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Closing process: a step in the accounting cycle that occurs at the end of the period. The closing process consists of journalizing and posting the closing entries to set the balances of the revenues, expenses, income summary and dividends accounts to zero for the next period. It also updates the retained earnings account balance for net income or loss duringthe period and any dividends paid to stockholders. Income statement reports net income for specific period
Temporary Account: an account that relates to a particular accounting period and is closed at the end of that period-the revenues, expenses, income summary, and dividends accounts.The balances of temporary accounts do not carry forward into the next time period. Instead, the business starts the new time period with a zero beginning balance in the temporary account. Permanent accounts: an asset that is not closed at the end of the period- the asset, liability,common stock, and retained earnings accounts. Permanent account balances are carried forward into the next time period. All accounts on the balance sheet are permanent accounts. They never stop.Closing entries: transfer the revenues, expenses, and dividends balances to the retained earnings account to prepare the company’s books for the next period. Income summary: a temporary account into which revenues and expenses are transferred prior to their final transfer into the retained earnings account. Summarizes net income (or net loss) for the period. Collecting sum of all expenses (debit) and sum of all revenues (credit) Closing Temporary Accounts- Net IncomeStep 1: Make the revenue accounts equal zero via the Income Summary Account. This closing entry transfers total revenues to the credit side of the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. Thisclosing entry transfers total expenses to the debit side of the Income Summary account. Step 3: Make the income summary account equal zero via the Retained Earnings account. This closing entry transfers net income (or net loss) to the retained earnings account. Step 4: Make the dividends account equal zero via the retained earnings account. This entry transfers the dividends to the debit side of the retained earnings account. Closing Temporary Accounts- Net Loss The income summary t-account would hold a debit balance instead of a credit balance.