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How to Make Closing Entry for Accounting Cycle

How to Make Closing Entry for Accounting Cycle:


There are temporary accounts such as income statement accounts, income summary accounts, drawing and dividend accounts, so well discuss more details as follows:

Company will prepare closing entries for the temporary accounts (nominal accounts). Temporary accounts include all of the income statement accounts such as revenues, expenses, gains and losses.

Temporary accounts that are not an income statement account are the proprietor’s drawing account and dividend for corporation. Some corporations use debit account for dividend instead of debiting retained earnings when declared dividends, so at the end of the year, the dividend account is closed to retained Earnings.

Nominal or temporary accounts are closed at the end of each accounting year. This closing process allows the nominal accounts (temporary accounts) to start the next accounting year with zero balances.  This means that their account balances are transferred to a permanent account. The balances in the temporary accounts will end up in a permanent account such as a corporation’s retained earnings account or in a sole proprietor’s capital account.

In manual systems, the balances in the temporary accounts will be transferred to an income summary account. Next the income summary account (net profit or net loss) will be transferred to retained earnings or to the owner’s capital account. Hence, the income summary account is also a temporary account.

Journal Entries for temporary accounts are as follows:

The closing entries require that a debit be entered into each of the temporary accounts having a credit balance. The closing entries also require that a credit be entered into each of the temporary accounts having a debit balance.

No. Account Types
1. Balance of revenue is at credit, so closing revenue is at debit.
Dr. Revenue

Cr. Income Summary

2. Balance of contra revenue is at debit, so closing contra revenue is at credit.
Dr. Income Summary

Cr. Contra Revenue

3. Balance of gain is at credit, so closing gain is at debit.
Dr. Gain

Cr. Income Summary

4. Balance of expenses is at debit, so closing expenses is at credit.
Dr. Income Summary

Cr. Expenses

5. Balance of loss is at debit, so closing loss is at credit.
Dr. Income Summary

Cr. Loss

6. Closing income summary means closing net profit or loss, and closing is as follows.
When company has net profit, so it means that income summary account has balance at credit, and closing income summary is at debit
Dr. Income summary

Cr. Retained earnings (or capital account for sole proprietor)

When company has net loss, so it means that income summary account has balance at debit, and closing income summary is at credit
Cr. Retained earnings (or capital account for sole proprietor)

Dr. Income summary

7. Balance of drawing (for sole proprietor) is at debit, so closing drawing is at credit.
Cr. capital account

Dr. Drawing

8. Balance of dividend (for corporation) is at debit, so closing dividend is at credit.
Cr. Dividend

Dr. Retained Earnings

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