Closing Entries Concepts and Practices
Closing Entries • Last stage in the accounting cycle is to prepare the accounts for the next period by transferring the results of business operations and owner’s withdrawals to Capital.
Types of Accounts • Real accounts continue from one period to another • Real accounts are assets, liabilities, and Capital • Nominal accounts have balances that do not continue from one period to another • Nominal accounts are revenue and expense accounts with the addition of Drawings
Income Summary Accounts • Used only for closing entries • Nominal accounts are closed into Income Summary to collect information • Income Summary is then closed to Capital
Closing Accounts • Nominal accounts need to have a balance of zero at the end of the fiscal period in order to collect only one period’s information • Net income will be transferred to Capital via the Income Summary account • Drawings are closed directly to Capital
How to Close the Accounts Four steps: • Close revenue (income statement credit column) to Income Summary • Close expenses (income statement debit column) to Income Summary • Close Income Summary to Capital (this amount will be net income or loss) • Close Drawings to Capital
Closing Drawings—to make it zero, you will debit Capital to show that it has been decreased by Drawings
Post-closing balance is prepared after the adjusting and closing entries have been journalized and posted. Only assets, liabilities, and capital should have balances. Everything else should be zero.