Transfer the balances of all revenue accounts to the income summary account to close the revenue accounts.
Discussion post:
Year-end close, also referred to as “closing the books,” is the procedure of examining, resolving, and confirming that each financial transaction and element of the business ledgers from the previous fiscal year tally up. This includes figuring out the company’s costs, earnings, revenue, assets, investments, equity, etc.
The closing process entails these four steps:
Transfer the balances of all revenue accounts to the income summary account to close the revenue accounts. An illustration of such a journal entry would be:
Account for Income Summary
Debit Account for Revenue
Transfer the balances of all cost accounts to the income summary account in order to close them. An illustration of such a journal entry would be:
Credit Income Summary Account
Debit Expense Account
Transfer the remaining balance from the income summary account to the retained profits account to close the account. An illustration of such a journal entry would be:
Debit Income Account
Credit Summary Account for Retained Earnings
Transfer the remaining balance from the dividends account to the retained profits account to close the dividends account. An illustration of such a journal entry would be:
Debit Dividends Account
Credit Retained Earnings Account
Temporary accounts are used to record transactions, like income, expenses, and dividends, for a particular accounting period. Each period, these accounts are closed, and the balances are moved to permanent accounts like retained profits. Permanent accounts, on the other hand, do not close at the end of each period and carry over their balances into the following one. Assets, liabilities, and equity accounts are a few types of permanent accounts.
Reference
Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Pearson
Comment on my discussion post:
Sonia,
Good post, although I think you forgot your citation. How long do you think a company could last without closing the books at the end of the financial year?
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