Accounting Cycle-2 > Closing Entries
The accounts we've been learning about can be categorized in a number of different ways.
We've categorized accounts by which financial statement they're reported on.
We've categorized accounts by whether they are current or long-term.
And now we're gonna learn to categorize accounts a new way - temporary or permanent.
Temporary accounts are closed at the end of the period. Closed means to zero out the temporary account balances.
Permanent accounts are unaffected by closing journal entries with the exception of owner's capital.
The income summary account, which is a new account for us, is a temporary account into which all revenues and expense accounts are transferred at the end of the period.
The net amount transferred equals our net income or net loss.
This account is rarely used by companies anymore but some textbooks still show this method.
So the closing journal entries is a formal process of moving revenues, expenses, and owner's withdrawals to owner's capital.
You recall very early on that we learned that revenues increase equity while expenses and owners withdrawals decrease equity.
Up until this point, that has all been conceptual. When we record closing journal entries, this is when those impacts on equity actually happen.
And finally, we close accounts to prepare our accounts to begin the next accounting period with zero balances for our temporary accounts.