Closing the books refers to preparing the books for the beginning of the next period in the accounting cycle. We do this by setting the revenue, expense and withdrawals accounts back to zero. These accounts are called temporary accounts because they relate only to one period. We only close temporary accounts in the closing process. The entries we make in the general journal to close our temporary accounts are called closing entries. We typically make a new account, called income summary, during the closing process. This account will have a balance of zero at the end as well.
To see how this works, we are going to use the same trial balance we used before (see: The Adjusting Process), or see the worksheet below.
The Closing Process:
(1) Close revenue accounts to income summary.
(2) Close expense accounts to income summary.
(3) Close income summary to owners' equity (or retained earnings in a corporation).
(4) Close withdrawals to owners' equity (or close dividends to retained earnings in a corporation).
(5) Prepare a post-closing trial balance to make sure accounts balance before we begin the next period. We can continue working with our worksheet from before (see: The Adjusting Process) to prepare this last trial balance.
1. Closing the Revenue Accounts
2. Closing the Expense Accounts
3. Closing the Income Summary Account
4. Closing the Withdrawals Account
5. Post-Closing Trial Balance
We can use the worksheet to record the closing entries and quickly build the post-closing trial balance. Also see Financial Statements for information on how the same worksheet can be used to prepare the financial statements.
The Closing Process
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