Closing Journal Entries

Here, we study about most important Accounting topic that is “Closing Journal Entries”.

What are Closing Journal Entries?

Closing Journal Entries Definition

Closing Entries are related to closing accounts of Revenues, Expenses and Dividends at the end of Accounting Period.

At the end of Accounting Period, all the Temporary Accounts (Revenues, Expenses And Dividends) are closed in order to bring down the balance of these types of account to Zero and transferred these accounts (Revenues And Expenses) to a Temporary Account that is "Income Summary Account" that is different from  Income Statement or Profit And Loss Account and then finally Profit Or Loss, that is calculated from Income Summary Account, is transferred to Statement of Retained Earnings. Dividend is the amount distributed to shareholders out of profits, so it is closed by transferring to Statement of Retained Earnings.

Note:

1. Permanent Accounts (Assets, Liabilities And Owner’s Equity or Equity) are not closed so these have balances and shown on the Balance Sheet in every Accounting Period.

2. At the End of Accounting Period, all the Expenses And Incomes / Revenues are closed by transferring to Income Summary Account that is a temporary account to find out Net Income / Net Profit and then this temporary account is closed to Statement of Retained Earnings.

In case of Closing Entries, there are following four possibilities when Closing Accounting Journal Entries are passed and these are mentioned below, but it is important to note that during the Accounting Period all the expenses and revenues are transferred to Income Summary Account.

Firstly, Let's us know how to transfer Expenses And Revenues to Income Summary Account during the Accounting Cycle:

                                  Revenues a/c XXX

                                                           Income Summary a/c   XXX

(Revenues are Transferred To Income Summary Account)

                               Income Summary a/c    XXX

                                                               Expenses a/c  XXX

(Expenses are Transferred To Income Summary Account)

Now, we are in a position to study about the four types Closing Entries passed by any business at the end of Accounting Cycle.

As there are so many Revenues / Incomes received and Expenses incurred during the Accounting Period, so a temporary Income Summary Account is prepared to find out Net Income / Net Profit, so, firstly all Expenses And Incomes are closed by transferring to Income Summary Account and then and this account is closed by transferring to Statement of Retained Earnings. To Close all Expenses, the Entry is:

1. Closing Expenses Accounts

                                          Income Summary a/c    XXX

                                                                           Expenses a/c   XXX

                                               (Expenses Closed To Income Summary Account)

2. Closing Incomes / Revenues Accounts

                                   Revenues / Incomes a/c    XXX

                                                                      Income Summary a/c    XXX

                                                 (Incomes Closed To Income Summary Account)

3. Closing Income Summary Account In case of Net Income / Net Loss

In case of Net Income:

                                  Income Summary a/c    XXX   

                                                                     Retained Earnings a/c   XXX

                            (Income Summary Transferred To Retained Earnings Account)


  In Case of Net Loss:

                                   Retained Earnings a/c    XXX

                                                                       Income Summary a/c    XXX

                                       (Income Summary Transferred To Retained Earnings Account)

4. Closing Dividend Account

4. Dividend is transferred to Statement of Retained Earnings by recording following Accounting Closing Journal Entry:

                         Statement of Retained Earnings a/c XXX

                                                                                 Dividend a/c XXX

(Dividend is closed at the end of Accounting Period)

So, Closing Accounting Journal Entries are passed to write off Revenues Accounts, Expenses Accounts, the difference between Revenues And Expenses that results in Profit or Loss Account And Dividend Account at the end of Accounting Period.