Closing Entries Process and Balances Explanation
The Purpose of Closing Entries
1. Transfer the balances of temporary accounts (revenues, expenses, and dividends) to the permanent account Retained Earnings.
2. Reset temporary accounts to zero balance for the start of the new accounting period.
3. Prepare the financial statements accurately by reflecting the net income or net loss for the period.
4. Ensure that the accounting equation (Assets = Liabilities + Equity) remains balanced.
5. Provide a clear picture of the company's financial position at the end of the period.
How does the closing entries process work in transferring account balances?Closing Entries Process Explanation
1. Close Revenue and Expense Accounts:- Debit Service Revenue for $50,500 to bring its balance to zero.
- Credit Salaries and Wages Expense for $26,500 and Supplies Expense for $7,000 to zero them out.
- Calculate the net income of $16,500 ($50,500 revenue - $34,000 total expenses).
2. Transfer Net Income to Retained Earnings:- Post the net income of $16,500 to the Income Summary account.
- Debit Retained Earnings for $16,500 to reflect the increase in equity.
3. Close Dividends Account:- Debit Retained Earnings for $2,500 to show the decrease in equity due to dividends.
- Credit the Dividends account for $2,500 to zero it out.
4. Final Balances After Closing Entries:- Retained Earnings: $44,500 (initial $30,500 + net income $16,500 - dividends $2,500)
- Dividends: $0
- Service Revenue: $0
- Salaries and Wages Expense: $0
- Supplies Expense: $0
- Income Summary: $0