STUDY UNIT EIGHT
1. Closing journal entries – journal entries that are made at the end of the accounting period in the preparation of the financial statements; temporary (income statement) accounts are closed to the income summary account, and then the income summary account is closed to the equity account .
2. Closing journal entries for expense accounts – credit the expense account and debit the income summary account; the credit should equal the expense account’s adjusted (or pre-closing) debit balance for the period, such that it reduces the expense account to zero.
12/31 Income summary $$$ (pre-closing expense debit balance)
Expense $$$ (pre-closing expense debit balance)
(Close expense to income summary)
3. Closing journal entries for income summary account – the income summary balance is reduced to zero and transferred to equity.
4. Closing journal entries for revenue accounts – debit the revenue account and credit the income summary account; the debit should equal the revenue account’s adjusted (or pre-closing) credit balance for the period, such that it reduces the revenue account to zero.
12/31 Revenue $$$ (pre-closing revenue credit balance)
Income summary $$$ (pre-closing revenue credit balance)
(Close revenue to income summary)
5. Income summary account – a temporary account used to summarize and transfer the net effect of the closing entries for the income statement accounts.
6. Income summary credit balance – total revenues exceed total expenses; income or profit for the period; is closed by debiting income summary and crediting equity by the amount of the income summary credit balance.
7. Income summary debit balance – total expenses exceed total revenues; loss for the period; is closed by debiting equity and crediting income summary by the amount of the income summary debit balance.
8. Income summary zero balance – total revenues equal total expenses; breakeven, no profit or loss for the period; no closing entry needed because no debit or credit balance exists.
9. Post-closing trial balance – listing of all of the entity’s balance sheet account balances after closing entries have been made; verifies that account balance debits still equal credits.
10. Retained earnings – an equity account used by corporations consisting of the income that is not distributed to owners.
11. Reversing journal entries – optional entries made at the beginning of an accounting period to reverse certain adjusting entries made in the prior period; simplifies accounting for regular transactions by eliminating the need for a bookkeeping clerk to enter complex journal entries from certain prior period accruals and deferrals.
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