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hello everyone I'm Larry your instructor for Financial Accounting and in this brief video I'd like to walk you through the process for making closing entries and I'm going to show you two methods they both work very similarly and end up with the same result but one is slightly different than the other we're going to show you both of these and my hope is that this will help you with our project our exercise in this course so in order to do closing we first need to understand that we are only going to close what are called the temporary accounts there are three types of accounts that we're going to be concerned with that are temporary accounts revenues expenses dividends in our project that we're working in this class we have one revenue account it is called service revenue but it's possible that a company may have multiple revenue accounts to close expenses there will probably be many different expense accounts to close utilities expense salaries expense all of these different expense accounts need to be closed they are temporary accounts and finally the dividends account revenues expenses dividends will all be closed these are the temporary accounts I want to make out make one final point about the revenue accounts and that is there is one account that has the term revenue in it that is not a revenue account do you recall what that is unearned revenues when you see unearned revenues that is not a revenue account that is a liability account that is on the balance sheet so keep that in mind we are closing revenue accounts but not unearned revenues that is a different type of account revenues expenses and dividends are what we are going to close any other accounts in your exercise or what are called permanent accounts cash accounts receivable land buildings accounts payable notes payable common stock unearned revenues all of those accounts are permanent accounts that appear on the balance sheet they are not to be closed we are only going to close revenues expenses and dividends these are the temporary accounts there are two approaches to doing closing the first we'll show the first approach closes the revenue expense and dividend counts directly to the retained earnings account the second approach has just one extra step to it in the second approach you're going to see the revenues and expenses the revenues and expenses will be closed to an account called income summary in the result of the resulting balance and income summary will in turn be closed to retained earnings dividends just as before will be closed directly to retained earnings so you'll see in the second approach there's an extra step for closing revenues and expenses to income summary and then the income summary balance to retained earnings but dividends the same let's take a look at these examples in this example we're going to directly close to do you see what that re stands for retained earnings we're going to close directly to retained earnings and we have several accounts your service revenue rent expense salary expense utility expense and also dividends and we've got the numbers included over a period it looks like the service revenue was credited three times over this period for eight thousand five thousand and seven thousand dollars respectively so what we've done is run the balance and when we add that up the resulting balance in our service revenue account is a credit balance for twenty thousand dollars it's very easy for us to see the balance and rent expense salary expense utility expense and also dividends it looks like they were only posted to once now let's do our closing entry all of our closing entries for revenues expenses and dividends this is the example where we are going to close everything directly to retained earnings so we'll draw our t account here for retained earnings and let's do the closing right on the t-accounts then I'll show you what they would look like in the journal so in this tea account we have a twenty thousand dollar credit balance in service revenue how do we close that we want to blow this account away to zero if there's a twenty thousand dollar credit balance we debit this account for twenty thousand dollars it is now white to zero if we've debited an account for twenty thousand dollars what must mean we simultaneously do credit another account for twenty thousand that's retained earnings we will credit it for twenty thousand we've debited the service revenue for its balance credited that amount to retained earnings and now service revenue has a zero balance in it similarly with the expense accounts we're going to close them to retained earnings but notice they all have debit balances how do we close each of those we make a matching credit balance in each ran expense as a debit balance of fifteen hundred credit it for fifteen hundred it's blown away to 0 it is wiped to a zero balance there's a credit to RIT to rent expense so we debit that amount to retained earnings salary expense has seven thousand dollars in a debit balance we credit for seven thousand the salary expense to blow it away to zero and we will debit retained earnings for that amount utility expense five hundred dollar debit balance let's close it credit that account for five hundred to close it debit that amount to retained earnings and there's one more account that we need to close dividends has a debit balance of two thousand dollars credit that for two thousand it's white to zero and we will debit two thousand on retained earnings now what can we do let's run the balance on our retained earnings on the credit side we have a twenty thousand twenty thousand dollar entry on the debit side if we add these numbers up it looks like they add to eleven thousand dollars so what do we have to do to get the final balance met these two sides 20,000 on the right 11,000 on the left the result is a balance of $9,000 on the credit side and that is the balance in our retained earnings account what kind of an account is retained earnings is that temporary or permanent it's a permanent account that you'll see on the balance sheet under equity that's it we've just completed the closing process closing revenues expenses and dividends directly to the retained earnings account this is nt account format what would it look like in entries in a journal same thing you're just looking at this in journal format in free closing entry I just made a moment ago you see right here in the journal we debited the service revenue for 20,000 credited retained earnings in this second grouping here we credited all of the expense accounts for the amounts that were in the balances and we debited the total we did this in one shot we took the total and debited all that to retained earnings and then we closed the dividends account to retained earnings you'll be doing this on your assignment this here the entries in the journal are no different from what we just did in the t-accounts here is the closing process let's do the one other example using the second approach in the first approach we close directly to retained earnings this second approach revenues and expenses will first be closed to an interim account called income summary its balance will then be closed to retained earnings dividends just as before will be closed directly to retained earnings let's do it same numbers as before in our accounts for this example but in this case we're going to have two accounts with the closing here I'll draw our first t account this will be income summary next to it this will be the retained earnings account let's do the closing how do we close service revenue $20,000 credit balance we debit that for twenty thousand to wipe it to zero where do we credit this to income summary that's our halfway point what about the three expense accounts we're going to credit each of them for their balance to wipe them to zero and we will debit all of that to income summary ran expense has 1500 on the left side so we will credit them on the right side and at the same time debit the income summary salary expense close that seven thousand dollars to wipe it to zero debit it to income summary utilities expense has a debit account of balance of five hundred let's credit for five hundred to wipe that to zero that balance and we will debit the five hundred to income summary now we can figure out in the income summary its balance we have twenty thousand on the right side on the left side it looks like we have nine thousand dollars totaled so we net the two twenty thousand on the right nine thousand on the left we have an eleven thousand dollar balance on the credit side on the income summary what do we do that what we do with this close it eleven thousand on the left side we will debit that 11 thousand on the right side to close it to 0 and if we debit it there we credit that over to retained earnings there's one other thing we need to close remember the dividends account that will be credited and closed directly over to retained earnings let's now take the balance and retained earnings eleven thousand on the right two thousand on the left a nine thousand dollar balance now exists on the credit side and retained earnings and that's the same result as we did before if you want to see these entries in the form of closing entries in the journal here's all the same entries closing service revenue to income summary the three expenses close to income summary then the difference between those two and income summer the $11,000 is debited to income summary credited to retained earnings dividends is then closed directly to retained earnings I realize this went very quickly folks but you're able to stop start and go back through this this is also shown exactly in the same way in your financial accounting book and also in our online lecture materials good luck and I hope that helps with your closing entries