CLOSING ENTERIES

The closing entries serve to transfer the balances out of certain temporary accounts and into
permanent ones. This resets the balance of the temporary accounts to zero, ready to begin the
next accounting period. The process transfers these temporary account balances to permanent
entries on the company's balance sheet.
Part of the Accounting Cycle being, closing entries are journal entries made at the end of
the accounting period. They reset the temporary accounts to zero where the balance transferred
to Retained Earnings.
The basic sequence of closing entries is as follows:
1. Debit all revenue accounts and credit the income summary account, thereby clearing out
the balances in the revenue accounts.
2. Credit all expense accounts and debit the income summary account, thereby clearing out
the balances in all expense accounts

There is an established sequence of journal entries that encompass the entire closing
procedure:

1. First, all revenue accounts are transferred to income summary. This is done through a
journal entry debiting all revenue accounts and crediting income summary. 
2. Next, the same process is performed for expenses. All expenses are closed out by
crediting the expense accounts and debiting income summary.
3. Third, the income summary account is closed and credited to retained earnings.
4. Finally, if a dividend was paid out, the balance is transferred from the dividends account
to retained earnings.

Retained Earnings – Profit earned by a company held for future use.

Temporary Accounts
Accounts that are needed to be reset to zero at the end of a period through closing entries.
Temporary Accounts are:
R- Revenue
E- Expenses
D - Dividends
How to reset a temporary account with closing entries
Debit Credit
Dividends 500
Revenue 20,000
Cost of Services 10,000
Overhead Expenses 5,000
Interest Expense 50
Tax Expense 1,000

Noted that left side is Debit and right side is Credit

CLEAR REVENUE TO INCOME SALARY

Transfer each Account to the Income Summary Account
The balance of Revenue is 20,000 then transferred to the Income Salary that has a balance of 0

CLEAR EXPENSES TO INCOME SALARY

Transfer each account to the Income Salary Account
The Credit will then be subtracted with the total debit

CLEAR INCOME SALARY TO RETAINED EARNINGS

With all the temporary accounted reset to zero and transferred to the Income Salary, it must
be debited 3,950 and credit the balance of the Retained Earnings with the same amount.
 CLEAR DIVIDENDS TO RETAINED EARNINGS
If there are any dividends present then, the balance of the dividend account will be credit
with 500 and the retained earnings account will be debited leaving the Retained Account with a
total of 3,450
Example #1
G Company supplied the following adjusted trial balance as of December 31.
G Company
Adjusted Trial Balance
December 31

DEBIT CREDIT
Cash 8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 400
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. 88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries & Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 208,250
Salaries and Wages Expense 72,500
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Depreciation Expense-Equipment 5,800
Depreciation Expense-Bldg. 1,750
Miscellaneous Expense 4,050
Insurance Expense 2,900
Supplies Expense 1,550
TOTALS: 444, 900 444, 900

Required:
a) Prepare closing entries
b) Prepare a post-closing trial balance

Solution:
1. Fees Revenue 208,250
Income Summary 208,250
2. Income Summary 141,250
Salaries and Wages Expense 72,500
Advertising Expense 23,200
Utilities Expense 18,000
Repairs Expense 11,500
Miscellaneous Expense 5,800
Insurance Expense 1,750
Supplies Expense 4,050
Depreciation Expense-Bldg. 2,900
Depreciation Expense-Equipment 1,550
Balance in Income Summary account = Net Income
3. Income Summary 67,000
Retained Earnings 67,000
4. Retained Earnings 8,000
Dividends 8,000
 G Company
Post-Closing Trial Balance
December 31
DEBIT CREDIT
Cash 8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 400
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg. 88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries & Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 113,000
TOTALS: 295,650 295,650
Problem #2:
Adjusted Trial Balance
DEBIT CREDIT
Notes Receivable 17,000
Supplies 1,000
Prepaid Rent 9,000
Equipment 65,000
Accumulated Depreciation 0 8,000
Capital Stock 0 15,000
Retained earnings 45,000
Dividends Payable 44,000
Wages Payable 0 3,000
Dividends 22,000
Unearned Fees 0 7,000
Fees Earned 0 210,000
Interest Income 17,000
Cost of Goods Sold 146,000
Wages Expense 44,000
Rent Expense 11,000
Interest Expense 9,000
Depreciation Expense 13,000
Supplies Expense 12,000
TOTAL: 349,000 349,000

Required:
a) Prepare closing entries.
b) Prepare a post-closing trial balance.
Problem #2 Solution:
1. Fees Earned 210,000
Interest Income 17,000
Income Summary 227,000
2. Income Summary 235,000
Cost of Goods Sold 146,000
Wages Expense 44,000
Rent Expense 11,000
Interest Expense 9,000
Depreciation Expense 13,000
Supplies Expense 12,000
3. Retained Earnings 8,000
Income Summary 8,000
4. Retained Earnings 22,000
Dividends 22,000
Post-Closing Trial Balance
DEBIT CREDIT
Notes Receivable 17,000
Supplies 1,000
Prepaid Rent 9,000
Equipment 65,000
Accumulated Depreciation 8,000
Capital Stock 15,000
Dividends payable 44,000
Wages Payable 3,000
Unearned Fees 7,000
Retained Earnings 15,000
TOTAL: 92, 000 92, 000
Special Considerations

If a company’s revenues are greater than its expenses, the closing entry entails debiting
income summary and crediting retained earnings. 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.