Closing journal entries play a crucial role in finalizing a company’s financial statements. By clearing out nominal accounts at the end of each accounting period, they ensure the balance sheet reflects accurate and up to date figures. These entries also help align retained earnings with the company’s actual net income.
With HashMicro’s accounting software, this process becomes significantly more efficient. The system handles closing entries with precision, allowing businesses to streamline financial reporting and reduce manual workload.
Discover how closing journals work and how the right software can simplify your financial close in the full article below.
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What is a Closing Entry?
A closing entry is an accounting process used at the end of a financial period to transfer the balances of temporary accounts to their corresponding permanent accounts. Temporary accounts include revenue, expense, and dividend accounts, which are only meant to track activity for a specific period.
Once the period ends, these accounts must be cleared so that the next period begins with a clean slate. The amounts are typically transferred to the retained earnings account, allowing the company’s financial statements to reflect its overall performance accurately and ensuring consistency in reporting from one period to the next.
Temporary and Permanent Accounts
Temporary accounts such as revenue, expense, and owner’s withdrawal accounts are used to record a company’s financial activities within a specific accounting period. These accounts are closed at the end of the year and do not carry forward into the next period.
For instance, if a business earns RM50,000 in revenue this year, that amount will not be recorded as revenue in the following year, even if the funds remain within the company.
In contrast, permanent accounts include assets, liabilities, and most equity accounts. Their balances are carried over from one period to the next, providing a continuous view of the company’s financial position.
These accounts are reflected on the balance sheet, which helps investors evaluate the company’s long-term value and financial stability.
Income Summary Account
Temporary account balances can be closed either by transferring them directly to the retained earnings account or by using an intermediary account known as the income summary.
The income summary functions as a temporary account that collects all revenue and expense totals, excluding dividends and interest. Since it is only used during the closing process, it doesn’t appear on financial statements and is cleared to zero once the process is complete.
Its primary purpose is to summarize the company’s net income for the period and then transfer the final amount to retained earnings. Using the income summary also provides a clear audit trail, making it easier for accountants to review the closing entries.
Examples of Closing Entry
Closing entries are a crucial part of the accounting cycle, as they help reset temporary accounts and ensure the records are accurate and ready for the next period. The following examples illustrate how each step is carried out.
Example 1: Close Revenue Accounts
| Date | Accounts | Debit (RM) |
Credit (RM) |
| 2024 | Service Revenue | 207,500 | |
| Dec. 31 | Income Summary | 207,500 |
The balance in the revenue account such as service revenue, is transferred to the income summary account as part of the closing process. This ensures the revenue account starts at zero in the new accounting period.
Example 2: Close Expense Accounts
| Date | Accounts | Debit (RM) | Credit (RM) |
| 2024 | Income Summary | 1,850,000 | |
| Dec. 31 | Cost of Goods Sold | 500,000 | |
| Depreciation Expense | 200,000 | ||
| Rent Expense | 400,000 | ||
| Interest Expense | 100,000 | ||
| Salaries Expense | 650,000 |
Expense accounts such as cost of goods sold, depreciation expense, and others are closed by moving their balances into the Income Summary account. This step clears the accounts, allowing them to start fresh in the next accounting period.
Example 3: Close Income Summary
| Date | Accounts | Debit (RM) | Credit (RM) |
| 2024 | Income Summary | 650,000 | |
| Dec.31 | Retained Earnings | 650,000 |
The balance in the income summary account, which shows the company’s net income or loss, is then transferred to the retained earnings account. This process updates the equity section of the balance sheet to reflect the company’s financial performance for the period.
Example 4: Close Dividends
| Date | Accounts | Debit (RM) | Credit (RM) |
| 2024 | Retained Earnings | 200,000 | |
| Dec.31 | Dividends | 200,000 |
The balance in the Dividends account is transferred to the Retained Earnings account to close it. This reduces retained earnings, representing the dividends distributed to shareholders during the period.
Simplify Writing Closing Entry with HashMicro Accounting Software
HashMicro accounting software in Malaysia is recognized as one of the leading accounting solutions, trusted by more than 2,000 businesses.
Powered by advanced technologies like Hashy AI, HashMicro offers a comprehensive suite of features and modules that streamline various accounting tasks, including the preparation of closing journal entries. Key features include:
- Automated financial reports: Enables businesses to produce precise financial statements automatically, saving valuable time and resources.
- Cash flow management: Provides real-time tracking of cash inflows and outflows to support informed decision-making.
- Tax management: Assists companies in accurately calculating, reporting, and fulfilling tax obligations by regulations.
- Automated bank reconciliation: Facilitates automatic matching of bank transactions, significantly reducing manual errors.
- Automated journal entries: Simplifies the creation of closing and adjusting journal entries, minimizing the risk of mistakes.
- Integration with other modules: Offers seamless connectivity with modules such as CRM and inventory management, delivering a comprehensive business management solution.
Conclusion
Closing entries are essential for preparing accurate financial statements by clearing temporary accounts in preparation for the next accounting period. During this process, balances from revenue, expense, and dividend accounts are transferred to retained earnings to maintain proper records.
To simplify and accelerate the closing process, HashMicro’s finance module ERP automates closing journal entries, reducing manual errors and saving valuable time with just a few clicks.
Additionally, HashMicro seamlessly integrates with CRM and inventory modules, offering a comprehensive solution that meets diverse business needs. From tax compliance to bank reconciliation, it ensures all processes are handled accurately and efficiently. Ready to experience the benefits? Try the free demo today!
FAQ Closing Entries
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What is the closing entries rule?
The closing entry entails debiting income summary and crediting retained earnings when a company’s revenues are greater than its expenses. The income summary account must be credited and retained earnings reduced through a debit in the event of a loss for the period. Dividends are closed directly to retained earnings.
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What is the goal of the closing process?
The closing process in accounting is the set of procedures used to finalize all accounts for the reporting period and prepare financial statements so that companies can obtain accurate records of their financial position.
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What do you do after closing entries?
After you make closing entries, all revenue and expense accounts will have a zero balance. Prepare one more trial balance. Since all revenue and expense accounts have been closed out to zero, this trial balance will only contain balance sheet accounts.
