Hello in this lecture, we’re going to talk about the closing process step three of the four step closing process, which will include the close of the income summary to the capital account. Remember that our objective is to close out all the temporary accounts, which are all the accounts below capital, including drawers, and the income statement accounts of revenue and expenses. So we want the adjusted trial balance to be converted to the post, post closing trial balance, which means that everything from capital on down will be zero. The way we do that is the four steps and that includes step one we did in a prior video closeout income to the income summary. Step two was to close out expenses to the income summary. Step three is what we’re going to do now close out the income summary now having net income in it to the capital account, then we’re finally going to close out the draws to the capital account.
This is a summary of what we did in the prior video. Step one, close out the income to the income summary. So Here we have an income that was now zero, we basically just move that up to our clearing account being the income summary account. Then step two, we close out all of the expenses to the income summary account. Now, we have everything zero on the income statement, all revenue and expense accounts are zero. And what’s in the income summary? net income, it’s important to recognize that before we close out the income summary to the equity section, and after we have closed out the income and expenses to the income summary, the income summary now has net income in it. Why is that important? Many test questions will actually ask the question in terms of what is an income summary when asked him how the allocation should be allocated to things like partnerships, and therefore we need to know that the income summary has net income in it.
So we know how to allocate that out in a lot of test questions. It’s also an important process because what we’re saying is that it’s a check figure. Everything on the revenue section is is zero now, income and expenses are now zero net income is now in the income summary, we can now say we look good, we are verified, we can now take that net net income summary, which is also net income that should have been on the income statement that we reported as of 1231. We’re going to take that number and allocate it to the appropriate equity section the appropriate capital accounts. In the case of a sole proprietor like this one, we just have the one capital account, if we had a partnership, we would have to allocate it to multiple capital accounts in accordance with their profit sharing the journal entry we now need in Step three, we’ll close out or make zero the income summary account and put that balance into the owners capital accounts.
So we can look at the income summary and say what’s in it, we see net incomes and it’s got a credit because it’s net income credits are winning meaning credits minus the debits revenue minus expenses have that credit balance, we need to make it go to zero. Now we’re going to clear out the clearing account. Therefore we’re going to do the opposite thing to it, which in this case will be a debit. So we’re going to debit for whatever’s in there. 88 980 In this case, We post that out as we go, we can see that it will then go to zero. And then we’re going to have to credit something. And of course, we’re finally going to credit what we wanted to credit this entire time, which is to put the entire income statement into one number into the capital account.
So we’re going to credit the capital account. If we post that out what will happen? Well, we have a credit balance in the capital account of 658 820. We’re crediting it again at eight nine at a credit and a credit will be the same thing making the credit go up in the credit direction. Does that make sense for that to happen? It does, because what we’re saying is that this is the credit balance that was owed to the owner or the assets minus the liabilities as of the beginning of the time period, or at least before net income was allocated to it. Now we’re saying that net income was earned by the business. This is the owner of the business represented by the equity section, and therefore the equity section needs to go up by the amount that was generated revenue minus the expenses in order to help Jim Right that that’s the allocation of the net income to the owners capital account. That is step three. And you can see that we had a lot of zeros down here, what was our objective? Again, we want to get to this post closing trial balance where everything from the owners capital on down is zero, we’re really close right now, meaning the entire income statement is zero revenue and expenses. And we close out that income summary. So that is now zero, that was part of the goal. And we just now need to close out to this draws, draws being the only thing that’s really not on the income statement that is a temporary account, it’s going to be on the equity statement, statement of owner’s equity. And that’s what we need to close out next time. What we’ve done so far is closeout income to the income summary, and then we close out the expenses to the income summary. Then we closed out this time, net income or the income summary which had net income in it to the capital account. Now next time we’re just going to finish this off by closing out drawers to the capital account.