How To Close Out Owners Draw

Endmost Entries

Afterwards financial statements are prepared, you lot are fix to get your books ready for the next accounting period by clearing out the income and expense accounts in the full general ledger and transferring the cyberspace income (or loss) to your possessor'south equity account. This is done past preparing closing entries in the general journal.

Note the distinction between adjusting entries and endmost entries. Adjusting entries are required to update certain accounts in your general ledger at the finish of an bookkeeping period. They must be done before you tin can fix your financial statements and income taxation render. Closing entries are needed to clear out your revenue and expense accounts every bit you start the beginning of a new bookkeeping period.

Preparing your closing entries is a very unproblematic, mechanical process. Follow these steps:

Close the revenue accounts. Prepare one journal entry that debits all the revenue accounts. (These accounts will have a credit rest in the general ledger prior to the closing entry.) Credit an account chosen "income summary" for the total.
Shut the expense accounts. Ready one journal entry that credits all the expense accounts. (These accounts will have a debit balance in the general ledger prior to the closing entry.) Debit the income summary account for the total.
Transfer the income summary balance to a capital account. Prepare a journal entry that clears out the income summary account. This entry finer transfers the net income (or loss) of the business to the owner'due south disinterestedness business relationship.
Close the drawing account. If your business is a sole proprietorship or partnership, shut the drawing accounts (if any) by preparing a journal entry that credits the drawing account and debits the owner'south equity account.

As an example, presume that yous take finalized your general ledger and prepared a residuum sheet and income statement for the twelvemonth ended December 31, 2001. You want to go your books ready for next year. You lot prepare the four endmost entries as follows:

	Debit	Credit
Sales	462,452
Income summary		462,452
To shut the revenue business relationship on 12/31/2001

	Debit	Credit
Income summary	399,871
Purchases		230,934
Advertising		one,850
Depreciation		13,250
Insurance		5,400
Payroll taxes		eight,200
Rent		9,600
Repairs and maintenance		13,984
Utilities		17,801
Wages		98,852
To close the expense accounts on 12/31/2001

	Debit	Credit
Income summary	62,581
Tom Beta, capital letter		62,581
To transfer 12/31/2001 net income to the capital business relationship

	Debit	Credit
Tom Beta, upper-case letter	12,000
Tom Beta, drawing		12,000
To close cartoon business relationship for yr ended 12/31/2001

After all closing entries are made, post the entry totals to the general ledger. Foot the full general ledger accounts to arrive at the beginning amounts for the new accounting period. All revenue and expense accounts should take a zip residuum.