1. Temporary vs. Permanent Accounts
  • Temporary (Nominal) Accounts: Accounts that track transactions within a single fiscal year (all revenue, cost of goods sold, and operating expense accounts). Their balances must be reset to zero at year-end so they can start fresh in the next period.
  • Permanent (Real) Accounts: Accounts that track long-term balances across multiple years (all assets, liabilities, and equity capital accounts). These balances are never reset to zero; they are carried forward to start the next period as opening balances.

2. The Income Summary Account Tool
To close out temporary accounts, accountants use a temporary clearing account called the Income Summary Account.
3. Closing Ledger Mechanics
  • Closing Revenue: Debit all revenue accounts to clear their balances | Credit Income Summary.
  • Closing Expenses: Debit Income Summary | Credit all individual expense accounts.
  • Closing the Summary Account: Debit Income Summary for the net profit amount | Credit the Owner’s Capital account.

Date         Account Titles & Explanation          Ref       Debit ($)    Credit ($)
-------------------------------------------------------------------------------------
2026-12-31   Income Summary Account                3999         64,500
                Salaries Expense                   6010                    42,000
                Office Rent Expense                6150                    12,000
                Electricity Expense                6410                     3,500
                Depreciation Expense               6810                     6,000
                Irrecoverable Debts Expense        6510                     1,000
             (To clear and close out operating expense 
              ledgers at the end of the fiscal year)

 
PreviousNext