Lessons · Accounting · closing the books
Closing the books: revenue and expenses go to equity
At year-end the revenue and expense accounts are emptied into equity, so they start the new year at zero. Balance sheet accounts are never closed; they carry on.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
On the first of January the sales account still shows last year's 50,000, and the first report of the new year says the business sold 50,000 in a week. Closing is what stops that, and it is also the answer to where the year's profit went: into equity.
How to think about it
Close each revenue account by debiting it to zero. Close each expense by crediting it to zero. The difference is the profit; move it to owner's capital, or retained earnings in a company.
Worked example
Sales 50,000 Cr; Rent expense 12,000 Dr; Wages expense 20,000 DrThe year's income statement accounts, with their balances.
Close revenue: Dr Sales 50,000 / Cr Income summary 50,000Sales now reads zero. Income summary is a scratch account used only for closing.
Close expenses: Dr Income summary 32,000 / Cr Rent expense 12,000, Cr Wages expense 20,000Both expenses read zero.
Profit = 50,000 − 32,000 = 18,000: Dr Income summary 18,000 / Cr Owner's capital 18,000The year's profit joins equity. Income summary reads zero too.
Your turn
The year's profit of 9,500 is moved out of income summary. Write the credit line.
Dr Income summary 9,500 / Cr 9,500
Solve one, graded on the server
The trap
Closing cash, or any balance sheet account. Cash does not start the year at zero; the bank still has it. Only the accounts that measure one period are emptied.