How to Prepare Closing Entries from Adjusted Trial Balance
Closing entries are an essential part of the accounting cycle, as they help to reset the accounts at the end of an accounting period and prepare them for the next period. These entries are prepared using the adjusted trial balance, which reflects the adjustments made to the unadjusted trial balance. In this article, we will discuss the steps involved in preparing closing entries from the adjusted trial balance.
Understanding the Adjusted Trial Balance
Before we delve into the process of preparing closing entries, it is crucial to understand the adjusted trial balance. The adjusted trial balance is a list of all the accounts in the general ledger, along with their adjusted balances. These adjusted balances are obtained by adding or subtracting the adjustments made to the unadjusted balances during the accounting period.
Identifying Temporary Accounts
The first step in preparing closing entries is to identify the temporary accounts. Temporary accounts are those that are used to track revenues, expenses, and dividends during a specific accounting period. These accounts include:
– Revenue accounts
– Expense accounts
– Dividend accounts
Temporary accounts are closed at the end of the accounting period to transfer their balances to the retained earnings account.
Transferring Revenue and Expense Accounts to Income Summary
To close the revenue and expense accounts, you need to transfer their balances to the income summary account. This is done by debiting the revenue accounts and crediting the expense accounts, and then crediting the income summary account for the total revenue and debiting it for the total expenses.
Closing the Income Summary Account to Retained Earnings
Once the revenue and expense accounts have been closed to the income summary account, the next step is to close the income summary account to the retained earnings account. If the income summary account has a credit balance, it indicates a net income for the period, and you will credit the retained earnings account. If the income summary account has a debit balance, it indicates a net loss, and you will debit the retained earnings account.
Closing the Dividend Account to Retained Earnings
Finally, the dividend account needs to be closed to the retained earnings account. Since dividends are a reduction in retained earnings, you will debit the retained earnings account and credit the dividend account.
Finalizing the Closing Entries
After completing the above steps, review the closing entries to ensure they are accurate. Once you are confident that the entries are correct, you can post them to the general ledger.
In conclusion, preparing closing entries from the adjusted trial balance involves identifying temporary accounts, transferring their balances to the income summary account, closing the income summary account to the retained earnings account, closing the dividend account to the retained earnings account, and finalizing the entries. By following these steps, you can ensure that your accounts are properly reset at the end of the accounting period and ready for the next period.
