The year-end closing process is an accounting procedure taken on at the culmination of the year to close business from the preceding year, carry forward balances from the past year, and open posting accounts for the coming year. Year-end closing is among a company's closing processes used to generate its financial statements (Lumen Learning, 2019).
Phases in the Closing Process
Step one involves closing entire income accounts to the income summary by moving the balances of revenue accounts to the income summary account (Lumen Learning, 2019). Hence, several revenue accounts are debited, while the income summary account ends up being credited.
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Example:
|
31 st Dec 2018 |
Particulars |
Debit |
Credit |
|
Service Revenue |
45,000 |
||
|
Income Summary |
45,000 |
Step two entails closing the expense accounts to the income summary by t ransferring the balances of different expense accounts to the income summary account (Lumen Learning, 2019). As such, the income summary account is debited, whereas the expense accounts are credited. This step closes all expense accounts.
Example:
| 31 st Dec 2018 | Particulars | Debit | Credit |
| Income Summary | 40,200 | ||
| Fuel Expense | 2,500 | ||
| Salaries Expense | 30,000 | ||
| Advertising Expense | 6,000 | ||
| Interest Expense | 1,200 | ||
| Depreciation | 500 |
Step three encompasses closing the income summary account to the retained earnings to close the income summary account (Lumen Learning, 2019). The income summary account gets a credit balance if the balances of entire revenue accounts are larger than the entire balances of the expense accounts; thus, one debits the income summary account and credits the retained earnings account. However, if total revenue accounts are fewer than the balances of expense accounts, the income summary account will have a debit balance; hence, the income summary account will be closed by debiting the retained earnings account and crediting the income summary account.
Example:
| 31 st Dec 2018 | Income summary(45,000-40,200) | 4,800 | |
| Retained Earnings | 4,800 |
Step four consists the closing of the dividends account by t ransferring the balance of the dividends account straight to the retained earnings account (Lumen Learning, 2019). Typically, dividends rewarded to shareholders are not expenses; thus, they are not used in the determination of the net income or loss. Also, its balance is not moved to the income summary account, but is moved straight to the retained earnings account.
Example:
| 31 st Dec 2018 | Retained Earnings | 1,500 | |
| Dividends | 1,500 |
Difference between Temporary and Permanent Accounts
Temporary accounts are ledger accounts, which record transactions for a sole accounting period, and get closed at the close of the period using suitable closing entries (Lumen Learning, 2019). In the subsequent accounting period, the accounts begin with a zero balance. They comprise expense, revenue, income summary, and dividend accounts. On the other hand, permanent accounts are ledger accounts whose balances remain in existence past the present accounting period (Lumen Learning, 2019). In the ensuing accounting period, the accounts begin with a non-zero balance but not at all times. They consist of asset, liability, and capital accounts . The permanent accounts where the temporary accounts are closed include the retained earnings account for a company and proprietor’s capital account for a sole proprietorship.
Reference
Lumen Learning. (2019). Closing Entries. Retrieved 13 August 2019, from https://courses.lumenlearning.com/suny-finaccounting/chapter/journalizing-and-posting-closing-entries/
