Skip to main content. Chapter 3: Completion of the Accounting Cycle. Search for:. Accounting Cycle 1. Analyze Transactions 5. Prepare Adjusting Journal Entries 9. Prepare Closing Entries 2. Prepare Journal Entries 6. Post Adjusting Journal Entries Post Closing Entries 3. Post journal Entries 7. Prepare Adjusted Trial Balance Prepare Post-Closing Trial Balance 4. Prepare Unadjusted Trial Balance 8.
Prepare Financial Statements Accounts are two different groups: Permanent — balance sheet accounts including assets, liabilities, and most equity accounts. These account balances roll over into the next period. So, the ending balance of this period will be the beginning balance for next period.
Temporary — revenues, expenses, dividends or withdrawals account. These account balances do not roll over into the next period after closing. Temporary accounts are income and expense accounts that are created during the accounting period and closed at the end. Permanent accounts are balance sheet accounts whose balances are carried forward to the subsequent accounting period. Examples of these permanent accounts include all asset and liability accounts.
Entry required to close the temporary income accounts to income summary account. All income accounts in the ledger such as sales, interest income, rental income, other income etc. Entry required to close the temporary expenses accounts to income summary account. All expense accounts in the ledger such as materials, wages, electricity, rent etc.
Entry required to close the temporary income summary account to permanent retained earnings account. The income summary account is also a temporary account which is opened and used just to empty the balances of various income and expense accounts in the ledger. Its balance is further transferred to a permanent balance sheet account known as retained earnings account. The income summary account is thus closed to retained earnings account. Entry required to close dividends account.
Dividends in a company are equal to drawings in a sole proprietorship form of business. Closing the Books. Accounting Books. Finance Books. Operations Books. Articles Topics Index Site Archive.
All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future. Permanent accounts, on the other hand, track activities that extend beyond the current accounting period.
Any account listed on the balance sheet, barring paid dividends, is a permanent account. As part of the closing entry process, the net income NI is moved into retained earnings on the balance sheet.
The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI.
One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors. Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand.
Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero. Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings.
Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow. There is an established sequence of journal entries that encompass the entire closing procedure:. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit.
Finally, dividends are closed directly to retained earnings. The retained earnings account is reduced by the amount paid out in dividends through a debit, and the dividends expense is credited. Fixed Income Essentials. Tools for Fundamental Analysis.
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