Revenue accounts represent additions to equity during the month, and expense accounts represent decreases to equity. The transactions recorded in these accounts could have been made directly to equity. They are collected in separate accounts because information about individual revenue and expense items is of great interest to management. These accounts are temporary subdivisions of equity.
At the end of the year, all revenue and expense accounts are "closed" to equity, and they start the next period with a balance of zero. For example, assume that sales revenue for the year was $90,000. The Sales Revenue account has a credit balance. You close it by making an entry to the opposite side of the account.
|
Dr. Sales revenue |
90,000 |
|
|
Cr. Profit/Loss |
90,000 |
The debit to Sales Revenue of $90,000 equals the credit balance of $90,000, so the balance in the account becomes zero.
Assuming that the Salaries Expense account was $70,000, you close it with the following entry:
|
Dr. Profit/Loss |
70,000 |
|
|
Cr. Salary expense |
70,000 |
Profit/Loss is a temporary account. After closing the revenue and expense accounts for the year, the Profit/Loss account is closed to Retained Earnings. If the profit for the year is $20,000, the entry is as follows:
|
Dr. Profit/Loss |
20,000 |
|
|
Cr. Retained earnings |
20,000 |