As mentioned in the accounting for inventories chapter, businesses close the accounts for all its incomes and expenses by transferring their balances to incomes statement at the end of each accounting period. The reason is that these revenue items are related to current year and not to the next year so they must be closed (transferred) to the income statement to which they are related.
Preparation of Closing of Incomes and Expenses Account:
Preparation of Income Statement by Closing of Incomes and Expenses Accounts:
Now assuming that business earned a gross profit of $13300 for March 2007 then his income statement may be prepared as:
Income Statement (Account Style or Horizontal Style):
The process of closing incomes and expenses accounts to income statement may also be explained with the help of following figure.
Income Statement (Vertical Style):
Incomes (revenues) are credited to income statement and expenses are debited. Though vertical style income statement does not appear as ledger account but nevertheless double entry rule still applies.