Which of the accounts below would be closed by posting a debit to the account?
Question: Which of the accounts below would be closed by posting a debit to the account?
If you are studying accounting, you may have encountered the concept of closing entries. Closing entries are journal entries that transfer the balances of temporary accounts (such as revenues, expenses, gains, and losses) to permanent accounts (such as retained earnings) at the end of an accounting period. This process ensures that the income statement only reports the results of the current period, and that the balance sheet reflects the cumulative earnings of the company.
One way to remember which accounts are closed by posting a debit to the account is to use the acronym REID, which stands for:
- Revenues
- Expenses
- Income summary
- Dividends
These accounts normally have a credit balance, so debiting them will reduce their balance to zero. For example, if the company earned $10,000 in revenue during the period, it will debit revenue for $10,000 and credit income summary for $10,000. This will close the revenue account and transfer its balance to income summary, which is a temporary account that summarizes the results of the period.
Similarly, expenses, gains, and losses are closed by debiting income summary and crediting the respective accounts. For example, if the company incurred $8,000 in expenses during the period, it will debit income summary for $8,000 and credit expenses for $8,000. This will close the expense accounts and transfer their balances to income summary.
The income summary account will then show the net income or net loss of the period, which is equal to revenues minus expenses (plus gains minus losses). The net income or net loss is then closed by debiting income summary and crediting retained earnings. For example, if the company had a net income of $2,000, it will debit income summary for $2,000 and credit retained earnings for $2,000. This will close the income summary account and transfer its balance to retained earnings, which is a permanent account that shows the accumulated earnings of the company.
Finally, dividends are closed by debiting retained earnings and crediting dividends. For example, if the company paid $500 in dividends during the period, it will debit retained earnings for $500 and credit dividends for $500. This will close the dividend account and reduce the balance of retained earnings.
In summary, REID accounts are closed by posting a debit to the account. This is a way to prepare the temporary accounts for the next accounting period and update the permanent accounts with the results of the current period.
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