Financial Accounting Notes

Closing Temporary Accounts

Revenue, expense, and drawing accounts are called temporary accounts, or nominal accounts, because they accumulate the transactions of only one accounting period. At the end of this accounting period, the changes in owner’s equity accumulated in these temporary accounts are transferred into the owner’s capital account. This process serves two purposes.  First, it updates the balance of the owner’s capital account for changes in owner’s equity occurring during the accounting period. Second, it returns the balances of the temporary accounts to zero, so that they are ready for measuring the revenue, expenses, and drawings of the next accounting period.

The owner’s equity account and other balance sheet items are called permanent or real accounts, because their balances continue to exist beyond the current accounting period. The process of transferring the balances of the temporary accounts into the owner’s permanent capital account is called closing the account. The journal entries made for the purpose of closing the temporary accounts are called closing entries.

Closing Entries for Revenue Accounts:

Revenue accounts have credit balances. Closing a revenue account, therefore, means transferring its credit balance to the income summary account.  This is accomplished by a journal entry debiting the revenue account in an amount equal to its credit balance, with an offsetting credit to the income summary account. The debit portion of this closing entry returns the balance of the revenue account to zero.

Oct 31                         Sales Commissions Earned                                               10,640
Income summary account                                        10,640

To close the sales commissions earned account.

Closing Entries for Expense Accounts:

Expense accounts have debit balances. Closing an expense account means transferring its debit balance to the income summary account. The journal entry to close an expense account, therefore, consist of a credit to the expense account in an amount equal to its debit balance, with an offsetting debit to the income summary account

To close expense accounts we can close each account separately by crediting it against income summary account, also we can close all the accounts together into an income summary account by compound journal entries.

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