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Asset and liability accounts are closed to the Income Summary account.

Asset and liability accounts are closed to the Income Summary account.

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In accounting, we often refer to the process of closing as closing the books. Only revenue, expense, and dividend accounts are closed—not asset, liability, Common Stock, or Retained Earnings accounts. The four basic steps in the closing process are:

  • Closing the revenue accounts—transferring the credit balances in the revenue accounts to a clearing account called Income Summary.
  • Closing the expense accounts—transferring the debit balances in the expense accounts to a clearing account called Income Summary.
  • Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account.
  • Closing the Dividends account—transferring the debit balance of the Dividends account to the Retained Earnings account.
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