How to Record an Entry to Close Revenue Accounts

The accounting cycle involves a series of steps to record and process financial transactions, culminating in the preparation of financial statements. A crucial phase at the conclusion of each accounting period is the performance of closing entries. These entries serve to reset the balances of temporary accounts to zero, preparing them for the accumulation of new data in the subsequent period. This process ensures that financial statements accurately reflect activity only for the current period.

Identifying Revenue Accounts

Revenue accounts represent the income generated by a business from its primary activities over a specific accounting period. Examples include Sales Revenue, Service Revenue, or Interest Revenue, depending on the business’s operations. These accounts are classified as “temporary” because their balances relate only to a single accounting period and must be cleared at the end of that period. Unlike permanent accounts, such as assets or liabilities, temporary accounts do not carry their balances forward.

To identify all relevant revenue accounts, businesses typically consult their chart of accounts, which lists every account used in their general ledger. A review of the general ledger itself will also show all accounts that have accumulated income during the period. Revenue accounts generally hold credit balances, indicating an increase in equity through earnings.

The Income Summary Account’s Role

The Income Summary account is a special, temporary general ledger account used exclusively during the closing process. It acts as an intermediary or clearing account, serving as a temporary holding place for the balances of all revenue and expense accounts. This account does not appear on financial statements and is closed after its purpose is served.

When closing revenue accounts, their balances are transferred into the Income Summary account. The net balance in Income Summary, representing the period’s net income or loss, is then transferred to a permanent equity account, typically Retained Earnings for corporations or the owner’s capital account for sole proprietorships.

Constructing the Closing Journal Entry for Revenue

To close revenue accounts, the journal entry reduces each account balance to zero. Since revenue accounts normally carry a credit balance, they are debited to achieve a zero balance. The corresponding credit side of the entry is made to the Income Summary account, reflecting the total revenue for the period. This ensures that the accounting equation remains in balance.

For example, if a business had Sales Revenue of $50,000 and Service Revenue of $10,000 for the period, the closing entry would involve debiting Sales Revenue for $50,000 and debiting Service Revenue for $10,000. The combined total of these debits, which is $60,000, would then be credited to the Income Summary account. This single entry effectively transfers all revenue balances into the Income Summary.

Recording and Verifying the Revenue Closing Entry

After constructing the closing journal entry for revenue, post this entry to the general ledger. Posting is the process of transferring the debits and credits from the journal entry to their respective individual accounts in the general ledger. Each revenue account listed in the journal entry will show a debit that offsets its existing credit balance, resulting in a zero balance.

Once posted, it is important to verify that all revenue accounts now have a zero balance. This can be confirmed by reviewing the general ledger accounts directly or by preparing a post-closing trial balance. The Income Summary account will now show a credit balance equal to the total revenue for the period.