Closing process: Overview

At the end of the fiscal period, accountants prepare the closing entries. This article provides an overview of the closing process.

The figures below come from the financial statements from our series on the fictional startup, TechnolOntario, Inc. However, you don’t need to refer back to the whole series to follow the closing process.

The T-accounts below show the economic activity for the company over the past fiscal year.

Recall that to prepare the closing entries, accountants must reset the figures in the temporary accounts (that is, the revenue, expense and dividend accounts) to zero, and transfer the balances to the statement of retained earnings. To do so, they debit the revenue accounts for the same amount of revenue earned during the period, and credit the expense accounts for the same amount of expense incurred. The difference in the dollar amount between the total revenue and the total expenses (which is the net income) is sent to the retained earnings account, either as a debit or a credit depending on whether the net income was a loss or a profit. Although the dividend accounts are not shown below, they would also be reset to zero, through either adding an equal debit or credit as needed, and the dollar amount would be transferred to the retained earnings account.

Looking at the T-accounts shown above, you can see the debits and credits that were issued in the closing process in order to reset the temporary accounts to zero. The highlighted figures illustrate the balances that go to the year-end financial statement.

After the closing process, the year-end financial statement would read:

References

Markle, K. (2004, August). Introduction to Accounting. Presentation delivered at Schulich School of Business, York University, Toronto, Canada.
Pratt, Jamie. (2003). Financial Accounting in an Economic Context. New York: John Wiley& Sons.