At the end of the fiscal year, after preparing the financial statements, some accounts are closed and their balances canceled, some accounts are carried over to the next fiscal period. The accounts can be classified for the purpose of closing them into real (permanent) accounts and nominal (temporary) accounts.
The real accounts represent the accounts that are not closed and their balances carried over to the next fiscal period. They include all the accounts in the statement of financial position, which are the assets, liabilities, and capital accounts.
The nominal accounts are the accounts whose balances are closed at the end of the fiscal period, so that their balance becomes zero. They include the revenue account and the expense account in the income statement. These accounts are closed in a special account called the income summary so that the expenses that have debit balance are closed by making them credit, the revenues account that have credit are closed by making it debit, as follows:
| Credit | Debit | Description |
|---|---|---|
| xxx | income summary A/C | |
| xxx | To The administrative and general expenses A/C | |
| xxx | To The selling and marketing expenses A/C | |
| xxx | To The other expenses and losses A/C | |
| Closing the expenses and other losses account |
| Credit | Debit | Description |
|---|---|---|
| xxx | The revenue A/C | |
| xxx | The other revenue and profits A/C | |
| xxx | To income summary A/C | |
| Closing the revenue and other profits account |
After closing the expense and revenue account in the income summary account, the balance of income summary account will appear debit if the expenses are greater than the revenue and this means that the company has made a loss at the end of the period. The balance appears credit if the revenue is greater than the expenses and this means that the company has made a profit; the income summary account is then closed in one of the owner's equity accounts (the capital or the owner current account or in the retained profits account) as follows:
| Credit | Debit | Description |
|---|---|---|
| xxx | income summary A/C | |
| xxx | To owner current account or capital or retained profits account | |
| Closing the income summary A/C |
| Credit | Debit | Description |
|---|---|---|
| xxx | owner current account or capital or retained profits account | |
| xxx | To income summary A/C | |
| Closing the income summary A/C |
The Owner's Withdrawals account is considered a temporary account which is closed in the capital account or in the owner current account by recording it in the credit side, but closing the Owner's Withdrawals account in the capital account will lead to changing the balance of the capital account from one fiscal period to another, and its balance will differ from the recorded in the company's Memorandum of Association and this contravenes the laws applicable in some countries, so it is preferable that it be closed in the owner current account.
| Credit | Debit | Description |
|---|---|---|
| xxx | owner current A/C | |
| xxx | To the Owner's Withdrawals A/C | |
| Closing the Owner's Withdrawals account in the owner current account |
After closing the temporary nominal accounts, a trial balance will be made after closing and preparing the balance sheet, which will contain all real permanent accounts that will be carried over to the next fiscal period. Hence, we have finished explaining the accounting cycle.