Closing Entry
Temporary accounts report amounts only for one period. They must, therefore, have a zero balance at the beginning of each period. When a journal entry is made to close a temporary account or reduce the balance to zero, it is known as a closing entry.
The following entries are made for temporary accounts:
- The balances from the revenue and expenses accounts are transferred to the income summary account.
- The balance of the income summary account is then transferred to the Owner’s Capital account.
- The balance of the Owner’s Drawing account is also transferred to the Owner’s Capital account.
The entries that transfer these balances are called closing entries.
Examples of temporary accounts are:
- Sale of goods -> Revenue (money coming into the business)
- Wages paid -> Expense (money going out of the business)
- Taxes paid -> Expense (money going out of the business)
- Payments for Utilities -> Expense (money going out of the business)
- Owner’s withdrawal -> Reduces Owner’s Equity (money going out of the business)