The retained earnings account balance has now increased to 8,000, and forms part of the trial balance after the closing journal entries have been made. This trial balance gives the opening balances for the next accounting period, and contains closing entries only balance sheet accounts including the new balance on the retained earnings account as shown below. When making closing entries, the revenue, expense, and dividend account balances are moved to the retained earnings permanent account.

Double Entry Bookkeeping

Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings. Revenue, expense, and dividend accounts affect retained earnings and are closed so they can accumulate new balances in the next period, which is an application of the time period assumption. The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts. Just like in step 1, we will use Income Summary as the offset account but this time we will debit income summary. The total debit to income summary should match total expenses from the income statement.

Step 1: Close all income accounts to Income Summary

Once this has been completed, a post-closing trial balance will be reviewed to ensure accuracy. Only incomestatement accounts help us summarize income, so only incomestatement accounts should go into income summary. The next day, January 1, 2019, you get ready for work, butbefore you go to the office, you decide to review your financialsfor 2019.

Closing Entry in Accounting: Definition, Example, and Best Practices

Notice that the Income Summary account is now zero and is ready for use in the next period. The Retained Earnings account balance is currently a credit of $4,665. Printing Plus has a $4,665 credit balance in its Income Summary account before closing, so it will debit Income Summary and credit Retained Earnings.

Preparing a Closing Entry

The income statementsummarizes your income, as does income summary. If both summarizeyour income in the same period, then they must be equal. Thebusiness has been operating for several years but does not have theresources for accounting software.

You can find this by taking a look at the trial balance or income statement in your accounting system. Instead the balances in these accounts are moved at month-end to either the capital account or the retained earnings account. Corporations will close the income summary account to the retained earnings account. All of Paul’s revenue or income accounts are debited and credited to the income summary account.

Step 3: Close Income Summary account

Get Started

• To close the drawing account to the capital account, we credit the drawing account and debit the capital account.
• Then, credit the income summary account with the total revenue amount from all revenue accounts.
• This means that the current balance of these accounts is zero, because they were closed on December 31, 2018, to complete the annual accounting period.
• Your car,electronics, and furniture did not suddenly lose all their value,and unfortunately, you still have outstanding debt.
• After the posting of this closing entry, the income summary now has a credit balance of $14,750 ($70,400 credit posted minus the $55,650 debit posted).
• Because you paid dividends, you will need to reduce your retained earnings account, which is what this entry accomplishes.