Closing Entries

• ese are end-of-period journal entries prepared to “empty” the temporary accounts of their
balances and prepare them for the next accounting period.

• e Income Summary account is a temporary proprietorship account used to close the

temporary or nominal accounts.

• Temporary or nominal accounts are those whose balances pertain to a particular accounting
period. ese are revenue and expense accounts, or income statement accounts.

• Preparation of closing entries is a required step in the accounting cycle. e closing journal
entries are posted so that all nominal accounts should have zero balances at the start of the next
accounting period.

Two Methods in Closing Accounts

1. Direct Method - the net income or loss and Drawing account are closed directly to the Capital
account.

2. Indirect Method - the net income or loss is closed to the Drawing account, aer which the
Drawing account is closed to the Capital account.

Steps in the Closing Process (Under the Indirect Method)

1. Debit all nominal accounts with credit balances and credit Income Summary.

2. Debit Income Summary and credit all nominal accounts with debit balances.

3. Compute the balance of the Income Summary account (Steps 1 and 2). Close its balance
against the Drawing account.

4. Compute the updated balance of the Drawing account and close the amount against the
Capital account.

5. Compute the balance of the Capital account and prepare Post-Closing Trial Balance.