1
The closing process consists of a series of steps performed at the end of an accounting period to reset temporary accounts to zero for the next period.
2
Temporary accounts include revenues, expenses, and dividends. They act like seasonal stats and do not carry over.
3
Permanent (real) accounts include balance sheet accounts like assets, liabilities, and equity (such as common stock and retained earnings), which carry their balances forward.
4
Step 1: Close revenue accounts (which have credit balances) by debiting them and crediting the Income Summary account.
5
Step 2: Close expense accounts (which have debit balances) by crediting them and debiting the Income Summary account.
6
Step 3: Close the Income Summary balance (net income or net loss) to Retained Earnings.
7
Step 4: Close dividend accounts by crediting the dividend account and debiting Retained Earnings.
8
Retained earnings is described as the 'mother of all permanent accounts' because it absorbs the balances of all temporary accounts at the end of the period.