The money you have should align with the money listed on these statements. Wehave completed the first two columns and now we have the finalcolumn which represents the closing (or archive) process. The Income Summary should equal the net profit or loss on the income statement. If you have a profit, debit Income Summary, and credit Equity/Retained Earnings. If you have a loss, credit Income Summary and debit Equity/Retained Earnings. At the end of a specific period, bookkeepers will “close the books,” or wrap up everything for a given month, quarter, or year.

To determine the income (profit orloss) from the month of January, the store needs to close theincome statement information from January 2019. This process results in all revenues and expenses being “corralled” in Income Summary (the net of which represents the income or loss for the period). In turn, the income or loss is then swept to Retained Earnings along with the dividends. Recall that beginning retained earnings, plus income, less dividends, equals ending retained earnings; likewise, the closing process updates the beginning retained earnings to move forward to the end-of-period balance.

Resources for Your Growing Business

This records the transfer of temporary account balances to permanent accounts. To begin closing the books, review the financial statements that contain this information. Check income summary documents and the balances in temporary accounts to start. Notice that revenues, expenses, dividends, and income summaryall have zero balances. The post-closing T-accounts will be transferred to thepost-closing trial balance, which is step 9 in the accountingcycle. The second entry requires expense accounts close to the IncomeSummary account.

When the books are closed, all debits and credits should add up to zero. A number of mechanisms are used to ensure that the final balance is accurate. If it’s not, the book cannot be closed, and your accountant or bookkeeper will try to figure out why there’s a discrepancy. Accrual accounting is one of the reasons closing the books is so important. To make a long story short, accrual accounting records transactions before cash changes hands. For example, if you render $1000 worth of services to a client, but they pay their bill 2 weeks later, the $1000 will go into accounts receivable when the services are rendered, not when the bill is paid 2 weeks later.

Review Preliminary Financial Statements

Now, your focus turns to accounts whose transactions aren’t reflected on a bank or credit card statement. There are plenty of accounts that don’t run through a statement and the closing process is sometimes referred to as closing the books your business likely has several. It’s becoming more and more rare to use actual books for your accounting – almost everyone has gone digital (it’s a lot easier that way).

In summary, the accountant resets thetemporary accounts to zero by transferring the balances topermanent accounts. The expense accounts have debit balances so toget rid of their balances we will do the opposite or credit theaccounts. Just like in step 1, we will use Income Summary as theoffset account but this time we will debit income summary. Thetotal debit to income summary should match total expenses from theincome statement. To further clarify this concept, balances are closed to assureall revenues and expenses are recorded in the proper period andthen start over the following period.