Closing the books — reset the scoreboard
Dec 31, after adjustments: Service Revenue shows $48,000, total expenses $31,000, owner draws $8,000. Close the books with the four closing entries and prove Income Summary does its job.
The journal entry
1 — Close revenues to Income Summary
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | $48,000 | |
| Income Summary | $48,000 |
2 — Close expenses to Income Summary
| Account | Debit | Credit |
|---|---|---|
| Income Summary | $31,000 | |
| Expenses (total) | $31,000 |
3 — Close Income Summary to Capital
| Account | Debit | Credit |
|---|---|---|
| Income Summary | $17,000 | |
| Owner's Capital | $17,000 |
4 — Close Draws to Capital
| Account | Debit | Credit |
|---|---|---|
| Owner's Capital | $8,000 | |
| Owner's Draws | $8,000 |
- Service Revenue (debit): Revenue is credit-normal, so closing it takes a DEBIT for its full balance — the account resets to zero for next year.
- Income Summary (credit): A one-day scratchpad account that exists only to net income together.
- Income Summary (debit): After entries 1–2, Income Summary's balance IS net income: 48,000 cr − 31,000 dr = 17,000 credit.
- Expenses (total) (credit): Each expense (debit-normal) is credited for its balance — in practice one compound entry crediting every expense account.
- Income Summary (debit): The netted income moves home to the owner's claim.
- Owner's Capital (credit): This entry IS the relay from Ch. 6 written in journal form: net income flowing into capital.
- Owner's Capital (debit): Draws reduce the owner's claim directly.
- Owner's Draws (credit): Capital now reads 10,000 + 17,000 − 8,000 = 19,000 — exactly Ch. 6's ending capital.
Remember this
- formula
Four closes, in order: (1) revenues → Income Summary, (2) expenses → Income Summary, (3) Income Summary (= net income) → Capital, (4) Draws → Capital. Temporaries hit zero; Capital catches everything.
- mnemonic
Temporary vs permanent: 'does this account measure THIS period or the whole life?' Period → close it. Life → leave it.
- watchout
Post-closing trial balance contains ONLY assets, liabilities, and capital. If a revenue or expense shows up on it, a closing entry was missed.