If your expenses for December had exceeded your revenue, you would have a net loss. When closing expenses, you should list them individually as closing entries accounting they appear in the trial balance. The T-account summary for Printing Plus after closing entries are journalized is presented in Figure 5.7.

When closing the revenue account, you will take the revenue listed in the trial balance and debit it, to reduce it to zero. As a corresponding entry, you will credit the income summary account, which we mentioned earlier. Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand. Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months.

Step 4: Close withdrawals to the capital account

Doing this would bring the balances of the Expenses Account to zero. However, the hard part of Closing Entries is remembering and knowing which accounts to close and how you complete them. We
have completed the first two columns and now we have the final
column which represents the closing (or archive) process. The T-account summary for Printing Plus after closing entries
are journalized is presented in
Figure 5.7. Notice that the Income Summary account is now zero and is ready
for use in the next period. The Retained Earnings account balance
is currently a credit of $4,665.

Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry. The owner’s drawing account will be zero and the owner’s drawing account will be closed by crediting the owner’s drawing account and debiting the capital account. Companies generally journalize and post-closing entries only at the end of the annual accounting period, in contrast to the steps in the cycle. The trial balance is like a snapshot of your business’s financial health at a specific moment.

How to Post Closing Entries

The statement of retained earnings shows the period-ending
retained earnings after the closing entries have been posted. When
you compare the retained earnings ledger (T-account) to the
statement of retained earnings, the figures must match. It is
important to understand retained earnings is not closed out, it is only updated. Retained
Earnings is the only account that appears in the closing entries
that does not close. You should recall from your previous material
that retained earnings are the earnings retained by the company
over time—not cash flow but earnings. Now that we have closed the
temporary accounts, let’s review what the post-closing ledger
(T-accounts) looks like for Printing Plus.