Closing entries
Closing entries are made at the end of the accounting period to close all the temporary accounts by transferring their balance to permanent accounts. Temporary accounts are all the income statement accounts along with dividends. Permanent accounts are balance sheet accounts. First, all the income statement accounts are transferred to the income summary account and then the balance in the income summary account is transferred to retained earnings.
Type of closing entries
1. Closing revenue and income account
The revenue account is closed by transferring the revenue balance to the income summary account. To do this process, the revenue account is debited and the income summary account is credited.
| Date | Description | Ref. | Debit | Credit |
| 31-Dec-24 | Service revenue/income account | $ xxx | ||
| Income Summary | xxx | |||
| (To close the revenue and other income account) |
2. Closing all expenses and losses account
The expenses and losses reported during the period are closed to the income summary by debiting the income summary account and crediting all expenses and losses accounts.
| Date | Description | Ref. | Debit | Credit |
| 31-Dec-24 | Income Summary | $ xxx | ||
| Expenses/Losses account | xxx | |||
| (To close the expense and losses account) |
3. Transferring the balance in income summary account to retained earnings
In this step, the balance in income summary account is transferred to retained earning account.
If revenue and other income exceed the expenses and other losses (in case of net income):
| Date | Description | Ref. | Debit | Credit |
| 31-Dec-24 | Income Summary | $ xxx | ||
| Retained earnings | xxx | |||
| (To close the income summary account) |
If expenses and other losses exceed the revenue and other income (in case of net loss)
| Date | Description | Ref. | Debit | Credit |
| 31-Dec-24 | Retained earnings | $ xxx | ||
| Income Summary | xxx | |||
| (To close the income summary account) |
4. Closing dividend account
Finally, the dividend account is closed to retained earnings account as follows:
| Date | Description | Ref. | Debit | Credit |
| 31-Dec-24 | Retained earnings | $ xxx | ||
| Dividend account | xxx | |||
| (To close the dividend account) |
To summarize, closing entries are important in the accounting cycle. As the name suggests, it helps in closing the accounting cycle for the period and ensures that only permanent account balances are carried forward, maintaining the accuracy and integrity of the financial statements.
