Explain Closing
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Entry (a) is our closing entry that transfers (closes ) the balance in the Drawing Account to the Capital Account. Since the current balance in our Drawing Account contained in our Adjusted Trial Balance Column is a $24,000 debit balance, the Drawing Account is credited and the Capital Account is debited. The result of this entry is removing the $24,000 debit balance from the Drawing Account and placing the $24,000 amount of the debit balance in our Capital Account. All we're actually doing is making an entry in the account that we want to close for the opposite of the debit/credit balance contained in the account that we want to close. If our closing account initially has a credit balance, we debit the account for the amount of the balance in the account and if our closing account initially contains a debit balance we credit the account we desire to close for the amount of the balance in the account. In this example, we removed the debit balance from our Drawing Account and placed it in our Capital Account. The balance in the account that is closed becomes zero as a result of the entry and is made ready for the start of the next period (normally year).
To close and transfer our Revenue and Expense Account Ending Balances we use a Special General Ledger Account named Income Summary. We could close out our income and expense accounts for the period by transferring the account balances directly to our Capital Account (Owner's Equity). Instead, we use this Special Account as an "informal income statement" and only transfer one summary amount to our Capital Account. The difference between the debit and credit balance in our Income Summary Account is actually profit if the credit balance accounts (sales/revenue) are greater than the debit balance accounts and a loss if the debit balance accounts (expenses) are greater than the credit balance accounts.
Entry (b) Consulting Services-Revenue Account
Our Consulting Services Account has a credit balance of 50000 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a debit to our Revenue Account Consulting Services for 50000 and a credit to our Income Summary Account for 50000.
Entry (c) Computer Sales-Revenue Account
Our Computer Sales Account has a credit balance of 100,000 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a debit to our Revenue Account Computer Sales for 100000 and a credit to our Income Summary Account for 100000.
Entry (d) Cost of Goods Sold-Expense Account
Our Cost of Goods Sold Account has a debit balance of 72,500 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Cost Of Goods Sold for 72500 and a debit to our Income Summary Account for 72500.
Entry (e) Rent Expense-Expense Account
Our Rent Expense Account has a debit balance of 6,000 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Rent Expense for 6000 and a debit to our Income Summary Account for 6000.
Entry (f) Utilities-Expense Account
Our Utilities Expense Account has a debit balance of 4,800 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Utilities for 4800 and a debit to our Income Summary Account for 4800.
Entry (g) Office Supplies-Expense Account
Our Office Supplies Expense Account has a debit balance of 1,200 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Office Supplies Expense for 1200 and a debit to our Income Summary Account for 1200.
Entry (h) Insurnace Expense-Expense Account
Our Insurance Expense Account has a debit balance of 6,000 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Insurance Expense for 6000 and a debit to our Income Summary Account for 6000.
Entry (i) Vehicle Operation Expense-Expense Account
Our Vehicle Operation Expense Account has a debit balance of 3,600 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Expense Account Vehicle Opearation for 3600 and a debit to our Income Summary Account for 3600.
Entry (j) Maintenance & Repairs-Expense Account
Our Maintenance & Repairs Expense Account has a debit balance of 2,900 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Maintenance & Repairs Expense Account for 2900 and a debit to our Income Summary Account for 2900.
Entry (k) Depreciation Expense-Expense Account
Our Depreciation Expense Account has a debit balance of 3,100 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Depreciation Expense Account for 3100 and a debit to our Income Summary Account for 3100.
Entry (l) Bad Debt Expense-Expense Account
Our Bad Debt Expense Account has a debit balance of 1,000 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Bad Debt Expense Account for 1000 and a debit to our Income Summary Account for 1000.
Entry (m) Bank Charges-Expense Account
Our Bank Charges Expense Account has a debit balance of 240 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Bank Charges Expense Account for 240 and a debit to our Income Summary Account for 240.
Entry (n) Advertising Expense-Expense Account
Our Advertising Expense Account has a debit balance of 4,250 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Advertising Expense Account for 4250 and a debit to our Income Summary Account for 4250.
Entry (o) Professional Fees Expense-Expense Account
Our Professional Fees Expense Account has a debit balance of 2,250 in our Adjusted Trial Balance Column of our Worksheet prior to our closing entry. Our closing entry needed is a credit to our Professional Fees Expense Account for 2250 and a debit to our Income Summary Account for 2250.
After closing all our Revenue and Expense Account Balances to our Income Summary Account, we are now ready to close (transfer) the balance of our Income Summary Account to our Capital Account.
Look at our Subtotal in our Worksheet on our line Balance Of Income Summary Account After Closing Revenue and Expense Accounts And Prior To Transferring Profit/Loss for the debit and credit balances in our Income Summary Account. The total debits are $107,840 and the total credits are $150,000 resulting in a credit balance in our Income Summary Account of $42,160. Does this amount look familiar ? By golly, that's the amount of our profit for our year. If the Income Summary Account has a debit balance, the balance represents a Loss for the period. A credit balance represents a Profit for the period. It's no coincident that this is the amount that is closed (transferred) to our Capital Account with our entry (p) after all our Revenue and Expenses Accounts have been closed to our Income Summary Account.
Entry (p) debits the Income Summary Account for $42,160 since it has a credit balance of this amount prior to closing and credits our Capital Account for $42,160. All we did is transfer our credit balance in our Temporary Income Summary Account to our Owner's Capital Account. Guess what the after closing ending balance of our Income Summary Account is ? I hope you said zero.
The Capital Account Balance after the Owner's Drawing Account and Income Summary Account have been closed is a credit balance of 40260 calculated by taking our beginning balance of 22100 and adding our profit of 42160 and subtracting our owner draws of 24000.
If our Income Summary Account had contained a debit balance prior to closing, we would have credited our Income Summary Account and debited our Capital Account. What would this debit balance represent ? A Loss unfortunately.