Closing Entries

Closing journal entries are made at year-end to prepare temporary accountsfor

the next accounting period.

Temporary or nominal accounts, (also called income statement accounts), are

measuredperiodically.
The amounts in one accounting period should be closed or brought to zero so that they
won't be mixed with those of the next period.
Temporary accounts consist of all revenue and expense accounts, and also withdrawal
accounts of owner/s in the case of sole proprietorships and partnerships.
Take note that closing entries are prepared only for temporary accounts. Permanent
accounts are never closed.

Four Steps in Preparing Closing Entries

1.
2.
3.
4.

Close all income accounts to Income Summary

Close all expense accounts to Income Summary
Close Income Summary to the appropriate capital account
Close withdrawals to the capital account/s (this step is for sole proprietorship and
partnership only)

Closing Entries: Example

Prepare the closing entries using the following information:
Gray Electronic Repair Services
Adjusted Trial Balance
December 31, 2014

Account Title
Cash
Accounts Receivable
Service Supplies
Furniture and
Fixtures
Service Equipment
Accumulated
Depreciation
Accounts Payable
Utilities Payable
Loans Payable
Mr. Gray, Capital
Mr. Gray, Drawing
Service Revenue
Rent Expense
Salaries Expense
Taxes and Licenses
Utilities Expense
Service Supplies
Expense

Debit
7,480.00
3,700.00
600.00

Credit

3,000.00
16,000.00
$

720.00
9,000.00
1,800.00
12,000.00
13,200.00

7,000.00
9,850.00
1,500.00
3,500.00
370.00
1,800.00
900.00

Depreciation Expense
Totals

720.00
46,570.00

46,570.00

Step 1: Close all income accounts to Income

Summary
Date
2014
Dec

Particulars

3
Service Revenue
1

Debit

Credit

9,850.00

Income Summary

9,850.00

In the given data, there is only 1 income account, i.e. Service Revenue. It has a credit
balance of $9,850. To close that, we debit Service Revenue for the full amount and
credit Income Summary for the same.
The Income Summary account is temporary. It is used to close income and expenses.
As you will see later, Income Summary is eventually closed to capital.

Step 2: Close all expense accounts to Income

Summary
3
Income Summary
1

8,790.00

Rent Expense

1,500.00

Salaries Expense

3,500.00

Taxes and Licenses

370.00

Utilities Expense

1,800.00

Service Supplies Expense

900.00

Depreciation Expense

720.00

To close expenses, we credit the expense accounts and debit Income Summary.
Now for the next step, we need to get the balance of the Income Summary account. In
step 1, we credited it for $9,850 and debited it in step 2 for $8,790. It would then have
a credit balance of $1,060.
Notice that the balance of the Income Summary account is actually the net income for
the period. Remember that net income is equal to all income minus all expenses.

Step 3: Close Income Summary to the

appropriate capital account
The Income Summary balance is ultimately closed to the capital account.
3
Income Summary
1
Mr. Gray, Capital

1,060.00
1,060.00

Step 4: Close withdrawals to the capital

account
Note: This step is applicable only to sole proprietorships and partnerships.

In a sole proprietorship, a drawing account is maintained to record all withdrawals

made by the owner. In a partnership, a drawing account is maintained for each partner.
Drawing accounts are closed to capital at the end of the accounting period.
Our example is a sole proprietorship business. Mr. Gray's withdrawals are recorded
inMr. Gray, Drawing. To close the drawing account to the capital account, we credit
the drawing account and debit the capital account. Notice that drawings decrease
capital.
3
Mr. Gray, Capital
1
Mr. Gray, Drawing

7,000.00
7,000.00

Conclusion
The purpose of closing entries is to prepare the temporary accounts for the next
accounting period. In other words, the income and expense accounts are "restarted".
After preparing the closing entries above, Service Revenue will now be zero. The
expense accounts and withdrawal accounts will now also be zero. The balances of
these accounts have been absorbed by the capital account Mr. Gray, Capital, which
now has a balance of $7,260 ($13,200 beginning balance + $1,060 in step #3 $7,000 in step #4).