin­ting Plus. The first ent­ry clo­ses reve­nue accounts to the Inco­me Sum­ma­ry account. The second ent­ry clo­ses expen­se accounts to the Inco­me Sum­ma­ry account.

Noti­ce that the balan­ces in inte­rest reve­nue and ser­vice reve­nue are now zero and are rea­dy to accu­mu­la­te reve­nues in the next peri­od. The Inco­me Sum­ma­ry account has a cre­dit balan­ce of $10,240 (the reve­nue sum). The eighth step in the accoun­ting cycle is pre­pa­ring clo­sing ent­ries, which includes jour­na­li­zing and pos­ting the ent­ries to the led­ger. In addi­ti­on, if the accoun­ting sys­tem uses sub­led­gers, it must clo­se out each sub­led­ger for the month pri­or to clo­sing the gene­ral led­ger for the enti­re com­pa­ny.

The inco­me sum­ma­ry account is an inter­me­dia­ry bet­ween reve­nues and expen­ses, and the Retai­ned Ear­nings account. It stores all of the clo­sing infor­ma­ti­on for reve­nues and expen­ses, resul­ting in a “sum­ma­ry” of inco­me or loss for the peri­od. The balan­ce in the Inco­me Sum­ma­ry account equ­als the net inco­me or loss for the peri­od. This balan­ce is then trans­fer­red to the Retai­ned Ear­nings account. What is the cur­rent book value of your elec­tro­nics, car, and fur­ni­tu­re? Are the value of your assets and lia­bi­li­ties now zero becau­se of the start of a new year?

Loo­king To Get Star­ted?

We want inco­me state­ments to start every year from zero, but for accounts like equip­ment, debt, and cash accounts—reported on the balan­ce sheet—we want to keep a run­ning balan­ce from the begin­ning of the busi­ness. The second ent­ry requi­res expen­se accounts clo­se to the Inco­me Sum­ma­ry account. To get a zero balan­ce in an expen­se account, the ent­ry will show a cre­dit to expen­ses and a debit to Inco­me Sum­ma­ry. Prin­ting Plus has $100 of sup­pli­es expen­se, $75 of depre­cia­ti­on expense–equipment, $5,100 of sala­ries expen­se, and $300 of uti­li­ty expen­se, each with a debit balan­ce on the adjus­ted tri­al balan­ce. The clo­sing ent­ry will cre­dit Sup­pli­es Expen­se, Depre­cia­ti­on Expense–Equipment, Sala­ries Expen­se, and Uti­li­ty Expen­se, and debit Inco­me Sum­ma­ry. The first ent­ry requi­res reve­nue accounts clo­se to the Inco­me Sum­ma­ry account.

which of the following accounts will be debited in the closing entry at the end of the year?

The clo­sing ent­ry will cre­dit Divi­dends and debit Retai­ned Ear­nings. Learn how to wri­te clo­sing jour­nal ent­ries for reve­nue, expen­se, and divi­dend accounts. A clo­sing ent­ry is a jour­nal ent­ry that is made at the end of an accoun­ting peri­od to trans­fer balan­ces from a tem­po­ra­ry account to a per­ma­nent account.

Exam­p­le of Clo­sing Ent­ries

To make the balan­ce zero, debit the reve­nue account and cre­dit the Inco­me Sum­ma­ry account. Other accoun­ting soft­ware, such as Oracle’s Peo­p­le­Soft™, post clo­sing ent­ries to a spe­cial accoun­ting peri­od that keeps them https://online-accounting.net/ sepa­ra­te from all of the other ent­ries. So, even though the pro­cess today is slight­ly (or com­ple­te­ly) dif­fe­rent than it was in the days of manu­al paper sys­tems, the basic pro­cess is still important to under­stand.

Dra­wing Account: What It Is and How It Works — Invest­o­pe­dia

Dra­wing Account: What It Is and How It Works.

Pos­ted: Sun, 24 Jul 2022 07:00:00 GMT [source]

In addi­ti­on, if the com­pa­ny uses seve­ral sets of books for its sub­si­dia­ries, the results of each sub­si­dia­ry must first be trans­fer­red to the books of the parent com­pa­ny and all inter­com­pa­ny tran­sac­tions eli­mi­na­ted. If the sub­si­dia­ries also use their own sub­led­gers, then their sub­led­gers must be clo­sed out befo­re the results of the units of pro­duc­tion method sub­si­dia­ries can be trans­fer­red to the books of the parent com­pa­ny. Sin­ce the inco­me sum­ma­ry account is only a tran­si­tio­nal account, it is also accep­ta­ble to clo­se direct­ly to the retai­ned ear­nings account and bypass the inco­me sum­ma­ry account enti­re­ly. The inco­me sum­ma­ry is a tem­po­ra­ry account used to make clo­sing ent­ries.

Jour­na­li­zing and Pos­ting Clo­sing Ent­ries

Noti­ce that the effect of this clo­sing jour­nal ent­ry is to cre­dit the retai­ned ear­nings account with the amount of 1,400 repre­sen­ting the net inco­me (reve­nue – expen­ses) of the busi­ness for the accoun­ting peri­od. You might be asking yours­elf, “is the Inco­me Sum­ma­ry account even neces­sa­ry? ” Could we just clo­se out reve­nues and expen­ses direct­ly into retai­ned ear­nings and not have this extra tem­po­ra­ry account? We could do this, but by having the Inco­me Sum­ma­ry account, you get a balan­ce for net inco­me a second time. This gives you the balan­ce to compa­re to the inco­me state­ment, and allows you to dou­ble check that all inco­me state­ment accounts are clo­sed and have cor­rect amounts. If you put the reve­nues and expen­ses direct­ly into retai­ned ear­nings, you will not see that check figu­re.

Start­ing with zero balan­ces in the tem­po­ra­ry accounts each year makes it easier to track reve­nues, expen­ses, and with­dra­wals and to compa­re them from one year to the next. The­re are four clo­sing ent­ries, which trans­fer all tem­po­ra­ry account balan­ces to the owner’s capi­tal account. This is no dif­fe­rent from what will hap­pen to a com­pa­ny at the end of an accoun­ting peri­od. A com­pa­ny will see its reve­nue and expen­se accounts set back to zero, but its assets and lia­bi­li­ties will main­tain a balan­ce. In sum­ma­ry, the accoun­tant resets the tem­po­ra­ry accounts to zero by trans­fer­ring the balan­ces to per­ma­nent accounts.

  • The clo­sing ent­ry will cre­dit Divi­dends and debit Retai­ned Ear­nings.
  • The clo­sing ent­ries are the jour­nal ent­ry form of the State­ment of Retai­ned Ear­nings.
  • When you compa­re the retai­ned ear­nings led­ger (T‑account) to the state­ment of retai­ned ear­nings, the figu­res must match.

For each tem­po­ra­ry account the­re will be a clo­sing jour­nal ent­ry. Tem­po­ra­ry (nomi­nal) accounts are accounts that are clo­sed at the end of each accoun­ting peri­od, and include inco­me state­ment, divi­dends, and inco­me sum­ma­ry accounts. The­se accounts are tem­po­ra­ry becau­se they keep their balan­ces during the cur­rent accoun­ting peri­od and are set back to zero when the peri­od ends.

From this tri­al balan­ce, as we lear­ned in the pri­or sec­tion, you make your finan­cial state­ments. After the finan­cial state­ments are fina­li­zed and you are 100 per­cent sure that all the adjus­t­ments are pos­ted and ever­y­thing is in balan­ce, you crea­te and post the clo­sing ent­ries. The clo­sing ent­ries are the last jour­nal ent­ries that get pos­ted to the led­ger. Per­ma­nent (real) accounts are accounts that trans­fer balan­ces to the next peri­od and include balan­ce sheet accounts, such as assets, lia­bi­li­ties, and stock­hol­ders’ equi­ty. The­se accounts will not be set back to zero at the begin­ning of the next peri­od; they will keep their balan­ces.

The balan­ce in divi­dends, reve­nues and expen­ses would all be zero lea­ving only the per­ma­nent accounts for a post clo­sing tri­al balan­ce. The tri­al balan­ce shows the ending balan­ces of all asset, lia­bi­li­ty and equi­ty accounts remai­ning. The main chan­ge from an adjus­ted tri­al balan­ce is reve­nues, expen­ses, and divi­dends are all zero and their balan­ces have been rol­led into retai­ned ear­nings. We do not need to show accounts with zero balan­ces on the tri­al balan­ces. A tem­po­ra­ry account is an inco­me state­ment account, divi­dend account or dra­wings account. At the end of the accoun­ting peri­od, the balan­ce is trans­fer­red to the retai­ned ear­nings account, and the account is clo­sed with a zero balan­ce.

Clear the balan­ce of the reve­nue account by debi­ting reve­nue and cre­diting inco­me sum­ma­ry. The next and final step in the accoun­ting cycle is to prepa­re one last post-clo­sing tri­al balan­ce. Under­stan­ding the accoun­ting cycle and pre­pa­ring tri­al balan­ces is a prac­ti­ce valued inter­na­tio­nal­ly.

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