Closing the books prepares your accounts for the next accounting cycle, ensuring you start with a clean slate. Moreover, it provides an opportunity to review your financial performance and make strategic decisions based on the data. Let’s say you’ve retained earnings balance sheet recorded a sale; you need to post this transaction to the sales and cash accounts within the general ledger. Consistent and accurate posting ensures that your general ledger reflects the true financial state of your business. After recording transactions, they need to be posted to the general ledger.

Step #4: Close Dividends

Notice how only the balance in retained earnings has changed and it now matches what was reported as ending retained earnings in the statement of retained earnings and the balance sheet. Any account listed on the balance sheet is a permanent account, barring paid dividends. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if closing entries it is not spent. Once we have obtained the opening trial balance, the next step is to identify errors if any, make adjusting entries, and generate an adjusted trial balance. Remember that all revenue, sales, income, and gain accounts are closed in this entry.

• In essence, we are updating the capital balance and resetting all temporary account balances.
• Approaching the fiscal year’s end requires preparing for the next period with great care.
• You only prepare your post-closing trial balance after you’ve finalised all your financial statements and closed any temporary accounts (like revenue, expenses, and dividends accounts).
• The closing journal entries start by balancing these accounts against the income summary.
• The trial balance is like a snapshot of your business’s financial health at a specific moment.

Closing Entry Shortcuts and Software Handling

The account has a zero balance throughout the entire accounting period until the closing entries are prepared. Therefore, it will not appear on any trial balances, including the adjusted trial balance, and will not appear on any of the financial statements. There may be a scenario where a business’s revenues are greater than its expenses.

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Trial balances are also a useful foundation when preparing your financial statements. Why was income summary not used in the dividends closing entry? Only income statement accounts help us summarize income, so only income statement accounts should go into income summary. Understanding the accounting cycle and preparing trial balances is a law firm chart of accounts practice valued internationally. The Philippines Center for Entrepreneurship and the government of the Philippines hold regular seminars going over this cycle with small business owners.

Step #1: Close Revenue Accounts

We don’t want the 2015 revenue account to show 2014 revenue numbers. Suppose a business had the following trial balance before any closing journal entries at the end of an accounting period. Thebalance in the Income Summary account equals the net income or lossfor the period. This balance is then transferred to the RetainedEarnings account. The accounts that need to start with a clean or $0 balance goinginto the next accounting period are revenue, income, and anydividends from January 2019. To determine the income (profit orloss) from the month of January, the store needs to close theincome statement information from January 2019.

How much are you saving for retirement each month?

It is a holding account for revenues and expenses before they are transferred to the retained earnings account. These permanent accounts form the foundation of your business’s balance sheet. However, you might wonder, where are the revenue, expense, and dividend accounts?