Information Sheet 1.1.

9: Closing book of accounts

Learning outcomes:
1. Close nominal/temporary accounts
2. Prepare post-closing trial balance

Learning Activities:
A. Identify the types of accounts based on ----nominal account
B. Prepare closing entries to close book of account
C. Use income and expense summary account in closing nominal account
D. Prepare post-closing trial balance

CLOSING ENTRIES

Reasons for closing the book of account

This is the last step in the accounting cycle, which prepares the organizations book of accounts for the next
accounting period. At this stage closing entries, the post-closing trial balance and the reversing entries has
to be prepared primarily because of two reasons.

1. Revenues, expenses and dividends has to start with a zero balance at the beginning of the New Year.
2. The companys retained earnings account has to include an increase for revenues from prior year
and a decrease for expenses and dividends from prior year.

Closing entries are journal entries made at the end of an accounting period which transfer the balances of
temporary accounts to permanent accounts.

A temporary/nominal account includes all income statement accounts such as depreciation expense,
consulting revenue, and rent expense; dividend accounts and the income summary account. Temporary
accounts start the year with a zero balance.

Permanent/real accounts are accounts that are related to one or more accounting periods. Permanent
accounts include assets such as Cash, Accounts Receivable, and Inventory Liabilities Such as Accounts
Payable, and Notes Payable; Common Stock and Retained Earnings. Permanent accounts carry their ending
balance into the next period.

The income summary account is a temporary account used only during the closing process. The account
contains all of the revenue and expenses for the prior period. One way to think about this account is that the
balance in income summary represents net income. The income summary account is NEVER included on a
financial statement because it is only used during the closing process.

Characteristics of Income Summary Account

Classified as a temporary owners equity account.

Does not have a normal balance.
Has a zero balance after the closing process and remains with a zero balance until after the
closing procedure for the next period.

Lead Experts Date: Developed Date: Revised Page #

Preparing Post Closing Trial Balance
Academy 1 APR 2016 Ver. 1 1
Information Sheet 1.1.9: Closing book of accounts

Steps in preparing closing entries

Lets look at the first step:

1. Transfer the balance of the revenue account to the Income Summary account. Revenue. Identify the
revenue accounts on the trial balance. Notice how they have a credit balance. We want the revenue account
to go to zero so to close a credit balance to zero, we must debit the revenue accounts.
The first journal entry recorded in the closing process will be: Debit to Consulting Revenue and Rental
Revenue and Credit Income Summary.

Revenue Accounts Debit

Income Summary Account Credit

2. Transfer the expense account balances to the Income Summary account. The second step is to identify
the expense accounts on the trial balance. Notice how they have a debit balance. We want the expense
account to go to zero so to close a debit balance to zero, we must credit the expense accounts.

The second journal entry recorded in the closing process will be: Debit to Income Summary and Credit
Depreciation Expense and Insurance Expense.

Income Summary Account Debit

Expense Accounts Credit

3. Transfer the balance of the Income Summary account to the owners capital account. The third step is to
calculate the balance in income summary account and then close income summary to owners equity/
retained earnings. We now want to close the income summary account so that the result is 0. To close a
credit balance, we will need to debit income summary. The third journal entry recorded in the closing
process will be: Debit to Income Summary and Credit owners equity/ retained earnings. The income
summary account is always closed to owners equity/ retained earnings.

Income Summary Account Debit

Owners Equity/Retained Earnings Credit

4. Transfer the balance of the drawing account/Dividend account to the owners capital account. The last, or
fourth step, is to identify the drawing/ dividend account on the trial balance. Notice how the drawing/
dividend account has a debit balance. We want the dividend account to go to zero so to close a debit
balance to zero, we must credit the drawing/ dividend accounts. The last, fourth, journal entry recorded in
the closing process will be: Debit to Retained Earnings and Credit Dividends. The drawing/ dividends account
is always closed to owners equity/ Retained Earnings.

Drawing Account Debit

Owners Equity/Retained Earnings Credit

So next time you need to perform closing entries, simply remember REID. R revenue; E expenses; I
Income Summary; and D Dividends/drawing .

POST CLOSING TRAIL BALANCE

Now that the book of accounts are closed, it is time to prepare the post-closing trial balance. The post-
closing trial balance reveals the balance of accounts after the closing process, and consists of balance sheet
accounts only. The post-closing trial balance is a tool to demonstrate that accounts are in balance; it is not a
formal financial statement. All of the revenue, expense, and dividend accounts were zeroed away via closing,
and do not appear in the post-closing trial balance.

Lead Experts Date: Developed Date: Revised Page #

Preparing Post Closing Trial Balance
Academy 1 APR 2016 Ver. 1 2