Chapter 4
four closing entries required in the closing process
Debit each revenue account for its balance and credit Income Summary for the total revenue. Credit each expense account for its balance and debit Income Summary for the total expenses. Debit Income Summary for its balance (net income) and credit the retained earnings account. Debit the retained earnings account for the balance of the dividends account and credit the dividends account.
closing process 4 steps
Step 1. Revenue account balances are transferred to an account called Income Summary. Step 2. Expense account balances are transferred to an account called Income Summary. Step 3. The balance of Income Summary (net income or net loss) is transferred to the retained earnings account. Step 4. The balance of the dividends account is transferred to the retained earnings account.
permanent accounts or real accounts
The balances of the accounts reported on the balance sheet are carried forward from year to year. Example: Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Common Stock, and Retained Earnings are permanent accounts.
temporary accounts or nominal accounts.
The balances of the accounts reported on the income statement are not carried forward from year to year. Also, the balance of the dividends account, which is reported on the retained earnings statement, is not carried forward. Because these accounts report amounts for only one period, Temporary Accounts should be at zero at the beginning of next period
Closing Entries
The entries that transfer the balances of the revenue, expense, and dividends accounts to the retained earnings account. Makes the temporary account at zero for the next period
Income Summary
a temporary account that is only used during the closing process. At the beginning of the closing process, Income Summary has no balance. During the closing process, Income Summary will be debited and credited for various amounts. At the end of the closing process, Income Summary will again have no balance.