Closing Journal: Understanding And How To Make Closing Journal

Closing entries are journals made at the end of an accounting period to close temporary nominal accounts. Why is the balance of net income recorded in the closing entries?

Then, what is the actual function of closing journals, account components, how to create it and its examples? Check out the explanation on the Journal by ActivelyShare blog.

In the accounting cycle, the last part to do is to prepare closing journals which of course will be the final review tool when the company, especially trading companies are at the end of the accounting period.

In a way, the closing journal is a special entry journal for the retained earnings statement to ensure the balance we report on the retained earnings statement and the balance is in accordance with the ending balance of retained earnings in our general ledger.

What is Closing Journal?

Closing entries are journals made at the end of an accounting period to close temporary nominal accounts. As a result of this closure, the balances of these accounts will be 0 (zero) at the beginning of the accounting period.

The closed accounts are nominal accounts and capital auxiliary accounts. The components that include nominal accounts are income and expenses, while capital auxiliary accounts are private and summary profit / loss.

After the closing entries are posted to each account, what remains is the real estimate (assets, liabilities, capital / equity).

Purpose and Functions of Making Closing Journal

The following are some of the purposes and functions of closing journal entries:

1. Closing the balance contained in all temporary estimates, so that the estimate becomes 0 (zero).
2. So that the capital account balance shows the amount that corresponds to the situation at the end of the period, so that the capital account balance will be equal to the final amount of capital reported on the balance sheet.
3. Separate income and expense account transactions so as not to mix with the nominal amount of income and expenses in the following year.
4. Presenting the balance sheet at the beginning of the next period after closing the books.
5. Makes it easier when the audit is carried out, because the transactions that occur between the current period and transactions in the next accounting period have been separated.
6. Presenting the actual (real) financial information of a company after closing the books (closing journal). The actual account consists of assets, liabilities and equity.

Account Terms in Making Closing Journal

Closing entries are used to close several accounts, namely income, expenses, profit / loss summary, and prive.

Closing entries can also be defined as journal entries made at the end of an accounting period to transfer the balances of various temporary or nominal accounts to a permanent account in the general ledger.

This journal is usually made when the company’s annual financial statements are completed.

This is to ensure that each income and expense account has a balance of 0 (zero) to start the next accounting cycle, which is a new period in a company.

Following are the individual components in the closing entries:

1. Income Account

The definition of company income is the result or income earned by the company.

There are 2 types of income, namely operating income, which is income directly related to the company’s business activities and non-business income, which is income that is not directly related to business activities.

Close all income accounts by moving the income accounts to the income summary account.

Here is an example.

2. Expense Account

The next component in the closing entries is the expense account.

The definition of expense itself is the sacrifice that occurs during business activities to earn income.

There are two types of expense accounts, namely operating expenses which are direct sacrifices for business activities and other expenses which are expenses that have nothing to do with business activities.

Close all expense accounts by transferring expense accounts to the profit / loss summary.

Here is an example.

3. Summary of Profit / Loss

Close all profit / loss summary accounts by transferring the profit / loss summary balance to the capital account.

Here there are two conditions that can occur, profit (revenue is greater than expenses) or loss (revenue is less than expenses). Here is an example.

If you make a profit, the profit / loss summary account is debited and the capital account is credited

And, if there is a loss, the capital account is debited and the profit / loss summary is credited

4. Private Account

Closing the private account (withdrawal of capital by the owner, usually only occurs in small-scale companies).

You do this by moving the private account to the capital account.

The following is an example of a closing journal.

Note: net income balance is recorded with closing entries

How to Make Closing Journal with Trading Company Example

Closing journals are compiled depending on the form of the company, whether it is a Limited Liability Company, Limited partnership, firm, or individual company, because the capital structure of the types of companies above are of course different.

The closing entry also sets the balance of all temporary accounts (income, expenses, dividends) to zero for the next period.

The following is a summary of the new accounts entered in the closing entries:

Unlike sales revenue accounts which have a normal balance on credit, sales discount and sales returns accounts are contra-income accounts that have a normal balance on debit.

Here are the four basic steps in creating a closing journal:

a. Closing the income account, transfers the credit balance in the income account to a clearing account called the Income Summary.

b. Close all expense accounts and contra-income accounts, transfer debit balances in expense accounts and contra-income accounts to the Income Summary account.

c. Close the Income Summary account, transfer the Income Summary account balance to the Retained Earnings account.

d. Closing the Dividend account transfers the debit balance from the Dividend account to the Retained Earnings account.

As an illustration, the following is an example of a closing journal entry case at a Your ABCD The Best company starting from this adjusted trial balance:

For additional information, the beginning balance of Your ABCD The Best’s retained earnings is $. 260,000,000.

The following is an example of the steps for making a Closing Journal:

1. Close the type of sales account that has a balance position on credit.

According to the trial balance above, there are two accounts that are in a credit position, namely Sales Income and Interest Income:

2. Close expense and contra-income accounts. Accounts to be closed are sales discounts, sales returns, operating costs, administrative costs, and interest costs.

3. Close the summary income account to retained earnings. Previously, income summary accounts on debit and credit positions had to be adjusted.

This value must be equal to the nominal net profit or loss on the income statement.

4. The next way to make closing entries is to close the dividend account to retained earnings.

Dividends are income that becomes the right of investors according to the agreement.

Therefore it must be deducted (debited) from the retained earnings equity account.

After that, the retained earnings statement can be made as follows:

My Conclusion

With closing entries, all accounts will be returned to zero so they are ready to start recording and reporting your trading company’s financial statements for the following year.

Closing entries are an important part of the company.

From the closing journal, the company can assess the company’s performance during the previous period and take into account the company’s next steps.

Therefore, closing journals must be made carefully and precisely.

That is the understanding and how to make closing entries in accounting that you should know.

You can record and keep closing journals and manage them properly so that they become a proper company financial report.

That’s an explanation of closing journals, how to make them, as well as examples of trading companies that are important to understand.

The question of why the net income balance is recorded in the closing journal has been answered.

Hopefully the information above is useful. Follow Actively Share’s social media for more information about business, finance, and accounting.