🔁 Recording Closing Entries
Think of closing entries like settling a restaurant bill at the end of the night. You're taking all the temporary activity (food ordered, tips, taxes) and clearing it to finalize your record for the night before starting fresh tomorrow.
There are four steps to this “closing out” process:
1. Transfer revenue account balances to Income Summary
- Credit revenue accounts
- Debit income summary
💡 Why? Revenue accounts have a normal credit balance. To bring them to zero, you must debit them. The "income summary" acts like a temporary holding tray — it collects all the earnings.
2. Transfer expense account balances to Income Summary
- Debit expense accounts
- Credit income summary
💡 Why? Expenses normally have debit balances. To zero them out, you credit them. This reduces the total in the income summary (netting against revenues).
3. Transfer Income Summary to Owner’s Capital
- If there's net income: debit income summary, credit capital.
- If there's a net loss: reverse it.
💡 Analogy: This is like handing the net earnings from the register over to the business owner. It increases their equity.
4. Transfer Withdrawals to Owner’s Capital
- Debit capital
- Credit withdrawals
💡 Why? Withdrawals reduce equity. This entry officially subtracts any money the owner took out.
📄 Post-Closing Trial Balance
What is it?
A trial balance prepared after all closing entries are posted.
Contains:
- ✅ Only permanent accounts: Assets, Liabilities, and Capital
- ❌ No temporary accounts: Revenues, Expenses, Withdrawals (they're all zeroed out)
📌 Purpose:
Ensure debits = credits (aka the books are still in balance)
Confirm that temporary accounts are clean and ready for the new period
Like resetting a scoreboard before a new game starts. The scores (temporary) are wiped, but player stats (permanent) carry over.