How to Close Revenue Accounts With a Journal Entry

Revenue accounts, such as Sales Revenue or Service Revenue, track the income an organization earns from its primary operations. These accounts are considered “temporary” because they accumulate financial activity only for a specific accounting period. The process of closing entries is a step in the accounting cycle, serving to prepare these temporary accounts for the subsequent accounting period. By resetting their balances to zero, closing entries ensure that each new period begins with a clean slate for revenue tracking.

Identifying Revenue Accounts and Their Balances

Before initiating the closing process, identify all active revenue accounts. These accounts can be found within the general ledger or by reviewing the unadjusted trial balance. Revenue accounts inherently carry a credit balance, reflecting the increase in equity from sales or services rendered. For instance, if a business records $50,000 in Sales Revenue, this amount appears as a credit balance.

Determining the current credit balance for each revenue account is necessary, as this amount will be debited to close them. For example, if a “Consulting Revenue” account shows a credit balance of $25,000 and a “Training Revenue” account shows $15,000, these are the amounts used in the closing process. This establishes the figures required for the subsequent journal entry.

The Closing Journal Entry for Revenue

To record the closing journal entry for revenue accounts, the principle is to reduce their balances to zero. Since revenue accounts hold a credit balance, closing them requires a debit entry for their current balance. For example, if “Sales Revenue” has a $100,000 credit balance, it will be debited for $100,000. This debit neutralizes the credit balance.

The corresponding credit entry for this closing action is made to an account called “Income Summary.” This account acts as a temporary holding place for revenue and expense balances during closing. If multiple revenue accounts are being closed, the sum of all debits to these revenue accounts will equal a single credit to the Income Summary account. An illustrative entry might involve debiting “Sales Revenue” for $100,000, “Service Revenue” for $50,000, and then crediting “Income Summary” for the combined total of $150,000.

The Role of Income Summary

The Income Summary account functions as a temporary clearing account. Its purpose is to consolidate the balances of all revenue and expense accounts. This consolidation allows for the calculation of net income or net loss. Revenue accounts are closed by debiting them and crediting Income Summary. Expense accounts are closed by crediting them and debiting Income Summary.

This account holds no natural balance outside of the closing cycle. It serves solely as an intermediate step to gather all temporary account balances. Once all revenues and expenses have been transferred into it, the resulting balance represents the net income or loss, which is then moved to a permanent equity account.

Post-Closing Steps

After revenue and expense accounts have been closed to the Income Summary account, the final balance of Income Summary represents the net income or loss. This balance is then transferred to a permanent equity account. For corporations, this transfer is to Retained Earnings, while for sole proprietorships or partnerships, it goes to Owner’s Capital. This final transfer clears the Income Summary account.

Following this, organizations prepare a post-closing trial balance. This trial balance verifies that only permanent accounts—assets, liabilities, and equity—retain balances. Zero balances in all temporary accounts, including revenue accounts, indicate successful completion of the closing process and readiness for the next accounting period.