Closing Entries
What are Closing Entries?
Closing entries are the entries necessary to close out temporary accounts in a manual accounting system.
![ce 1](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-1.jpg)
How it Works
During the period, you record details of income and expenses.
![ce 2.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-2.5.jpg)
At month-end, you take the information contained in the income and expense accounts.
![ce 3](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-3.jpg)
Then you transfer that information to the income statement.
![ce 4](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-4.jpg)
In the process, you close the income and expense accounts.
![ce 5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-5.jpg)
Closing Income & Expense Accounts
Income and expense accounts are temporary accounts.
![ce 6](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-6.jpg)
They collect information for the current period, only.
![ce 7](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-7.jpg)
Once the income statement is prepared, their job is done.
![ce 8](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-8.jpg)
So you close them out.
![ce 9](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-9.jpg)
This leaves them empty, ready for next period’s information.
![ce 10.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-10.5.jpg)
To transfer the information, you use the general journal.
![ce 11](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-11.jpg)
This journal has a debit and a credit column.
![ce 12](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-12.jpg)
You use debits and credits when closing out accounts.
![ce 13](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-13.jpg)
For example, you use them to close out the sales account.
![ce 14.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-14.5.jpg)
The sales account has a credit balance.
![ce 15](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-15.jpg)
So, to transfer the balance, you record sales in the general journal with a debit entry.
![ce 16](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-16.jpg)
This registers a debit entry in the sales account, itself.
![ce 17](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-17.jpg)
As such, the entry offsets the credit entry currently shown in the sales account.
![ce 18](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-18.jpg)
By bringing the account’s balance to zero, you effectively close out the account.
![ce 19](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-19.jpg)
After this, you credit the income summary account.
![ce 20](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-20.jpg)
This shows the business received money from income.
![ce 21](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-21.jpg)
With this entry, you record income component of the income statement.
![ce 22](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-22.jpg)
Next, you need to transfer expenses to the income summary account.
![ce 23](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-23.jpg)
Expenses are recorded with a debit balance.
![ce 24](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-24.jpg)
To transfer the balance, you record the expense in the general journal with a credit entry.
![ce 25](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-25.jpg)
This registers a credit entry in the expense account itself.
![ce 26](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-26.jpg)
As with income, the entry offsets the current balance.
![ce 27.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-27.5.jpg)
You transfer all expenses in the same manner.
![ce 28](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-28.jpg)
By bringing the balance of each and every expense account to zero, you effectively close out all expense accounts.
![ce 29](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-29.jpg)
After this, you debit the income summary account with total expenses.
![ce 30](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-30.jpg)
This shows the business used the money for expenses.
![ce 31](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-31.jpg)
Next, you find the income summary account’s balance.
![ce 32](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-32.jpg)
The income summary account itself is also a temporary account and needs to be closed out, as well.
![ce 33](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-33.jpg)
To do this you close it out through the general journal.
![ce 34](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-34.jpg)
The income summary account’s balance shows the period’s profit or loss.
![ce 35](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-35-1.jpg)
You transfer the profit from the income summary account with a debit entry.
![ce 36](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-36.jpg)
The entry will offset the account’s current balance..
![ce 37](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-37.jpg)
This effectively closes the account.
![ce 38](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-38.jpg)
At the same time, you credit retained earnings.
![ce 39](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-39.jpg)
When complete, the transaction will show that profit has been transferred to retained earnings.
![ce 40](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-40.jpg)
Closing Owners Drawings
Owners drawings is also a temporary account.
![ce 41](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-41.jpg)
The account tracks owners drawings for the current period, only.
![ce 42](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-42.jpg)
So, at period-end, it needs to be closed out as well.
![ce 43](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-43.jpg)
You close owners drawing through the general journal.
![ce 44](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-44.jpg)
Owners drawings has a debit balance.
![ce 45](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-45.jpg)
So, to transfer the balance, you use a credit entry.
![ce 46](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-46.jpg)
The credit entry offsets the account’s current balance.
![ce 47](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-47.jpg)
This closes the account by bringing its balance to zero.
![ce 48](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-48.jpg)
After this, you debit the capital account.
![ce 49](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-49.jpg)
Typically, the capital account has a credit balance.
![ce 50](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-50.jpg)
It shows how much money is owed to the owner—or has come from the owner.
![ce 51.5](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-51.5.jpg)
By debiting the account, you are showing that the drawings have gone to the owner.
![ce 52](https://seeaccountingnow.online/wp-content/uploads/2021/08/ce-52.jpg)