General Ledger Closing Entries

After we have prepared financial statements there are certain general ledger accounts which must be closed in order to be used for the next accounting periods.  If we talk about income and expenses this category general measure accounts.  They are used only to record financial data for particular accounting period and we cannot have opening or closing balances and in order to calculate net result for the period for a month, quarter or a year those accounts should have zero balances and all the entries of those accounts they are transferred to the income summary and afterwards to the written earnings account.

 

And in order to transfer the entries from income or expenses general ledger accounts we should make closing entries so we should close general ledger accounts.  We will use company Zeta and we will take income and expenses accounts and we will close them.  We do directly to the retained earnings here we are not using income summary.  Usually intermediate account of income summary is used however since here we have only several entries and not a lot of information we transfer the balances of income and expenses accounts directly to the retained earnings.

 

If you analyze comprehensive problems which are attributed to this course or if you analyze the exercises you can see there that we are using income summary as an intermediate account to close income and expenses account.  So here we have a balance of income account, which is $7,900 and it was on credit side.  In order to close income account we do the opposite entry with debit income account and we credit retained earnings account.  By doing this we have closing balance of income account equal to zero.

 

And for the next accounting period next month we again will be using income account and we do the same action or the same step with the expenses account.  We start from cost of good sold.  We had closing balance equal to $4,500 and we record an opposite entry so we credit expenses account and we debit retained earnings.  So basically we transfer a balance of the cost of sales to the retained earnings account and we do the same with other expenses account depreciation expenses.

 

We close this account by crediting it and transferring it to retained earnings and operating expenses account again the same entry crediting this account and debiting retained earnings and the final is payroll expenses and payroll expenses again we credit payroll expenses and debit retained earnings and you can see that after this is done we calculate the final balance in the retained earnings account.

 

You can see that it is on the credit side and it is $2,105 and this is net result net profit for the month and if you go back to the part of the representation where we were preparing financial statements for the Zeta you can find this amount in the income statement as a net profit for current month.

 

So in this way we have closed all the income and expenses accounts and again during the next month we will be using them to record expenses and income and to calculate net result from operations for that particular month.

Liked this post? Share it!