Closing journal entries are made at the end of an accounting period to prepare income statement accounts for the next period.
This is because income statement accounts are measured periodically; and so, the amounts in one accounting period should be closed or brought to zero so that they won’t get mixed with those of the next period.
Note: This process is called Fiscal Year End in Xoro
Income Statement accounts consist of all revenue and expense accounts. Take note that closing entries are prepared only for temporary/income statement accounts. Permanent accounts are never closed. Here are 3 Steps of a closing Entry
- Close all income accounts to Income Summary
- Close all expense accounts to Income Summary
- Close Income Summary to the appropriate Retained Earnings account
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