Closing Journal – Closing journal is one part of the financial statements that will be prepared at the end of the accounting period. This portion of the financial statements is used to close nominal accounts to prepare a period-end balance sheet.
There are several important things that need to be understood and paid attention to when preparing closing journals. This includes how to compile it, along with what components must be recorded in it. Check out the full review of closing journals, starting from understanding, how to make them, to the following case examples.
1. Purpose and Function of Making Closing Journals
Closing entries journal or closing journal is made at the end of the accounting period after the preparation of the company’s financial statements. This journal needs to be made because there are accounts whose balances must still be adjusted until the amount is zero, so as not to affect the next period’s transactions.
The preparation of this closing journal is adjusted to the form of the company, both CV, firm, and PT. The preparation of closing journals that are made flexible aims to make it easier for interested parties to study them.
The main purpose of making closing entries is to close all accounts that are on provisional estimates, so that their balances are zero. This is done so that the balance in the capital account shows the actual conditions at the end of the period.
Closing the account that is in the temporary balance will make the company’s capital balance have the same amount as the balance at the end of the period. The capital balance will be used as a benchmark for opening the next period’s books of accounts.
The function of the next closing journal is to separate income and expense accounts. This is so that the two accounts do not mix with the balances in the next accounting period. After the separation of the two accounts, the company can start preparing for the next period.
Closing entries are also useful for facilitating the auditing process because each transaction between periods has been separated. The company’s auditors will easily make transactions that are in several accounting periods at once.
The last use of the closing journal is to help present the real financial statements of the company after closing the books in one period. The financial statements presented at the end of the period only contain the company’s assets, liabilities and equity.
Furthermore, there are several components that will be closed later, namely nominal accounts and capital assistants. This type of account will be closed so that the balance becomes zero, so it has no effect on the company’s financial transactions in the next period.
Learn about the basics of accounting and easy ways to keep journals through the book Introduction to Accounting: Easily Journalize With a Transaction Cycle Approach which is below.
2. How to Make a Closing Journal
The format of this company’s financial closing report is the same as the general journal. Journal entries prepared at the end of this period are used to transfer balances to permanent accounts. The transferred balance comes from the nominal account in the general ledger.
Closing entries are made when the preparation of the company’s annual financial statements has been completed. Each nominal account will ensure that the balance returns to zero so that the company can start the accounting cycle in the next period.
The preparation of this closing journal is actually based on the company’s income statement. The company accountant doesn’t need to be confused anymore about opening other financial reports, because the profit and loss has already explained the nominal figures in detail.
The format of the general journal which is made the same as the general journal also has the main goal of speeding up the work process. In addition, this format is also considered to make it easier for the auditing party to check what accounts are in the closing journal.
The components in the closing journal include income accounts, expenses, profit/loss summaries, and prive. The following is a complete review of all account components that must be prepared in closing entries at the end of the period.
In making financial reports, there are important elements in it, such as a systematic list of account names, balances in the value of money circulating in each activity segment, and calculations using accounting that can be selected according to company needs which are discussed in the Second Edition of Introduction to Accounting .
2.1.1 Revenue Account
The revenue account contains every transaction related to income received by the company in one period. In general, company income is divided into two types, namely due to the company’s operational activities and other income.
Income related to the company’s operational activities, for example, is the company’s income when it succeeds in selling goods or services. This type of income is influenced by the company’s production factors.
Other types of income in the company relate to income outside the main operational activities, for example, such as due to the sale of machinery. All of the income will be posted in a special ledger of the income account
In the process of making financial reports, each income account in the general ledger will be closed and the balance transferred to the profit and loss summary at the end of the journal entry. Closing the income account is quite easy, namely by reversing the position of the balance.
The company’s earnings account pair at the closing journal entry is the profit/loss summary. The revenue account is recorded in the debit position, while the profit and loss summary is recorded in the credit. The following is an example of how to enter closing entries for a revenue account.
| Account name | Debit | Credit |
| Services revenue | IDR 15,000,000 | |
| Income Summary | IDR 15,000,000 |
The income account has a normal balance on the debit side, so that at the time of closing the journal entry, the balance will be transferred to a partner. After the closing entries are made, the balance in the revenue account will be zero.
It should also be noted that in a trading company, there is a slight difference with the service sector regarding the revenue account. In a service company, usually the company’s income will be recorded in operating income, while in a trading business it will be posted in the sales account
2.2.2 Expense Account
Expenses are a form of company expenditure during one period to carry out operational activities in order to gain profit. Just like income, expenses are divided into two types, namely operating expenses and other expenses.
The operating expense account has a direct relationship with the company’s operational activities. Examples of these operating expenses include depreciation of equipment, payment of employee salaries, and company electricity costs.
The next type of expenditure, namely other expenses, in this case, is none other than expenses that are not directly related to the company’s operational activities. One of the forms of other expenses charged to this company is interest expense from bank loans.
How to close this expense is done by moving the related accounts into the journal. This expense account is placed on the credit side of the closing journal, because the original balance was debited, so it must be reversed.
The counterpart to the expense account when it is recorded in the closing journal is the profit/loss summary. The function of the profit/loss summary account is to find out the total amount of the company’s expenses to calculate the company’s profit. The following is an example of entering an expense account closing journal.
In trading companies, types of expenses are divided into operating expenses and general administration. Operating expenses are the company’s direct expenses related to the process of organizing and selling merchandise.
General administrative expense is a form of company expenditure for managerial office activities that act to make sales planning and concepts. These two loads are held in 2 different places, namely the office area and the warehouse center.
| Account name | Debit | Credit |
| Income Summary | IDR 7,500,000 | |
| Equipment Expenses | Rp. 1,000,000 | |
| Machine Depreciation Load | Rp. 2,400,000 | |
| Salary expense | Rp. 3,600,000 | |
| Interest expense | Rp. 500,000 |
2.3.3 Profit/Loss Summary
The next component that must be included in the closing journal is the profit and loss summary account. The method used to close the profit and loss account is slightly different when compared to the expense and income accounts.
The profit and loss summary account is closed after the preparation of the financial statements by transferring the balance to the capital account. There are two types of ways you can do to make closing journals for profit/loss summary accounts. This depends on the condition of the company, whether it is likely to be a profit or a risk.
If the company experiences a profit, where the income is greater than the expenses, then the profit and loss summary account will be recorded in a debit position. The following is an example of closing an income summary account when the company is in profit.
| Account name | Debit | Credit |
| Income Summary | Rp. 17,000,000 | |
| Capital | IDR 17,000,000 |
There is also another possibility that can also occur related to the company’s finances, namely the emergence of losses. When the company suffers a loss, when preparing the account closing journal, the profit/loss summary will be posted on the credit side, with the following example.
| Account name | Debit | Credit |
| Capital | Rp. 10,000,000 | |
| Income Summary | Rp. 10,000,000 |
Each condition of the profit/loss summary account in the closing journal must be posted because it has an effect on capital for the next accounting period. The capital owned by the company will increase or decrease according to its position in the closing journal.
2.4.4 Private Account
The last account that must be closed when compiling the journal at the end of this period is the private account. The definition of prive is personal expenditure by the owner of the company which usually has a minimal amount.
The prive must be posted to the general ledger for further closing in the period end journal. This private company expenditure will affect the capital position, even if only in a small amount.
This prive will later be recorded on the credit side of the closing journal, while the debit section will be filled with capital. The withdrawal of privately owned capital will affect the nominal in the company’s capital balance for the next accounting period.
The thing that must be considered before making closing entries is that the owner should not take the capital excessively. Taking capital that is done too often and excessively must be avoided so that financial stability can be maintained.
In the process of preparing closing entries, the position of the private account is on the credit side, while the debit side will be filled with capital. The following is an example of making a closing journal related to a private account closing report.
| Account name | Debit | Credit |
| Capital | Rp. 1,000,000,- | |
| private | Rp. 1,000,000 |
3. Examples of Case Journal Closing
Learning how to compile closing journals is incomplete without being accompanied by case examples. Making closing entries can be based on the balance sheet and loss report for the year in question to find out what points are in the financial statements.
The form of the income statement and balance sheet can be designed with the simplest possible model to facilitate the reversal process.
In this case, the financial statements of a trading company are somewhat more complex because there is a sales account which acts as income. Apart from that, there are also other accounts related to sales, so caution is required when compiling them.
Expense accounts at trading companies are also divided into 2 types, namely expenses made for the production process and organizing office management. Both types of expenses must be entered in the closing journal. The following is an example of a case for compiling closing journals in a company.
PT Makmur Sentosa
balance sheet
As of 31 December 2020
| Account name | Amount (IDR) | Account name | Amount (IDR) |
| Cash | 28,500,000 | Account payable | 20,650,000 |
| accounts receivable | 15,750,000 | Interest debt | 80,000 |
| Inventory | 2,100,000 | Bank debt | 34,800,000 |
| Equipment | 500,000 | ||
| Building | 75,000,000 | Venture capital, | 71,120,000 |
| Ak Peny. Building | 4,000,000 | ||
| Equipment | 10,000,000 | ||
| Ak. Equipment Depreciation | 1,200,000 | ||
| Amount | 126,650,000 | 126,650,000 |
Profits owned by the company obtained from the income statement will be included in retained net income or additional capital. This is marked by the closing of the profit and loss summary account and the increase in nominal capital on the balance sheet.
In learning about financial accounting, management accounting, and auditing with current developments, Sinaumed’s can read the book Introduction to Behavioral Accounting An Exploration of a Conceptual Model for Beginners .
4. Accounting Book Recommendations
The following is a recommended book on accounting. Books consist of introductory accounting books , cost accounting books, and financial accounting books
Material Related to Closing Journals
5. Conclusion of Closing Journals
Closing entries are an important part of the company’s financial accounting process at the end of the period so that there are no nominal accounts on the initial balance sheet for the next period. The nominal account must be reversed so that the balance position becomes zero because it relates to only one period of operation.
The process of recording closing journals can be done by moving the accounts and balances in the income statement, but with a reversal position. This nominal account will be reversed to become a permanent position on the balance sheet.
There are 4 components that must be included in closing journals, namely income, expenses, profit/loss summary, and prive. Each component is optional because it is based on the company’s personal operational activities.
Furthermore, because this closing journal plays a very important role in the company’s financial books in the current and subsequent periods, the preparation of this journal must be done as well as possible. The details of each aspect listed must also be properly examined.