It is temporary because it lasts only for the accounting period. At the end of the accounting period, the balance is transferred to the retained earnings account, and the account is closed with a zero balance. For each temporary account there will be a closing journal entry. The balance in dividends, revenues and expenses would all be zero leaving only the permanent accounts for a post closing trial balance. The trial balance shows the ending balances of all asset, liability and equity accounts remaining. The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings.
Journalizing and Posting Closing Entries
Are the value of your assets and liabilities now zero because of the start of a new year? Your car, electronics, and furniture did not suddenly lose all their value, and unfortunately, you still have outstanding debt. The next day, January 1, which of the following is not a closing entry? 2019, you get ready for work, but before you go to the office, you decide to review your financials for 2019.
Example of a Closing Entry
Closing entries prepare a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period. Closing, or clearing the ledger account balances, means returning the account to a zero balance. Having a zero balance in these accounts is important so a company can compare performance across periods, particularly with income. It also helps the company keep thorough records of account balances affecting retained earnings.
Interim Financial Periods
The remaining balance in Retained Earnings is $4,565 the following Figure 5.6. This is the same figure found on the statement of retained earnings. The remaining balance in Retained Earnings is $4,565 (Figure 5.6). Why was income summary not used in the dividends closing entry? Only income statement accounts help us summarize income, so only income statement accounts should go into income summary.
- The information needed to prepare closing entries comes from the adjusted trial balance.
- Afterwards, withdrawal or dividend accounts are also closed to the capital account.
- For our purposes, assume that we are closing the books at the end of each month unless otherwise noted.
- Temporary accounts are income statement accounts that are used to track accounting activity during an accounting period.
- These posted entries will then translate into a post-closing trial balance, which is a trial balance that is prepared after all of the closing entries have been recorded.
- It is temporary because it lasts only for the accounting period.
- The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5).
The revenue and expense accounts should start at zero each period, because we are measuring how much revenue is earned and expenses incurred during the period. However, the cash balances, as well as the other balance sheet accounts, are carried over from the end of a current period to the beginning of the next period. Although it is not an income statement account, the dividend account is also a temporary account and needs a closing journal entry to zero the balance for the next accounting period. The expense accounts have debit balances so to get rid of their balances we will do the opposite or credit the accounts.
The retained earnings account balance has now increased to 8,000, and forms part of the trial balance after the closing journal entries have been real estate cash flow made. This trial balance gives the opening balances for the next accounting period, and contains only balance sheet accounts including the new balance on the retained earnings account as shown below. This means that it is not an asset, liability, stockholders’ equity, revenue, or expense account.