At the end of a fiscal year, a company performs an accounting procedure known as year-end close, or a closing of the books. As part of the procedure, a company will record journal entries that transfer all account balances from its income statement to the balance sheet, leaving all income and expense accounts with a zero balance at the start of the new fiscal year. This closing procedure enables a company to measure its financial performance and operating results for each reporting year, and to measure business trends and growth for each year.
Finalize all income and expense journal entries for the year based on your year-end checklist. Ensure that all corrections, accruals and necessary adjustments have been made to the ledger.
Create a journal entry to close each revenue account. Debit each revenue account for its final year-end balance, and offset the entry with a credit to the ledger account "income summary." As an example, if a revenue account has a debit balance on the ledger of $386,000, the journal entry to record the close of the account will appear as follows: "Debit Revenue 386,000" and "Credit Income Summary 386,000."
Create a journal entry to close each expense account. Credit each expense account for its final year-end balance, and offset the entry with a debit to the ledger account used in step 2, "income summary." As an example, if wage expenses end the year with a debit balance of $90,000, the journal entry to close the account will appear as follows: "Debit Income Summary 90,000" and "Credit Wage Expenses 90,000"
Close the entire balance in "income summary" to the balance sheet account "retained earnings" after all income and expense accounts have been closed. Check the balance of the income summary account after it is posted to make sure it has a zero balance. If income summary has a credit balance of $324,000, the journal entry to close the account to retained earnings will appear as follows: "Debit Income Summary 324,000" and "Credit Retained Earnings 324,000."
Determine whether the company has paid dividends during the fiscal year, and if so, book a journal entry to close the dividend account to retained earnings. Because the account has a normal debit balance, credit the account for the year-end balance and debit, or reduce retained earnings. Make sure all entries in steps 1 to 5 have posted correctly to the general ledger. The books are now closed.