Hello, in this lecture, we’re going to talk about the closing process step one of the step four process. Last time, we talked about the objectives of the closing process, which in essence was to close out the temporary accounts, all the accounts from the draws, and the revenue and expenses on down to zero. Putting that balance into the capital account, we talked about how we were going to do that, we’re going to do a four step process, including closeout, the income to the income summary, and then close out the expenses to the income summary. And then we’re going to close out the entire income summary to the capital account. And finally closeout draws to the capital account. We’re going to start off with step one of those four step processes. In order to do this. We are adding this new account you’ve probably been wondering, income summary account, what is that? Where did it come from? Why is it there? The income summary can be called a clearing account, meaning it’s going to start at zero and it’s going to end at zero right when we’re done with this four step process which we’re going to do basically at the same point. Time.
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Why then do we have it if it’s just going to start at zero and then end at zero, its purpose is going to be to allow us to close out the entire income statement meaning the revenue and expenses to the income summary. The result then will be that the income summary will have net income in it, which is revenue minus expenses, then we can check to see that the revenue and expense accounts are totally closed out that it’s zero, that the income summary will have net income in it, then we can allocate the income summary to the capital account. This can be a helpful process, especially when we go to like partnerships or some more complex equity sections, because then we can know that we’re allocating the proper amount to the partners. In the case of a sole proprietor, then we’re allocating to the sole proprietor of the sole capital account in this format. Remember, our goal is to have all these accounts be zero starting with revenue, there’s only one revenue account in this case, and most of the time, there’s only gonna be a few revenue accounts because we only do a few things as opposed to expenses where we have a lot of different things that we spend the money on. We concentrate specialize in one or two things, usually from a revenue side. Therefore, we just need to make that revenue account zero journal journal entry wise, in order to do that we see of credit balance represented by the brackets, we need to do the opposite thing to it then to make it go down, which is going to be a debit for everything in there for 330 to 250. If we post that, then we’ll post the debit that will take it to zero. That’s the goal, we want it to be zero, then we need to credit something, what are we going to credit. Ultimately, we wanted in the capital account, that’s what we’re ultimately aiming for. But we’re first going to put it into that income summary. That’s what we’re going to do first to put it into that clearing account. And there we have it in the clearing account, and the clearing account goes up in the credit direction to the 330 to 250. In essence, all we’ve done then is move the revenue here up to the income summary account. That’s the first step of our four step process. This is where we’re at at this point in time. This is where we need to be. Remember, we’re going to keep moving on to the next steps next time so we have now closed out the income. Next time we’re gonna close out the expenses to the income summary. Then we’re going to take the income summary which will then have net income in it, close it out to the capital account, which is where we ultimately want that, then we’re going to close out draws to the capital account.
