In accounting, we often refer to the process of closing as closing the books. Only revenue, expense, and dividend accounts are closed—not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are:

Closing the revenue accounts—transferring the credit balances in the revenue accounts to a clearing account called Income Summary.

Closing the expense accounts—transferring the debit balances in the expense accounts to a clearing account called Income Summary.

Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account.

Closing the Dividends account—transferring the debit balance of the Dividends account to the Retained Earnings account.



How to Close an Account into Income Summary Account

When closing the accounts in the income statement, accountants can choose to close them directly and transfer the values to the retained earnings account or transition them to the income summary account before finally transferring them to the retained earnings account. Let us discuss how to do the latter.

The content of the income statement (such as the revenues and expenses) are transferred to the income summary. The values are debited from their respective accounts and credited to the income summary.

The amounts in the account should be checked for errors. Accountants should take note that its balance should equal the net income of the company for the year.

Afterward, the balance in the income summary account is transferred to the retained earnings account if the business is a corporation or to the capital account of the owner for a sole proprietorship. Only then is the account closed.