A journal entries usually prepared at the end of the accounting period to eliminate the balances in the temporary capital account and to transfer these balances to the income summary and eventually to the permanent capital account.
After the accountant prepared the income statement and balance sheet, a summary account variously known as Expense and Income Summary or Profit and Loss Summary is set up. In order to close all the temporary capital account.
Example: Temporary account
Revenue .................. $13,500
Rent Expense................1,500
Utilities Expense..............750
Salaries Expense...........2,500
Supplies Expense.............995
Shehla, Drawing ...........1,500
The closing entries are as follows:
1. Close out income accounts.
Dec. 31 Revenue...............................$13,500
Expense and Income Summary .............$13,500
To close the revenue account
2. Close out expense accounts.
Dec. 31 Expense and Income Summary...$7,245
Rent Expense.......................................1,500
Utilities Expense.....................................750
Salaries Expense..................................2,500
Supplies Expense....................................995
To close the expense accounts.
3. Close out the Expense and Income Summary account.
Dec. 31 Expense and Income Summary.........$6,255
Shehla, Capital.............................................$6,255
To close the expense and income summary account.
Note: If the revenue is more than the expenses, it shows the profit to be added to the capital. If expenses is more than the revenue, then a loss has been sustained, and a credit is made to Expense and Income Summary and a debit to the capital account.
4. Close out the drawing account.
Dec. 31 Shehla, Capital .....................$1,500
Shehla, Drawing ................................$1,500
To close Shehla, Drawing account.
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