Chapter 4, Problem 1DQ

To determine

Introduction:

Closing Entries are used to close out temporary accounts such as Income/Expense/Withdrawals and Income Summary Account at the end of each accounting cycle for preparation of year-end financial statements.

the steps in recording closing entries

Answer to Problem 1DQ

Solution:

There are 4 steps to record closing entries.

1. Close Credit balances from all Revenue accounts to Income Summary
2. Close Debit balances from all Expense accounts to Income Summary
3. Close Income Summary (Net income/Loss) to Capital Account
4. Close Withdrawals account to Capital Account.

Explanation of Solution

Purpose of closing out process is to extend balances of each Income /Expense/Withdrawal/Income summary account to the Capital account so that it enables to identify the net change in Equity for the given accounting period as well as it enables to start next accounting year temporary accounts with a balance of zero.

Closing Journal Entries are as follows.

1) Close Credit balances from all Revenue accounts to Income Summary by Debiting Revenue Account and Crediting Income Summary Account.

	Dr	Cr
Revenue Account	$X
Income Summary Account		$X

2) Close Debit balances from all Expense accounts to Income Summary by Crediting Expense Account and Debiting Income Summary Account.

	Dr	Cr
Income Summary Account	$X
Expense Account		$X

3) Close Income Summary (Net income/Loss) to Capital Account

Net Gain − After closing out all Expenses and Income accounts if Income Summary Account results with a Credit Balance it is a Net gain, which means Income summary account contains more revenues than expenses. It will be closed out by debiting the income summary account and crediting Income summary account as follows.

	Dr	Cr
Income Summary Account	$X
Capital Account		$X

Net Loss − After closing out all Expenses and Income accounts if Income summary account results with a Debit Balance it is a Net Loss, which means Income summary account contains more expenses than Revenues. It will be closed out by Crediting the Income summary account and Debiting Capital Account

	Dr	Cr
Capital Account	$X
Income Summary Account		$X

4) Close Withdrawals account to Capital Account by Debiting Capital account and Crediting Withdrawals Account.

	Dr	Cr
Capital Account	$X
Withdrawals Account		$X

Conclusion

As mentioned above closing out journal entries are recorded to clear out each temporary account at the end of each accounting year end.