Closing Entries

Alright. So after we've adjusted our books, made our adjusted trial balance, created our financial statements. Well then we're ready to close the books for the year. Let's check it out. So we're gonna make some closing entries after we've put out our financial statements. Right? And these closing entries are used to zero out what we call a temporary account balances. Let's go back to the temporary account balances. And this is after the financial statements have been created. Right? So let's talk about what these temporary accounts are. Temporary accounts are accounts related to a certain time period. Okay, so they're temporary because they're only related to that time period. And those are generally going to be our income statement accounts for the most part. I'm gonna say income statement and dividends because that is the other one. Right? So we've got our revenues are expenses and dividends are are the temporary accounts. Okay, so remember that dividends is not an expense, right? We've said it all in unison together, dividends are not an expense, dividends are not an expense, but they are a temporary account because they only hold the value from this year's dividends and then we want to start over next year. Alright, so those are temporary accounts being our income statement accounts plus dividends that are permanent accounts. Well, these are accounts that hold balances from period to period. These are gonna be our balance sheet accounts. Okay, balance sheet accounts, you can think there's some cash balance last year, but we're not going to zero out the cash, right? We still have that cash and the next year, we're gonna have a different amount of cash or somehow the same amount of cash whatever it might be. Um That account is never gonna be closed. There's always gonna be some balance in the cash account and we're gonna leave it year over year. Right? So those asset liability and equity accounts, those are going to be our permanent accounts. I want to introduce you to one more account, the income summary account. And this is a temporary account used during the closing process. Okay? So it only comes up now while we do the closing entries and then we don't use it throughout the year. It just helps us close the books. Okay? So let's pause here and then we'll we'll go through each of the closing entries using our example from the adjusted trial balance. So grab your adjusted trial balance from the previous lessons and we're gonna use that to to close out the books of that company. All right, so let's do that now.

Alright so let's go through these closing entries now, we're gonna be using the adjusted trial balance from the previous lesson. Okay so let's go ahead and start with the revenues. Right so just so you know what I'm talking about, I'm going up here to the adjusted trial balance and when I talk about service revenue I'm talking about closing this revenue account using this balance using our adjusted trial balance. Okay so let's go back to this first entry. So the first entry it says debit each revenue account for its full balance and credit income summary. So if you think about it, revenue accounts have a credit balance right? They generally have a credit balance and now we're going to debit it to get it down to zero. So there's some balance in the account, we're going to debit it by that amount to zero it out so it's zero and it's ready for the next year. So our revenue was 7500 from our adjusted trial balance. So we're going to debit our revenue account 7500. That brings the revenue down to zero. And the income summary account we're going to credit for the 7500. Okay so now if you think about it, all of our revenues are have been taken off the books and have been put into the income summary account. So the income summary account is sitting with a 7500 credit balance right? There's a 7500 credit balance in the income summary account after that entry. So let's go down to the second entry. So right now we've closed our revenue accounts right? There was a revenue account with a balance in it. We just negated that balance down to zero. So we want to do the same thing with expenses. But remember expenses generally have a debit balance. So to get rid of the expenses with debit balances, we're gonna need to credit all those expenses. So I'm pulling all these expenses from the adjusted trial balance and it's just going to go down the line. We had rent expense was 1000. So we're gonna credit rent expense, 1000 Salary expense, 1800, supplies, expense was 300 depreciation, 400 utilities, 500 and income tax 600. These were all the expenses from the adjusted trial balance and now they've been zeroed out right because they had a debit balance. We credit them the same amount so that negates it down to zero. So the last thing to do in this step is find out what's going to be the debit to the income summary right? Because we have all of these credits in this entry. So we need to total them up to find the amount of the debit. So I'm just gonna go ahead and do it in my phone. So you've got a 1000 1808 104 105 100 plus 600. And we get a total of 4600. So now we're debating the income summary 4600. So remember that the the income summary balance after the previous entry was 7500 credit balance. Right? But now we're gonna subtract 4600. Right because there was this debit entry and if you haven't seen this before cr I think it means credit record D. R. Debit record. I think that's the terminology there. Um So sometimes you'll just see credit or debit. So we're taking this 7500 credit balance and we're subtracting out 4600 from it. Right? And those were the expenses so that makes sense. Right. This kind of gonna summarize our income into one account in the income summary account. So 7500 minus 4600. That's a 2900 credit balance right? It's important to note if the income summary is gonna have a debit or a credit balance so that we know what's going to happen at the end. Okay so right now we have a credit balance of 2900 in the income summary account. Next we have to close our dividends account. So remember dividends are not an expense, they do not show up on the income statement, they get taken straight out of retained earnings, retained earnings are all the income that we've made in previous years, it's all sitting in retained earnings. So if we want to pay out to our stockholders we take a bit of that retained earnings and pay it out to them. Okay So in this case are retained earnings or excuse me, your dividends were 3200 in the in the example, so we have to decrease our retained earnings with a debit of 3200. And then 3200 as a credit to the dividends. The dividends were originally sitting with a debit balance. So as just so you know when we the dividends entry when we declared the dividends. So we said so the company said hey we're paying a dividend of $3200. They would have made an entry that looks like this debit dividends for 3200 credit cash. 3200, something like that. Okay it could get more complicated later on but we don't need to deal with that right now. Okay so um that's the idea. So this dividends debit balance right? There was this debit to dividends when we declared them. Well that was sitting in the equity account. Remember equity accounts are generally credit balances right? Credit is a good thing for equity. So this debit was decreasing the equity balance and now we're finally getting it off the books right? So there was a previous debit of 3200 to dividends. Now we're creating it at 3200 to get rid of it right and it's finally coming out of retained earnings. So our income summary balance after this transaction. Well it's still 2900. Right? We didn't touch the income summary in that in that entry. Okay so our income summary is still 2900 Now it's time to close out the income summary. Right? So notice dividends got close to retained earnings and now we're closing the income summary to retained earnings. Right? So remember all of our net income, I've said this before, the net income goes to retained earnings right? Every year we get some net income, it goes to retained earnings. Well this is it finally going to retain earnings. Alright so throughout the year we earned all these revenues we paid all these expenses and now we're finally putting that those numbers into retained earnings. So in the case that revenues were greater than expenses like in the case that we have here we made a profit right, there was more revenues than there were expenses. And in this case the income summary is gonna have a credit balance and that makes sense right because the revenues were credits. So those credits were bigger than the expenses those debits. So we end up with a net credit balance in the income summary. So since it has a credit balance we need to use a debit to get rid of the income summary. And the opposite would be true. If we had a loss. We would be closing the income summary with a credit. In this case we have a a profit. So income summary has a credit balance. So just like we have here 2900 credit balance to get rid of that. We need to debit the income summary, whoops. Missing em there Summary 20 900. And our credit is going to be to retained earnings. So notice we're crediting retained earnings in this case, this increases the value of retained earnings right? Because retained earnings goes up with credit balances. So this profit that we made, we made a $2900 profit in net income this year that is being closed to retained earnings and it's increasing the value of retained earnings just like we would expect. Cool. So now the income summary balance, Well it was 2900. We just debited it 2900. So it is now closed, there's nothing left in income summary. All of our revenue accounts are closed, all our expense accounts are closed, dividends are closed. We're done. We're fresh and ready for the new year. Cool. So let's pause here and then move on to the next video.