Chapter 6
The Accounting Cycle: Statements and Closing entries
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The income summary is only used to close the revenue and expense accounts.The owner’s drawings
account is not closed through the income summary account because owner’s withdrawals do not
affect the amount of net income or net loss.The owner’s drawings account is closed directly to the
owner’s capital account.
Using the adjusted trial balance amounts for our existing company (Figure 6.13), the closing entries
are presented as shown in the journal in Figure 6.17 below.
JournAl
Page 3
date
Account Title and explanation
Pr
debit
Credit
2016
Jan 31 Service revenue
400
4,500
income Summary
315
4,500
To close revenue
Jan 31 income Summary
315
1,325
Depreciation expense
510
150
insurance expense
515
100
interest expense
520
25
rent expense
540
800
Telephone expense
550
250
To close expenses
Jan 31 income Summary
315
3,175
Parish, Capital
300
3,175
To close Income Summary
Jan 31 Parish, Capital
300
2,000
Parish, Drawings
310
2,000
To close owner's drawings
________________
Figure 6.17
The first two transactions are nearly the same as shown in the direct method (Figure 6.14), except
that the income summary account is used instead of owner’s capital.
The third transaction is used to close the income summary to the capital account. The value of
$3,175 is the difference between the revenue and expenses accounts. Note that this value is the
same as the net income reported on the income statement in Figure 6.4.
The last transaction is identical to the one shown in the direct method (Figure 6.14).
Figure 6.18 summarizes how the temporary accounts are closed at the end of an accounting period
under each method.
1
2
3
