Closing entries are used in financial accounting.
At the end of every accounting period, closing entries are done for the income statement accounts (revenues and expenses) and the owner withdrawals account. Each of these accounts must get down to a balance of zero to close. This is done with a temporary account called Income Summary.
Steps for closing entries:
Do this in order!
| Partial trial balance used for closing accounts: | Debit | Credit |
| Withdrawals | 1,000 | |
| Revenues | 15,000 | |
| Materials expense | 2,000 | |
| Phone expense |
1,200 |
|
| Utilities expense | 800 |
The revenues, expenses, and withdrawals go on the opposite side to the trial balance. This gets each account down to zero.
1. Close revenue to income summary
| Debit | Credit | |
| Revenues | 15,000 | |
|
Income Summary |
15,000 |
2. Close expenses to income summary.
| Debit | Credit | |
| Income summary | 4,000 | |
|
Materials expense |
2,000 | |
|
Phone expense |
1,200 | |
|
Utilities expense |
800 |
3. Close income summary to capital
Net Income
| Debit | Credit | |
| Income Summary | 11,000 | |
|
J. Jones, Capital |
11,000 |
(15,000 – 4,000 = 11,000. Income summary has a credit balance (profit) of 11,000, so debit it down to zero). This is a profit. If there was a loss, where expenses are higher than revenues, the journal entry would be reversed.
Net Loss
| Debit | Credit | |
| J. Jones, Capital | xxx | |
|
Income Summary |
xxx |
Note: This is the only journal entry of the four that would be reversed.
4. Close withdrawals to capital
| Debit | Credit | |
| J. Jones, Capital | 1,000 | |
|
J. Jones, Withdrawals |
1,000 |