The last step in completing the accounting cycle is closing entries. After closing all revenue and expense accounts, Softie Limited Company had a debit balance of $16,354 in its income summary account. What would be the proper journal entry to record the closing of the income summary account?

Question

Revenue 16,354 Income Summary 16,354

Expenses 16,354 Income Summary 16,354

Equipment 16,354 Income Summary 16,354

Retained Earnings 16,354 Income Summary 16,354

Answer 1

When closing entries are made, the Income Summary account is closed to the Retained Earnings account. In this case, since the Income Summary has a debit balance of $16,354, it indicates that expenses exceeded revenues, resulting in a net loss.

To record the closing of the income summary account, the appropriate journal entry would debit Retained Earnings (to reduce it, because of the loss) and credit Income Summary (to zero it out). The entry would be as follows:

Retained Earnings             16,354
     Income Summary                    16,354

This entry reflects a transfer of the loss from the Income Summary account to the Retained Earnings account, effectively closing the Income Summary for the period.