How to Compute an Income Statement From Closing Entries

The year-end closing is not difficult -- but it is time-consuming, tedious, and harried. Data must be gathered, compiled, and consolidated for preparing financial statements, income tax returns, and closing entries that will zero-out the temporary accounts in order to ready the books for the next accounting period. These tasks must be presented in financial reports that are accurate and timely for used by management and investors.

Things You'll Need

• Computer
• Spreadsheet software
• Ledger sheets

Instructions

Use The Income Statement As A Model

1. The closing entries are made after the financial statements are prepared; therefore, computing an income statement from closing entries is a relatively simple task. In fact, the income statement can be used as a model to make the entries that will close the temporary accounts.

2. The first part of the journal entry should be debit entries. Each revenue account should be debited for its corresponding balance. In a corporation, the retained earnings account should be debited for the balance in the dividends account. In a sole proprietorship or a partnership, the capital accounts should be debited for the balance in each drawing account.

3. If the income statement shows a net loss, then a journal entry should be made debiting the retained earnings account (corporation) or the capital account (sole proprietorship or partnership) for the amount of the net loss.

4. Next are the credit entries. A journal entry crediting each expense account, including the cost of goods sold account and the dividends or drawing accounts, should be made for each account's corresponding balance.

5. If the income statement showed a net income, then a journal entry should made crediting the retained earnings account for a corporation or the capital accounts in a sole proprietorship or partnership for the amount of the net income.

Tips & Warnings

• Ordinarily the journal entry closing the dividends or drawing accounts is made separately from the entries closing the revenue and expense accounts. The journal entry closing the net income (loss) into the retained earnings or capital accounts is also made separately.

References

• “Financial Accounting (5th ed.),” Jerry J. Weygandt, Donald E. Kieso, and Paul D. Kimmel. 2005.

Resources

• “Closing the Loop on Closing the Books,” Strategic Finance, 93(1), 43-47, Jeff Adler, CPA, July, 2011.