Closing Process
DRTFGGG Closing process at the end of the accounting period includes closing of all temporary accounts by making the following entries.
- Close all revenues accounts to Income Summary.
- Close all expenses accounts to Income Summary.
- Close Income Summary by allocating each partner's share of net income or loss to the individual capital account.
- Close each partner's drawing account to the individual capital accounts.
To illustrate, assume that there are two equal partners, Partner A and Partner B. The partnership agreement specifies that after providing for salary and interest allowances the remaining income is divided equally. Assume also that net income of the partnership was $100,000 and the two partners received allowances as indicated in the table below.
The allocation of net income would be reported on the income statement as shown.
Net Income $100,000
| Partner A | Partner B | Total | |
|---|---|---|---|
| Allocation of net income | 60,000 | 40,000 | 100,000 |
| Salary allowances | 30,000 | 20,000 | 50,000 |
| Interest allowances | 20,000 | 10,000 | 30,000 |
| Remaining income | 10,000 | 10,000 | 20,000 |
Net Income of the partnership is calculated by subtracting total expenses from total revenues. After that salary and interest allowances are subtracted from Net Income, and the result is Remaining Income, which is divided equally in accordance with the partnership agreement.
At the end of the accounting period each partner's allocated share is closed to his capital account. Based on the net income allocation shown above, the closing entry is:
| Debit | Credit | |
|---|---|---|
| Income Summary | $100,000 | |
| Partner A, Capital | $60,000 | |
| Partner B, Capital | $40,000 |
Read more about this topic: Partnership Accounting
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