ACCT 1110 ~ Chapter 4

The Closing Process

Intro: We need the following accounts to be zero at the beginning of the accounting period:
1) all revenue accounts, 2) all expense accounts, and 3) the owner withdrawals
account. These are called “temporary” accounts. All of the other accounts, the
“permanent” accounts (the balance sheet accounts) have balances that continue.

Steps in the Closing Process (see Chapter 3 arrow handout for numbers)

1. Close all revenue accounts to Income Summary (that silly little closing account)
a. Revenues have credit balances, so we close them with debits.
b. Journal Entry:
Accounting Fees Earned 16,840
Rent Income 120
Income Summary 16,960

2. Close all expense accounts to Income Summary

a. Expenses have debit balances, so we close them with credits.
b. Journal Entry:
Income Summary 9,755
Wages Expense 4,525
Rent Expense 1,600
Utilities Expense 985
Supplies Expense 2,040
Insurance Expense 100
Depreciation Expense 50
Miscellaneous Expense 455

3. Close Income Summary to Capital

a. The balance in the income summary account must be equal to net income.
Closing the income summary account puts the net income amount into the
capital account which is where we need it to be at period end.
b. Journal Entry:
Income Summary 7,205
Capital 7,205

4. Close the Withdrawals account to Capital

a. The withdrawals account has a debit balance, so we
close it with a credit. This takes the effect of the
withdrawal out of the capital account.
b. Journal Entry:
Capital 4,000
Withdrawals 4,000

Closing Purposes:
1) Closes the temporary accounts.
2) Updates the Capital account.