Closing Entries The Why and the How….

Closing Temporary Accounts Income Summary Revenue Expenses We close revenue and expense accounts into a temporary account called “Income Summary”

Actual Transaction- Close Revenue l Debit Revenue l Credit Income Summary l The Revenue account normally has a credit balance, once you debit the account -- it will go down to 0 l POST TO LEDGER ACCOUNTS

Actual Transaction- Close Expenses l Debit Income Summary l Credit All Expenses l Expenses have a normal debit balance, once they are credited -- the balance will be 0. l POST TO LEDGER ACCOUNTS

What happens next? Income Summary Expenses Revenue Profit or Loss Income Summary Balance recorded: in the Capital Account…. If the Income Summary has a credit balance - profit If the Income Summary has a debit balance - loss

In Summary Temporary account balances must be reduced to 0 at the end of each period. You then start the next fiscal period with revenue at 0 and all expenses at 0. If you did not do this, you would not be able to determine the revenue earned/and expenses incurred for a period.