Fundamentals of Accounting

Closing Entries
Closing Entries
What are closing entries?
- Journal entries that needs to be recorded after the
Financial Statement have been prepared.

What are to be closed?

- Income, Expense, and Owner’s Drawing accounts
(Temporary or Nominal accounts)

Why do we need to close them?

- To clear (Zero out) Income, Expense, and Owner’ Drawing
accounts so that in the next accounting period, the book is
ready for a new set of temporary or nominal accounts.
4 Steps in making Closing Entries:
1.) Close all Revenues/ Incomes
to Income Summary account:

Revenues or Incomes xxx

Income Summary xxx
To close revenues or income accounts
4 Steps in making Closing Entries:
2.) Close all Expenses
to Income Summary account:

Income Summary xxx

Expenses xxx
To close expenses accounts.

* Note that all Expense accounts must be closed

individually (not in Total), therefore all Expense accounts
must be credited.
4 Steps in making Closing Entries:
3.) Close Profit or Loss
to Capital account:
Income Summary xxx
Capital xxx
To close Profit to Capital account.

OR

Capital xxx
Income Summary xxx
To close Loss to Capital account
4 Steps in making Closing Entries:
4.) Close Owner’s Drawing account
to Capital account:

Capital xxx
Drawing xxx
To close Drawings to Capital account.
Post Closing Trial Balance
After accomplishing so many accounting steps,
there is a need to prepare another trial balance
to prove the equality of the debits and credits.
The Post Closing Trial Balance is prepared after
closing the books and contains only real
accounts with balances. It has the same
accounts as those found in the statement of
financial position.

* Note that same account balances will be

forwarded in the next accounting period.