Question

What are the steps in recording closing entries?

Short answer

There are four steps in recording closing entries.

Step-by-step solution

Definition of closing entries

Closing entries are the entries made at the end of every accounting period.

Steps in recording closing entry

First step: Close Credit Balances in Revenue Accounts to Income Summary

In the first step of the closing entry, all the revenues are transferred to the income summary.

Second step: Close Debit Balances in Expense Accounts to Income Summary

In the second step of the closing entry, the debit of the income summary account is transferred to expenses.

Third step: Close Income Summary to Retained Earnings

In the third step net income of the income summary account is transferred to retained earnings account. After this, the amount of net income is used in the retained earnings statement.

Fourth step:Close Dividends Account to Retained Earnings

At the last stage of the closing, the amount of the dividends is paid out from the retained earnings hence, the dividend account is closed against retained earnings account.