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In finance and accounting, a closing entry refers to a journal entry made at the end of an accounting period that resets a company’s account. In this entry, the balance of a company’s temporary accounts on the income statement is moved into permanent accounts on the balance sheet. The closing entry helps to reset the balance on the temporary account to zero while they are transferred into the permanent account. The temporary accounts of a company show the balances of a single accounting period while the permanent accounts show accounts for multiple periods.
A Little More on What is a Closing Entry
Oftentimes, a closing entry is done manually, however, there are accounting methods, with the aid of technological advancement that supports a computerized way of shifting balances from temporary accounts into permanent ones. A closing entry entails resetting the balances of temporary accounts and permanent accounts, in which the balance of temporary accounts is zero and the balance of the permanent accounts increase.
The income summary is important in a closing entry, this is the summary used in the aggregation of all income accounts. It is, however, important to note that the account income summary does not appear on financial statements, rather, it is a summary used in the closing process/entry.
Closing Entry Sequences
There are specific sequences used for the closing entry procedure, the sequences are;
- The transfer of all revenue accounts into the income summary- this entails a debit on revenue accounts and a credit on the income summary.
- Closing of all expenses by crediting the expense accounts and debiting income summary.
- Closing of the income account.
- Transfer of all income statement balances to retained earnings, this means that all dividends are closed or transferred to retained earnings.
There are certain roles played by the closing entries in a financial report, the specific ones are;
- The amounts on the temporary accounts on the income statement are moved into the permanent accounts on the balance sheet.
- Revenue accounts and expense accounts have zero balance at the end of closing entries.
- All revenue, income or dividends that a company earns are transferred into retained earnings.