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CLOSING ENTRIES: Recall in The Previous

Temporary accounts like income, expenses, and net income must be closed at the end of the accounting period and their balances transferred to the capital account. Closing entries are needed to reduce the temporary accounts to zero so their balances do not carry over to the next period. The document provides an example of the closing entries needed for Marcelo Company, which include debiting the individual income accounts and crediting an income summary account, then debiting the income summary and crediting the capital account to record the transfer of net income for the period.

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60 views

CLOSING ENTRIES: Recall in The Previous

Temporary accounts like income, expenses, and net income must be closed at the end of the accounting period and their balances transferred to the capital account. Closing entries are needed to reduce the temporary accounts to zero so their balances do not carry over to the next period. The document provides an example of the closing entries needed for Marcelo Company, which include debiting the individual income accounts and crediting an income summary account, then debiting the income summary and crediting the capital account to record the transfer of net income for the period.

Uploaded by

Park Chimmy
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CLOSING ENTRIES: Recall in the previous

lessons that Assets, Liabilities, and Capital are


classified as real or permanent accounts while
income and expenses are called nominal or
temporary accounts. Real accounts are those
accounts whose balances are carried over for
the next accounting period. On the other hand,
small accounts are those accounts whose
balances cannot be carried over to other
accounting periods and has to be closed.
To illustrate, presented below is income
statement of Marcelo Company.
Marcelo Company
Comprehensive Income Statement
For the Year ended December 31, 2015

Revenue
Service Income 275,000
Other Income 15,000
Interest Income 450
Total Income 290,450
Expenses
Salaries Expense 45,000
Depreciation Expense 12,250
Rent Expense 55,000
Utilities Expense 46,750
Taxes and Licenses 7,380
Doubtful accounts expense 4,900
Supplies Expense 400
Insurance Expense 10,000
Interest Expense 1,000
Total
182,680
Net Income 107,770

Going back to posting these accounts to a


ledger, the income accounts are normally on
the credit side, whereas the expense accounts
are on the debit side. All these accounts should
be reduced to zero at the end of the accounting
period that is why the following closing entries
are needed:
Debit Credit
Service Income 275,000
Other Income 15,000
Interest Income 450
Income and Expense Summary
290,450
To close income accounts

Income and Expense Summary


182,680
Salaries Expense
45,000
Depreciation Expense
12,250
Rent Expense
55,000
Utilities Expense
46,750
Taxes and Licenses
7,380
Doubtful accounts expense
4,900
Supplies Expense
400
Insurance Expense
10,000
Interest Expense
1,000

The ending balance of the income and expense


summary was calculated to be 107,770 which is
the net income of the company as reflected in
its statement of operations. Income and
expense summary is another nominal or
temporary account which also has to be closed
at the end of the accounting period. This
account is closed to the capital account of the
company. The closing entry for the income and
expense account is as follows:
Debit Credit
Income and Expense Summary 107,770
Capital 107,770

Marcelo Company
Statement of Changes in Owner’s Equity
For the year ended December 31, 2015
Capital beginning 127,850
Add: Net income 107,770
Capital Ending 235,620
*After all the closing entries have been made
and posted, all that is left in the company are
the real or permanent accounts namely
ASSETS, LIABILITIES and CAPITAL.

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