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Journalizing & Posting Closing Entries

7 May, 2015 - 16:44

After the financial statements are completed, all adjusting entries are recorded in the journal and posted to the ledger so that all financial statements are in agreement. It is necessary to close all temporary accounts and record the net change to the owner's equity account. This is accomplished by journalizing and posting closing entries for all temporary accounts. An Income Summary account is used to summarize revenue and expense accounts, and establishing the net profit or loss for the period. In addition, any transaction that increases or decreases capital should also be posted to the appropriate capital account.

PROCEDURES TO CLOSE TEMPORARY ACCOUNTS

  1. Debit all revenue accounts, and credit Income Summary.
  2. Credit all expense accounts, and debit Income Summary.
  3. Add debit and credit columns of Income Summary. If the credit balance exceeds the debit balance, a profit has been realized.
  4. Results of the Income Summary should be posted to a capital account (Owner's or Shareholders equity).
  5. If there is activity in the Drawing or Dividend accounts, it is necessary to credit those acounts and debit a capital account.