BAT4M - Closing Entries

Closing entries are entries made at the end of a fiscal period to close temporary accounts (like expenses and revenues) into the owner/shareholder equity account.

Learning Goals

By the end of this activity you will be able to:

• Understand the need for closing entries at the end of the fiscal period
• Describe the four steps in the process of closing the accounts at the end of the fiscal period
• Identify temporary and permanent accounts.

Success Criteria

I will know I am successful when:

• I can record the journal entries to close temporary accounts
• I can explain why closing entries are necessary.

Key Terms

• Temporary Accounts: Accounts that must be closed (balance converted to 0) at the end of a fiscal period. Examples: Revenues, Expenses, Drawings.
• Permanent Accounts: Accounts that can carry a balance from period to period. Examples: Assets, Liabilities, Capital.
• Income Summary (or Revenue and Expense Summary): A temporary account used to close the revenues and expenses and quickly show whether the company earned or loss money in the period. It is closed to the Capital account.

Process

1. At the end of a fiscal period (month, quarter or year), temporary accounts need to be "emptied" with a closing entry that reduces the account balance to zero.
2. Revenue and Expenses need to be recognized and recorded for the time period when incurred. Drawings must be closed as well.
3. Close the temporary accounts into an account called "Income Summary" or "Revenue and Expense Summary". Follow this order:
   1. Close all the revenues (a debit entry in the revenue account that matches with a credit entry in the Income Summary). For example, in Service Fees, create a debit entry called "Closing Entry" for the account balance and a matching credit entry in Income Summary called or "To close revenue".
   2. Close all the expenses (a credit entry in the expense(s) account and a debit entry in Income Summary). You can close all the expenses with a compound entry (multiple credit entries for each expense account and one debit entry in Income Summary.
   3. Close the Income Summary into the Capital account (if the company earned income, use a debit entry in Income Summary and a credit entry in Capital to show an increase in value, if the company incurred a loss, use a credit entry in Income Summary and a debit entry in Capital to show a decrease in value).
   4. Close Drawings into Capital (credit Drawings the sum of all that was withdrawn by the owner in the fiscal period and debit Capital).
4. Remember to make entries in the General Journal and the General Ledger.

Example

Activity

• Raptors Accounting
• On the last day of the month, the accountant may have to journalize transactions, make adjusting entries and complete the closing entries.