A general ledger is a record of all of a company's accounts and their associated transactions and balances. Revenue, expense and dividend accounts are temporary accounts because they hold a balance for only one accounting period. Permanent accounts, such as assets, in comparison, hold a balance over multiple periods. Closing your small business's general ledger at the end of an accounting period transfers the temporary-account balances to the retained earnings account and reduces their balances to zero so that they are ready for the next period.
- Debit the revenue account by the amount of its balance at the end of the accounting period to reduce it to zero. Credit the income summary account by the same amount. Income summary is an account used specifically for the closing process. For example, if your small business has $100,000 in revenue, you would debit $100,000 to the revenue account and credit $100,000 to the income summary account.
- Credit each expense account by the amount of its balance to reduce each account's balance to zero. In this example, assume you have balances of $30,000, $12,000 and $18,000 in the wages, utilities and advertising expense accounts, respectively. Credit $30,000 to the wages expense account and credit the other accounts by their respective balances.
- Add together the credits you made to each expense account to determine your total expenses. Debit the result to the income summary account. In the example, add $30,000, $12,000 and $18,000 to get $60,000 in total expenses. Debit $60,000 to income summary.
- Subtract the amount of total expenses you debited to income summary from the amount of revenue you credited to income summary. A positive result represents net income for the period, while a negative number represents a net loss. Continuing with the example, subtract $60,000 from $100,000 to get $40,000 in net income.
- Debit the amount of net income to income summary. Credit the same amount to the retained earnings account. Alternatively, credit a net loss to income summary and debit the same amount to retained earnings. These entries reduce the income summary account to zero and either add net income to or subtract a net loss from retained earnings. In this example, debit $40,000 in net income to income summary and credit $40,000 to retained earnings.
- Debit the retained earnings account by the amount of the dividend account's balance. Credit the dividend account by the same amount. This reduces the dividend account to zero and reduces the retained earnings account by the amount of dividends paid during the period. For example, if your dividend account has a $5,000 balance, you would debit retained earnings and credit dividends each by $5,000.
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Bryan Keythman
