Four steps in posting closing entries: clear revenue to income summary, clear expenses to income summary, clear balance in income summary to retained earnings, clear dividends to retained earnings

In this video, “Four steps in posting closing entries: clear revenue to income summary, clear expenses to income summary, clear balance in income summary to retained earnings, clear dividends to retained earnings,” the Accounting Stuff channel explains the concept of closing entries in accounting and how they are used to reset temporary accounts to zero and transfer their balances into retained earnings. They cover the differences between temporary and permanent accounts and provide a useful trick to remember which accounts fall into each category. The video demonstrates two ways to post closing entries: the long way and the short way, and includes a step-by-step example of posting closing entries using a trial balance and creating financial statements. The post closing trial balance is also discussed, showing the final balances in each account after the closing entries have been posted.

Hey there, in this informative video brought to you by Accounting Stuff, you’ll learn all about closing entries in accounting. We’ll walk you through two different ways to post closing entries – the long way and the short way – and explain how these entries reset temporary accounts to zero and transfer their balances into permanent retained earnings. We’ll also cover temporary and permanent accounts, provide a trick to remember which accounts belong to each category, and demonstrate the process of posting closing entries using a trial balance. So, if you want to master the four steps in posting closing entries and understand their significance in accounting, this video is for you!

Four steps in posting closing entries

Clear revenue to income summary

The first step in posting closing entries is to clear the revenue account to the income summary account. Revenue is a temporary account that represents the income or sales generated by a business during a specific accounting period. To clear the revenue account, you will need to debit the revenue account and credit the income summary account for the same amount. This transfer effectively resets the revenue account to zero and transfers its balance to the income summary account.

Clear expenses to income summary

The second step is to clear the expenses to the income summary account. Expenses are also temporary accounts that represent the costs incurred by a business in generating revenue. To clear the expenses, you will need to credit the expense accounts and debit the income summary account for the same amount. This transfer clears the expenses to zero and transfers their balance to the income summary account.

Clear balance in income summary to retained earnings

The third step involves clearing the balance in the income summary account to the retained earnings account. Income summary is a temporary account that is used to summarize the net income or net loss of a business for a specific accounting period. To clear the balance in the income summary account, you will need to debit the income summary account and credit the retained earnings account for the same amount. This transfer ensures that the net income or net loss is properly allocated to the retained earnings account.

Clear dividends to retained earnings

The final step is to clear the dividends to the retained earnings account. Dividends are payments made to the shareholders or owners of a business and are considered a distribution of profits. Dividends are also temporary accounts that need to be cleared at the end of each accounting period. To clear the dividends, you will need to debit the dividends account and credit the retained earnings account for the same amount. This transfer ensures that the dividends are properly accounted for and reduces the retained earnings accordingly.

Differences between temporary and permanent accounts

Understanding temporary accounts

Temporary accounts are accounts that are used to record transactions for a specific accounting period. These accounts include revenue, expenses, and dividends. Revenue accounts record the income or sales generated by a business, expenses accounts record the costs incurred in generating revenue, and dividends accounts record the payments made to the shareholders or owners of a business. Temporary accounts are reset to zero at the end of each accounting period to start fresh for the next period.

Understanding permanent accounts

Permanent accounts, on the other hand, are accounts that carry their balances forward from one accounting period to another. These accounts include assets, liabilities, and equity accounts. Assets accounts record the resources owned by a business, liabilities accounts record the obligations or debts owed by a business, and equity accounts record the ownership interest in a business. Permanent accounts are not reset to zero at the end of each period and their balances are carried forward.

The long way of posting closing entries

Resetting revenue and expense accounts to zero

The first step in the long way of posting closing entries is to reset the revenue and expense accounts to zero. This is done by transferring the balances of these accounts to the income summary account. By clearing the revenue and expense accounts to zero, we ensure that the balances are properly accounted for and ready for the next accounting period.

Transferring balances to the income summary account

The second step involves transferring the balances from the revenue and expense accounts to the income summary account. This is done by debiting the revenue account and crediting the income summary account for the amount of the revenue, and crediting the expense accounts and debiting the income summary account for the amount of the expenses. This transfer summarizes the net income or net loss in the income summary account.

Transferring the balance to retained earnings

The third step is to transfer the balance in the income summary account to the retained earnings account. This is done by debiting the income summary account and crediting the retained earnings account for the amount of the net income or net loss. This transfer ensures that the net income or net loss is properly allocated to the retained earnings account.

Clearing the dividends account

The final step in the long way of posting closing entries is to clear the dividends account. This is done by debiting the dividends account and crediting the retained earnings account for the amount of the dividends. This transfer reduces the retained earnings by the amount of dividends declared and ensures that the dividends are properly accounted for.

The short way of posting closing entries

Quicker way to clear balances of Unter’s temporary accounts

The short way of posting closing entries is a quicker method to clear the balances of temporary accounts. This method involves consolidating the steps of the long way into a single closing entry. By using this method, the balances of revenue, expense, and dividends accounts can be cleared to zero at once.

Resetting revenue, expenses, and dividends to zero using one closing entry

In the short way, a single closing entry is used to reset the balances of revenue, expenses, and dividends accounts to zero. This closing entry involves debiting the revenue account and crediting the expense and dividend accounts for their respective balances. By doing this, the balances of these temporary accounts are cleared to zero.

Debit revenue account and credit dividend and expense accounts

In this closing entry, the revenue account is debited to clear its balance to zero, and the expense and dividend accounts are credited to clear their balances to zero. This ensures that all temporary accounts are reset and ready for the next accounting period.

Balance of $3,450,000 credited to retained earnings

After the revenue, expenses, and dividends accounts have been cleared to zero using the short way of posting closing entries, the net balance of these accounts is transferred to the retained earnings account. In this case, a balance of $3,450,000 is credited to the retained earnings account. This represents the net income or net loss of the business for the accounting period.

Post-closing trial balance

Explanation of post-closing trial balance

The post-closing trial balance is prepared after the closing entries have been posted and the temporary accounts have been closed. It is a report that shows the final balances in each account at the end of the accounting period. The post-closing trial balance includes only permanent accounts, such as assets, liabilities, and equity accounts.

How it shows final balances in each account

The post-closing trial balance shows the final balances in each account after the closing entries have been posted. It provides a clear snapshot of the financial position of a business at the end of the accounting period. The balances in the post-closing trial balance represent the cumulative transactions and adjustments made throughout the period.

Its role as next year’s opening trial balance

The post-closing trial balance serves as the starting point for the next accounting period. It becomes the opening trial balance for the new period. The balances in the post-closing trial balance are carried forward into the new period to ensure continuity in the accounting records. This starting point helps in the preparation of financial statements and the analysis of a business’s performance.

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Purchasing cheat sheets for closing entries

For additional support and learning resources, you can purchase cheat sheets for closing entries. These cheat sheets provide a quick reference guide for understanding and implementing closing entries in accounting. They can be helpful in reinforcing your understanding of the concepts and serving as a handy tool during the closing process.

By supporting the channel and utilizing the available resources, you can enhance your knowledge and skills in accounting, specifically in the area of closing entries.