Revenue and expense accounts are called temporary accounts because at the end of each
accounting period, the balance in both accounts are reduced to zero. This allows the
accounts to begin fresh with a zero balance for the next accounting period. Revenue less
expense determines if the company has made a profit or incurred a loss.
Permanent accounts carry their balances from one accounting period to another (e.g.
assets, liabilities & owner’s equity). They are not closed at the end of the accounting period
but their balances are carried forward.
Closing the Books:
The revenue and expense accounts are closed at the end of the accounting period because:
1) To prepare the revenue and expense accounts for the next accounting period, so that
each period, the entire process starts anew.
2) To update the owner equity account.
The revenue and expense accounts gives us the profit or loss. This amount is used to
complete the balance sheet by updating the capital account. The closing entries update the
capital account in the ledger. It then agrees with the B/S.
Income Summary Account:
To close the revenue and expense accounts their balances are transferred to the income
summary account. The credit balance in the income summary account tells us that a net
income was earned.
- The balance in the income summary should be the same as the net income or
net loss on the worksheet.
Steps to Close the Books
- Revenue and expense accounts are recorded in the journal i.e. closing entries.
- Journal entries are then posted to the general ledger account
1) Revenue account carries a credit balance so you debit revenue and credit income
summary. To close revenue account.
Dr. Rev a/c
Cr. Income Summary a/c
To close the revenue account
2) Expense account carries a debit balance so you credit expense and debit