Closing the books Temporary and permanent accounts Permanent accounts are the balance sheet accounts The balance in these accounts carries over from one accounting period to the next For example if a company ends Year 1 with 500 in Cash the company begins Year 2 with the same 500 Cash balance Permanent accounts are also known as real accounts Temporary accounts are accounts that affect Retained Earnings Revenues expenses and dividends are all temporary accounts The balances of these accounts are not carried forward to the next accounting period At the end of the fiscal year the balances of these accounts must be zeroed out that is set to zero Temporary accounts are also known as nominal accounts Purpose of Closing entries Closing entries accomplish two objectives Zero out the balances of the temporary accounts before the new accounting period begins Transfer the balances of the temporary accounts into Retained earnings This updates the balance in RE and changes it from Beginning RE to Ending RE Closing process Closing the books uses the following four step process 1 Zero out the balance in every revenue account debit each and transfer total revenue into Income Summary credit Income Summary 2 Zero out the balance in every expense account credit each and transfer total expense into Income Summary debit Income Summary 3 After Steps 1 and 2 are completed the balance in the Income Summary account should be equal to net income Now zero out the Income Summary account into Retained Earnings 4 Zero out the balance in the dividends account into Retained Earnings After closing entries are posted Once the closing entries have been recorded in the journal and posted to the ledger 1 The balance in Retained earnings should be equal to the amount of ending Retained earnings shown on the Balance Sheet 2 All temporary accounts revenues expenses and dividends should have a zero balance