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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.
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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.