Journalizing Closing Entries For A Merchandising Enterprise

closing entries examples and solutions

In a perpetual system, the software is continuously updating the general ledger when there are changes to the inventory. In the periodic system, the software only updates the general ledger when you enter data after taking a physical count. In a perpetual system, the COGS account is current after each sale, even between the traditional accounting periods.

  • However, perpetual systems require your staff to perform regular recordkeeping.
  • If dividends were not declared, closing entries would cease at this point.
  • Once the cycle concludes, steps are taken to begin the next accounting cycle.
  • If you put the revenues and expenses directly into retained earnings, you will not see that check figure.

In this example, subtract $10,000 in total expenses from $15,000 in total revenue to get $5,000 in net income. Calculate the sum of the amounts in the debit column and the sum of the amounts in the credit column. Verify that the sum of the debit column equals the sum of the credit column to ensure that the debits and credits in your records balance. If they are unequal, check your general ledger accounts for errors. Cost flow assumptions are inventory costing methods in a periodic system that businesses use to calculate COGS and ending inventory. Beginning inventory and purchases are the input that accountants use to calculate the cost of goods available for sale.

Introduction To The Closing Entries

For example, your business might have completed work for a customer, but the invoice has not yet been processed. So the revenue you thought you would recognize this month needs to be pushed to the next month, which requires an adjusting journal entry.

The data are from the example data used to illustrate the perpetual inventory system. When the periodic method is used, no entry is made to record the cost of closing entries examples and solutions the inventory sold for a particular sale. Furthermore, as the journal entries show, inventory purchases are not debited to the Merchandise Inventory account.

closing entries examples and solutions

QuickBooks Closing Entries means reconciling the company’s accounts. The transactions are recorded to know whether the company’s retained earning account reflect any real increase in revenues from the previous year and show lessened dividend payment and expenses. Adjusting entries for depreciation are a little bit different than with other accounts.

Popular Questions Of Class 11 Accountancy

The cost of computers and printers sold in January is overstated by £23,000. The unsold computers and printers are an asset of £23,000 in the form of inventory. Close the books and issue financial statements at least quarterly.

If your business is a sole proprietorship or a partnership, your next step will be to close your income summary account. You can do this by debiting the income summary account and crediting your capital account in the amount of $250. This reflects your net income for the month, and increases adjusting entries your capital account by $250. Notice that the balances in the expense accounts are now zero and are ready to accumulate expenses in the next period. The Income Summary account has a new credit balance of $4,665, which is the difference between revenues and expenses (Figure 5.5).

This method also makes the calculations less time-consuming. In the periodic Online Accounting system, you only perform the COGS during the accounting period.

Afterwards, withdrawal or dividend accounts are also closed to the capital account. Once you have completed and posted all closing entries, the final step is to print a post-closing trial balance, and review it to ensure that all entries were made correctly. As an another example, you should shift any balance in the dividends paid account to the retained earnings account, which reduces the balance in the retained earnings account. This resets the balance in the dividends paid account to zero. All of Paul’s revenue or income accounts are debited and credited to the income summary account. This resets the income accounts to zero and prepares them for the next year.

Using this approach keeps you from inadvertently “doubling up” by recording the revenue or expense in both sets of books. In a perpetual weighted average calculation, the company keeps a running tally of the purchases, sales and unit costs. The software recalculates the unit cost after every purchase, showing the current balance of units in stock and the average of their prices. The next sales transaction reflects this newly calculated unit cost. See the same activities from the FIFO and LIFO cards above in the weighted average card below.

Thoughts On periodic Inventory System

Temporary accounts are ledger accounts used to record transactions for only a single accounting period and are closed at the end of the period by making appropriate closing entries. In next accounting period, these accounts are opened again and normally start with a zero balance. Temporary or nominal accounts include revenue, expense, dividend and income summary accounts.

closing entries examples and solutions

Therefore, the income summary account is closed by debiting income summary account and crediting retained earnings account. Not every business uses reversing entries; cash-only businesses and businesses that bill and receive payment within the same accounting period are generally exempt. You can think of reversing entries as a bit like time travel—except they help you account for past expenses and revenue without complicating the present. These entries are made at the end of the accounting period to simplify the next one. In effect, these entries cancel out the prior year’s accrual. Certain end-of-period adjustments must be made before you can close your books. Adjusting entries are required to account for items that don’t get recorded in your daily transactions, such as accrual of depreciation, accrual of real estate taxes, etc.


The credit to income summary should equal the total revenue from the income statement. It is also possible to bypass the income summary account and simply shift the balances in all temporary accounts directly into the retained earnings account at the end of the accounting period. Examples retained earnings of temporary accounts are the revenue, expense, and dividends paid accounts. Any account listed in the balance sheet is a permanent account. A temporary account accumulates balances for a single accounting period, whereas a permanent account stores balances over multiple periods.

Step 1: Closing The Revenue Account

Whether you’re posting entries manually or using accounting software, all revenue and expenses for each accounting period are stored in temporary accounts such as revenue and expenses. Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called theincome summary account. The income summary account is then closed to the retained earnings account. Transfer the balances of various expense accounts to income summary account. It is done by debiting income summary account and crediting various expense accounts. The accounting cycle can help the business in catching transaction errors. It can also help measure and compare profitability from the end of one fiscal period to another.

Financial Accounting Topics

The income summary is a temporary account used to make closing entries. Before closing, balances exist in these accounts; after closing, no balances exist. Using reversing entries as part of the accounting cycle can help. As the final step taken during any given accounting period, they make it easier to avoid costly errors and make sure you’ve got an accurate snapshot of your accounts. Companies make any necessary adjustments from purchasing goods to a general ledger contra account. A contra account is meant to be opposite from the general ledger because it offsets the balance in their related account and appears in the financial statements. Examples of contra accounts include purchases discounts or purchases returns and allowances accounts.

If you granted the discount, you could post an adjusting journal entry to reduce accounts receivable and revenue by $250 (5% of $5,000). The closing entries in a manual system ‘close’ the books by ‘closing’ all the revenue and expense account ledgers, to zero. Next, Locate the ‘Expense Accounts’ in the Trial balance, and you will see a debit balance. Make a Credit entry in the income summary account for every ‘Expense account.’ The Expense account total should be ‘zero’ now. Firstly, look for revenue accounts in the Trial Balance that has the revenue and capital accounts in the company ledger. There is a ‘credit balance’ reflected here and to zero it out you need to do a ‘debit entry’ for every revenue account. This action will move the credit balance to the Income summary account.

The balance in Income Summary is the same figure as what is reported on Printing Plus’s Income Statement. On the statement of retained earnings, we reported the ending balance of retained earnings to be $15,190. We need to do the closing entries to make them match and zero out the temporary accounts. Permanent – balance sheet accounts including assets, liabilities, and most equity accounts.

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