Do you need to finalize year-end journal entries and close out your books, but put it off because it creates anxiety? If so, fear not. Bayou Bookkeeping and Tax Services is here to help. “Closing the books” simply means making journal entries to get your temporary accounts to a zero balance. Here’s an easy explanation of how to close your books for the previous year: First, you’ll create an account called Temporary Income Summary. Second, you close your income and expenses by transferring their balances to the Income Summary. Third, the Income Summary is then closed to Retained Earnings. Finally, dividends are closed out; however, they are moved directly to Retained Earnings as opposed to the temporary Income Summary account. Here is an example using a freelance writer as an example.
For each revenue account, you will create year-end journal entries to debit the revenue account and credit the income summary. Let’s assume you show $136,000 in your revenue account. You’ll debit revenue $136,000 and credit $136,000 to the income summary. If you have multiple revenue accounts, you perform this step for each. The total credit(s) to the income summary must equal the total revenue from the income statement.
1. Close Out Revenue Account(s)
2. Close Out Expense AccountsThese year-end journal entries close each expense account by crediting each account so that it equals zero and creating an offsetting debit entry to the income statements. For example, if your salary was $85,000 and you spent $7,500 in advertising, you credit Salaries and Wages $85,000 and create a debit entry to the income statement. Then, you’ll credit $7,500 to the advertising account and create an offsetting debit entry of $7,500 to the income statement. Repeat this step for each expense account.
3. Year-End Journal Entries to Income Summary and Retained EarningsOnce you have closed all the revenue and expense accounts by creating year-end journal entries, you are ready to close the temporary income summary account to Retained Earnings. Using our previous examples, you should show a $136,000 credit and $92,500 in debits, or a $43,500 credit balance your income summary (assuming there were no additional entries or accounts). If so, you close the income summary by creating a debit entry of $43,500 and offsetting it with a credit entry of $43,500 to Retained Earnings. If you have a net loss, on the other hand, you will credit the income summary and debit Retained Earnings. In this case, there are no paid dividends.
Congratulations! Your books are closed. Done properly, your year-end journal entries should match those reflected on your financial statements. When everything is reconciled and closed, you’re finished.
Need More Help?
Transactions are the foundation of your financial records, so it’s important they are accurate and current when it comes to year-end journal entries. If you need help and live in the Baton Rouge area, call Bayou Bookkeeping today at (225) 442-1137 or schedule a consultation online. We’ll give you access to a certified bookkeeper along with other accounting services, such as payroll and tax filing. Together, we’ll ensure your bookkeeping, accounting, and finances are solid so that you can focus on what you do best: running your business.