Accounting and Finance Foundations

Unit 7

Accounting and Finance Foundations Unit 7: Financial Statements 601

Financial Statements

Chapter 18

Student Guide

Closing Entries2.3.9Lesson 18.6

Closing entries are journal entries made at the end of the accounting period. The closing entries accom-

plish two goals:

1. Closing entries prepare the trial balance for the next accounting period by clearing the revenue,
   expense, and dividend accounts of their balances. Remember, the income statement reports net
   income for a single accounting period and shows revenues and expenses for that period only.
   Therefore, the revenue and expenses need to have zero balances before beginning the accounting
   cycle again.


2. Closing entries summarize a period’s revenues and expenses. You do this by transferring the bal-
   ances of revenues and expenses into the income summary. The Income Summary account only
   appears in the closing process and will never appear on the financial statements. The balance of
   the Income Summary will be transferred to the Retained Earnings account.

The required closing entries include:

1. Closing all credit balances from the income statement accounts to the Income Summary account


2. Closing all the debit balances from the income statement accounts to the Income Summary ac-
   count


3. Closing the Income Summary account to the Retained Earnings account


4. Closing the Dividends account balance to the Retained Earnings account

After the completion of the closing entries, the entries are posted to the general ledger. To ensure the

entries have posted correctly, you should review the adjusted trial balance and verify that the appropriate

accounts have zero balances.