There are three general closing entries that must be made. Close all revenue and gain accounts 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. Remember that all revenue, sales, income, and gain accounts are closed in this entry. Paul’s business or has a few accounts to close. Close all expense and loss accounts All expense accounts are then closed to the income summary account by crediting the expense accounts and debiting income summary.
Close all dividend or withdrawal accounts Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income summary account. These accounts are closed directly to retained earnings by recording a credit to the dividend account and a debit to retained earnings. Now that all the temporary accounts are closed, the income summary account should have a balance equal to the net income shown on Paul’s income statement . Now Paul must close the income summary account to retained earnings in the next step of the closing entrieIns. Income statement The income statement is one of the three primary financial statements used to assess a company’s performance and financial position. The incomes statement summarizes the revenues and expenses generated by the company over the entire reporting period. It is also known as profit and loss statement or the statement of revenue and expense, the income statement primarily focuses on company’s revenues and expenses during a particular period. It focuses on the four key items – revenue, expenses, gains and losses. It does not cover receipts or the cash payments. It starts with the details of sales, and then works down to compute net
income and eventually the earnings per share. Revenues and gains 1. Operating revenue: revenue realized through primary activities is often referred to as operating revenue. For a company manufacturing a product, or for a wholesaler, distributor or retailer involved in the business of selling that product, the revenue from primary activities refers to revenue achieved from sale of the product. Similarly, for a company in the business of offering services, revenue from primary activities refers to the revenue or fees earned in exchange of offering those services 2. Non-operating revenue: revenues realized through secondary, non-core business activities are often referred to as non- operating recurring revenues. These revenues are sourced from the earnings from interest earned on business capital lying in the bank, rental income from business property, income from strategic partnerships like royalty payment receipts or income from an advertisement display placed on business property.
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