How to Prepare Closing Entries

Prepare closing entries at the end of the fiscal year to bring temporary account balances to zero and transfer these balances to balance sheet accounts. Temporary accounts include revenue, expense and capital withdrawal accounts, such as distributions and dividends. A special account, called the income summary, is often used to enter all the revenue and expense accounts to calculate the company's net income for the period. The closing entries prepare the company books to begin recording the subsequent year's transactions.

Instructions

1. Close revenue accounts by debiting the revenue accounts with amounts equal to the credit balance in these accounts. For example, if the balance in the sales account is $500,000, the debit entry to this account is a $500,000 debit. The closing entry is a debit ($500,000) to sales and a credit ($500,000) to the income summary account. Write an explanation for this entry, such as, "To close sales to the income summary for the year ending 12/31/20XX."

2. Make closing entries to each expense account by posting an amount equal to the balance in each of these accounts. For example, if wage expense is $100,000, telephone expense is $42,000, and cost of goods sold is $240,000--all debit balances)--post a credit of $100,000 to wage expense, a credit of $42,000 to telephone expense and a $240,000 credit to cost of goods sold. Post a debit of $382,000 (100,000+42,000+240,000) to the income summary account. Write an explanation describing the reason for the entry. Once all the revenue account balances and all the expense account balances are transferred to the income summary account, subtract total expenses from total revenues to get the company's net income or loss for the period.

3. Transfer the net income (or loss) from the income summary account to the company's equity accounts. For a corporation, this is the retained equity account. For a partnership, it's the partners' equity accounts. For a limited liability company, it's the members' equity accounts. This entry closes the income summary account by posting a credit or a debit to the income summary account and the opposite entry to the equity account(s).

4. Adjust the temporary equity accounts to zero. These accounts are normally debit balances. Post a credit equal to these balances in each temporary equity account and a debit to the appropriate permanent equity account. Written explanations of each of these entries keep the transactions clear for later examination.

Tips & Warnings

• Check to be sure all transaction amounts have been properly posted by checking all temporary account balances after the closing entries are completed. All temporary accounts should have zero balances.

References

• Cerritos College: Closing Entries and the Postclosing Trial Balance

Resources

• Read this Article in Spanish