How to Close Books for the Year End

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At the end of a company's year, an accountant must close the books.
At the end of a company's year, an accountant must close the books. (Image: pen image by AGphotographer from Fotolia.com)

A company's year end can either be a calendar year end, Dec. 31, or a fiscal year end, which is any other day besides Dec. 31. When this occurs, you need to close the books out for the year. This is a process of reviewing six different credits or debits, and it closes the revenue and expense accounts out to zero to start the next year. It also resets the gains and loss accounts back to zero to start the next year.

Find your general ledger and add together all revenue, expense, gain and loss accounts. Do not net together the debits and credits. So you will have six different accounts with different balances. You will have a credit revenue balance, a credit expense balance, a credit gain balance, a debit revenue balance, a debit expense balance and a debit loss balance.

Debit the revenue account balance with a credit balance and credit the same amount to "Income Summary." By debiting this amount, you reduce the credit balance in the account to zero and move that amount to an account called "Income Summary."

Debit the gain account balance with a credit balance and credit the same amount to "Income Summary." By debiting this amount, you reduce the credit balance in the account to zero and move that amount to an account called "Income Summary."

Debit any expense account balance with a credit balance and credit the amount to "Income Summary." Since expenses are normally credits, these are "contra-accounts." By debiting this amount, you reduce the credit balance in the account to zero and move that amount to an account called "Income Summary."

Credit the expenses account with a debit balance and debit the account "Income Summary." By debiting this amount, you reduce the credit balance to zero and move the amount to an account called "Income Summary."

Credit the revenue account with a debit balance and debit the "Income Summary" account. This revenue account is also a "contra-account." By debiting this amount, you reduce the credit balance to zero and move the amount to an account called "Income Summary."

Credit the loss accounts that have a debit balance and debit the "Income Summary" account. By debiting this amount, you reduce the credit balance to zero and move the amount to an account called "Income Summary."

Net together the total debits and credits in the "Income Summary" account. This is your income or loss for the year.

Debit "Income Summary" and credit "Retained Earnings" if you have a gain for the year. Credit "Retained Earnings" and debit "Income Summary" if you have a loss for the year. Remember, you determined gain or loss in Step 8.

Debit "Retained Earnings" and credit "Dividends" by any dividend amounts paid during the previous year. This resets the "Dividend" amount back to zero.

Tips & Warnings

  • Remember, when you debit or credit an account while closing entries, always debit or credit the full amount in the account. This is because when you close the account, you want the account to have a zero balance afterwards. This resets the account so you can start track your income next year.

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