We’ll use a company called MacroAuto that creates and installs specialized exhaust systems for race cars. Here are MacroAuto’s accounting records simplified, using positive numbers for increases and negative numbers for decreases instead of debits and credits in order to save room and to get a higher-level view. If you’d like to learn more about other small business accounting applications, closing entries accounting be sure to check out our small business accounting software reviews. QuickBooks Online also lets you delete a previously posted journal entry, but in order to maintain an audit trail, any journal entry posted in error should be reversed, not deleted. The first step in preparing journal entries for your business is to determine exactly what transaction needs to be entered.

Clear the balance of the revenue account by debiting revenue and crediting income summary. The eighth step in the accounting cycle is preparing closingentries, which includes journalizing and posting the entries to theledger. Income and expenses are closed to a temporary clearing account, usually Income Summary. Afterwards, withdrawal or dividend accounts are also closed to the capital account. This is closed by doing the opposite – debit the capital account (decreasing the capital balance) and credit Income Summary. In turn, your accounting software application handles the brunt of the work, creating journal entries automatically when financial transactions are processed, increasing accuracy and reducing your workload.

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Prepare the closing entries for Frasker Corp. using the adjusted trial balance provided. The business has been operating for several years but does not have the resources for accounting software. This means you are preparing all steps in the accounting cycle by hand. Remember that all revenue, sales, income, and gain accounts are closed in this entry. Thebusiness has been operating for several years but does not have theresources for accounting software.

Income Summary

The permanent accounts in which balances are transferred depend upon the nature of business of the entity. For example, in the case of a company permanent accounts are retained earnings account, and in case of a firm or a sole proprietorship, owner’s capital account absorbs the balances of temporary accounts. Closing journal entries are used at the end of the accounting cycle to close the temporary accounts for the accounting period, and transfer the balances to the retained earnings account. Notice that revenues, expenses, dividends, and income summary all have zero balances.

The expense accounts and withdrawal account will now also be zero. Instead, companies transfer the net income or net loss from the revenue and expense accounts to a temporary account called “Income Summary,” and then to the owner’s capital. Closing entries is entries made to close and clear the revenue and expense accounts and to transfer the amount of the net income or loss to a capital account or accounts or to the retained earning accounts. As the drawings account is a contra equity account and not an expense account, it is closed to the capital account and not the income summary or retained earnings account. In some cases, accounting software might automatically handle the transfer of balances to an income summary account, once the user closes the accounting period. The entries take place "behind the scenes," often with no income summary account showing in the chart of accounts or other transaction records.

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The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account. Notice that the balances in the expense accounts are now zeroand are ready to accumulate expenses in the next period. The IncomeSummary account has a new credit balance of $4,665, which is thedifference between revenues and expenses (Figure5.5).

It’s important to note that neither the drawing nor the dividends accounts need to be transferred to the income summary account. Closing entries are completed at the end of each accounting period after your adjusted trial balance has been run. One of the most important steps in the accounting cycle is creating and posting your closing entries.

Where does the company keep track of its closing entries?

These accounts carry forward their balances throughout multiple accounting periods. Our discussion here begins with journalizing and posting theclosing entries (Figure5.2). These posted entries will then translate into apost-closing trial balance, which is a trialbalance that is prepared after all of the closing entries have beenrecorded. When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings. Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry. In a sole proprietorship, a drawing account is maintained to record all withdrawals made by the owner.