Closing Entry

What Is a Closing Entry?

A closing entry is a journal entry made toward the finish of accounting periods that includes shifting data from transitory accounts on the income statement to permanent accounts on the balance sheet. Impermanent accounts incorporate revenue, expenses, and dividends, and these accounts must be closed toward the finish of the accounting year.

Grasping Closing Entries

The purpose of the closing entry is to reset the brief account balances to zero on the general ledger, the record-staying with system for a's financial data.

Brief accounts are utilized to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance since they are reported in defined periods and are not carried over into what's in store. For instance, $100 in revenue this year doesn't count as $100 of revenue for next year, even on the off chance that the company retained the funds for use in the next 12 months.

Permanent accounts, then again, track activities that stretch out past the current accounting period. They are housed on the balance sheet, a section of the financial statements that provides investors with an indication of a company's value, including its assets and liabilities.

Any account listed on the balance sheet, excepting paid dividends, is a permanent account. On the balance sheet, $75 of cash held today is as yet valued at $75 next year, even on the off chance that it isn't spent.

As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for sometime later. Any funds that are not held onto cause an expense that diminishes NI. One such expense not entirely set in stone toward the year's end is dividends. The last closing entry decreases the amount retained by the amount paid out to investors.

Income Summary Account

Impermanent account balances can either be moved straightforwardly to the retained earnings account or to an intermediate account known as the income summary account ahead of time.

Income summary is a holding account used to aggregate all income accounts with the exception of dividend expenses. Income summary isn't reported on any financial statements since it is just utilized during the closing system, and toward the finish of the closing system the account balance is zero.

Income summary successfully gathers NI for the period and disseminates the amount to be retained into retained earnings. Balances from brief accounts are moved to the income summary account first to leave a audit trail for accountants to follow.

Recording a Closing Entry

There is a laid out sequence of journal sections that envelop the whole closing method:

1. In the first place, all revenue accounts are moved to income summary. This is finished through a journal entry debiting all revenue accounts and crediting income summary.
2. Next, a similar cycle is performed for expenses. All expenses are closed out by crediting the expense accounts and debiting income summary.
3. Third, the income summary account is closed and credited to retained earnings.
4. At last, on the off chance that a dividend was paid out, the balance is moved from the dividends account to retained earnings.

Significant

Modern accounting software naturally produces closing sections.

Special Considerations

On the off chance that a company's revenues are greater than its expenses, the closing entry involves debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account should be credited and retained earnings decreased through a debit.

At last, dividends are closed straightforwardly to retained earnings. The retained earnings account is decreased by the amount paid out in dividends through a debit, and the dividends expense is credited.

Features

• It includes shifting data from transitory accounts on the income statement to permanent accounts on the balance sheet.
• All income statement balances are eventually moved to retained earnings.
• A closing entry is a journal entry made toward the finish of the accounting period.