| Debit | Credit | |
| Revenue | 50,000 | |
| Income summary | 50,000 |
2. Empty the expense account by crediting it for $45,000, and transfer the balance to the income summary account with a debit. The entry is:
| Debit | Credit | |
| Income summary | 45,000 | |
| Expenses | 45,000 |
3. Empty the income summary account by debiting it for $5,000, and transfer the balance to the retained earnings account with a credit. The entry is:
| Debit | Credit | |
| Income summary | 5,000 | |
| Retained earnings | 5,000 |
All of these entries have emptied the revenue, expense, and income summary accounts, and shifted the net profit for the period to the retained earnings account.
Closing Procedure
Having just described the basic closing entries, we must also point out that a practicing accountant rarely uses any of them, since these steps are handled automatically by any accounting software that a company uses. Instead, the basic closing step is to access an option in the software to close the reporting period. Doing so automatically populates the retained earnings account for you, and prevents any further transactions from being recorded in the system for the period that has been closed.
Instead of the preceding entries, the practicing accountant is more concerned with completing a series of closing activities to ensure that all material transactions have been included in the accounting period. These closing activities include the following:
Complete all customer invoicing
Accrue any revenue that cannot be billed
Ensure that all supplier invoices have been entered
Accrue any expenses for which no supplier invoices were received
Update the allowance for doubtful accounts
Update the vacation accrual
See AlsoIs Retained Earnings an Asset?Calculate commissions owed to the sales staff
Complete the bank reconciliation
Calculate depreciation
Verify the physical inventory count
Verify the contents of all cost pools to be allocated
Apply overhead to inventory and the cost of goods sold
Calculate income taxes
Verify the contents of all asset and liability accounts
Complete the financial statements and review for errors
Correct any errors found
Release the financial statements
The number of closing activities may be quite substantially longer than the list shown here, depending upon the complexity of a company's operations and the number of subsidiaries whose results must be consolidated.
In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. In addition, if the company uses several sets of books for its subsidiaries, the results of each subsidiary must first be transferred to the books of the parent company and all intercompany transactions eliminated. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company.
Finally, if the parent company is engaged in any cash sweeping activities, it may be necessary to record loans from the contributing subsidiaries to the parent company for the amount of cash swept into the investment account of the parent company, with the parent paying interest to the subsidiaries for any loaned cash.
Related Articles
Accounts That Are Close at Year End
The Difference Between Adjusting Entries and Closing Entries
