Page 158 - Accounting Principles (A Business Perspective)

4. Completing the accounting cycle

31 Salaries Expense (-SE) 507 1 8 0
Salaries Payable (+L) 206 1 8 0
To accrue one day's salaries that were earned by are unpaid.
The closing process
In Chapter 2, you learned that revenue, expense, and dividends accounts are nominal (temporary) accounts that
are merely subclassifications of a real (permanent) account, Retained Earnings. You also learned that we prepare
financial statements for certain accounting periods. The closing process transfers (1) the balances in the revenue

and expense accounts to a clearing account called Income Summary and then to Retained Earnings and (2) the
balance in the Dividends account to the Retained Earnings account. The closing process reduces revenue, expense,
and Dividends account balances to zero so they are ready to receive data for the next accounting period.
Accountants may perform the closing process monthly or annually.
The Income Summary account is a clearing account used only at the end of an accounting period to
summarize revenues and expenses for the period. After transferring all revenue and expense account balances to
Income Summary, the balance in the Income Summary account represents the net income or net loss for the

period. Closing or transferring the balance in the Income Summary account to the Retained Earnings account
results in a zero balance in Income Summary.
Also closed at the end of the accounting period is the Dividends account containing the dividends declared by
the board of directors to the stockholders. We close the Dividends account directly to the Retained Earnings
account and not to Income Summary because dividends have no effect on income or loss for the period.
In accounting, we often refer to the process of closing as closing the books. Remember that only revenue,
expense, and Dividend accounts are closed—not asset, liability, Capital Stock, or Retained Earnings accounts. The
four basic steps in the closing process are:
• Closing the revenue accounts—transferring the balances in the revenue accounts to a clearing account

called Income Summary.
• Closing the expense accounts—transferring the balances in the expense accounts to a clearing account
called Income Summary.
• Closing the Income Summary account—transferring the balance of the Income Summary account to
the Retained Earnings account.
• Closing the Dividends account—transferring the balance of the Dividends account to the Retained
Earnings account.

Revenues appear in the Income Statement credit column of the work sheet. The two revenue accounts in the
Income Statement credit column for MicroTrain Company are service revenue of USD 13,200 and interest revenue
of USD 600 (Exhibit 20). Because revenue accounts have credit balances, you must debit them for an amount equal
to their balance to bring them to a zero balance. When you debit Service Revenue and Interest Revenue, credit
Income Summary (Account No. 600). Enter the account numbers in the Posting Reference column when the
journal entry has been posted to the ledger. Do this for all other closing journal entries.
MICROTRAIN COMPANY
General Journal Page 4
Date Account Titles and Explanation Post. Debit Credit
Ref.
2010 Closing Entries
Dec. 31 Service Revenue 400 1 3 2 0 0

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