Let’s review our accountancy cycle again. We have actually completed the an initial two columns and also now we have the final column which represents the closing (or archive) process.

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Accounting bike
1. Analyze Transactions5. Prepare Adjusting newspaper Entries9. Prepare closing Entries
2. Prepare newspaper Entries6. Article Adjusting newspaper Entries10. Short article Closing Entries
3. Post journal Entries7. Prepare changed Trial Balance11. Prepare Post-Closing trial Balance
4. Prepare Unadjusted attempt Balance8. Prepare gaue won Statements

Accounts room two various groups:

Permanent – balance sheet accounts including assets, liabilities, and most same accounts. These account balances role over into the following period. So, the finishing balance that this period will be the start balance for following period.Temporary – revenues, expenses, dividend (or withdrawals) account. This account balances do not roll over right into the next period after closing. The closing procedure reduces revenue, expense, and dividends account balances (temporary accounts) to zero for this reason they are ready to receive data for the next audit period.

Accountants may perform the closing procedure monthly or annually. The closeup of the door entries room the journal entry type of the explain of kept Earnings. The score is to make the post balance the the retained income account complement what us reported on the explain of preserved earnings and start the next period with a zero balance because that all short-lived accounts.

Remember exactly how at the start of the course us learned the net revenue is added to equity. This is the procedure to make that happen!

The following video summarizes exactly how to prepare close up door entries.

In accounting, we frequently refer come the procedure of closing together closing the books. Just revenue, expense, and also dividend accounts space closed—not asset, liability, typical Stock, or Retained earnings accounts. The four straightforward steps in the closing process are:

Closing the revenue accounts—transferring the credit balances in the revenue accounts to a clearing account dubbed Income Summary.Closing the expense accounts—transferring the debit balances in the cost accounts come a clearing account called Income Summary.Closing the Income summary account—transferring the balance the the Income an overview account come the Retained income account.Closing the dividends account—transferring the debit balance that the dividends account to the Retained revenue account.

 Let’s review what we know about these accounts:

Increase withDecrease with

If we desire to do the account balance zero, we will decrease the account. We use a brand-new temporary closing account dubbed income summary to keep the closeup of the door items until we get close income review into retained Earnings. To close method to make the balance zero. We will look in ~ the following information for MicroTrain native the adjusted trial balance:

Retained Earnings $ 6,100
Service Revenue 36,500
Interest Revenue 600
Salaries Expense 18,360
Rent Expense 1,200
Utilities Expense 500
Insurance Expense 200
Supplies Expense 7,000
Depreciation Expense 750

Notice how the retained revenue balance is $6,100? ~ above the explain of kept earnings, we reported the ending balance of retained earnings to it is in $15,190. We must do the closing entries to do them match and zero the end the momentary accounts.

Step 1: close Revenue accounts

Close way to do the balance zero. We watch from the changed trial balance the our revenue accounts have actually a credit transaction balance. To do them zero we desire to decrease the balance or do the opposite. We will debit the revenue accounts and also credit the Income an overview account. The credit to income summary should same the complete revenue from the income statement.

Service Revenue 36,500
Interest Revenue 600
income Summary 37,100

Step 2: Close Expense accounts

The cost accounts have actually debit balances for this reason to remove their balances us will execute the opposite or credit transaction the accounts. Similar to in action 1, us will usage Income an overview as the offset account however this time we will debit earnings summary. The complete debit to income review should complement total expenses from the earnings statement.

Income Summary 28,010
earnings Expense 18,360
rental Expense1,200
Utilities Expense500
insurance allowance Expense200
provides Expense7,000
Depreciation Expense750

Step 3: Close Income Summary account

At this point, you have actually closed the revenue and expense account into revenue summary. The balance in income an overview now to represent $37,100 credit – $28,010 debit or $9,090 credit transaction balance…does the number it seems to be ~ familiar? It must — income summary should match net revenue from the revenue statement. We desire to eliminate this credit transaction balance by debiting earnings summary. What did we carry out with network income? We added it to retained income in the explain of maintained earnings. How do we rise an equity account in a journal entry? us credit!

Income an introduction (37,100 – 28,010) 9,090
preserved Earnings 9,090

If prices were better than revenue, we would have actually net loss. A network loss would decrease retained income so we would execute the opposite in this journal entry by debiting preserved Earnings and crediting income Summary.

Step 4: Close Dividends (or withdrawals) account

After we add net income (or subtract net loss) top top the statement of retained earnings, what carry out we execute next? we subtract any dividends to acquire the finishing retained earnings. This will certainly be the newspaper entry type of law this calculation yet be careful since you perform not want to usage the lot of kept earnings yet DIVIDENDS. We desire to decrease retained income (debit) and also remove the balance in dividend (credit) for the quantity of the dividends. MicroTrain did not pay dividend this year yet the entry would show up as:

Retained EarningsDiv Amt
DividendsDiv Amt

Div Amt way we will use the DIVIDEND amount and not the balance in kept earnings.

Anytime we complete journal entries, we constantly need to short article to the very same ledger cards or T-accounts we have actually been utilizing all along. When we post, we do not adjust anything from the journal entries — we debit (left side) where we walk in the entries and credit (right side) wherever we did in the entries. The ledger map for income summary and retained earnings would look prefer this:

Account: earnings SummaryDebitCreditBalance
(1) nearby Revenues 37,100 37,100
(2) close Expenses28,010 9,090
(3) Close earnings Summary 9,090 0

Account: maintained EarningsDebitCreditBalance
Beginning Balance6,100
(3) Close revenue Summary9,09015,190
(4) nearby Dividends015,190

The balance in dividends, revenues and also expenses would all it is in zero leaving only the permanent accounts for a write-up closing trial balance. The psychological balance reflects the ending balances of every asset, liability and equity accounts remaining. The main readjust from an readjusted trial balance is revenues, expenses, and also dividends are all zero and their balances have been rolled right into retained earnings. We execute not need to show accounts through zero balances on the attempt balances.

MicroTrain’s write-up closing attempt balance would be:

Cash 10,000
Accounts Receivable 25,000
Interest Receivable 600
Supplies 1,500
Prepaid Insurance 2,200
Trucks 40,000
Accum. Depreciation-Trucks 750
Accounts Payable 25,000
Unearned Revenue 3,000
Salaries Payable 360
Common Stock 35,000
Retained Earnings 15,190
TOTALS 79,300 79,300

Notice just how only the balance in retained earnings has readjusted and it now matches what was reported as finishing retained revenue in the statement of maintained earnings and also the balance sheet.

Congratulations! You made it through the complete accounting cycle.

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Answer the following questions on closeup of the door entries and rate your confidence to check your answer.