How Closing Journals for Income Statement Accounts Are Created

Use the Create Income Statement Closing Journals process to meet audit requirements. The process creates a journal entry that shows the selected revenue and expense account balances moved to the retained earnings account.

The process:

Generates journals to close out the year-to-date (YTD) actual balances of all or the selected income and expense accounts.
Creates an audit trail showing how the amount for the closing (retained earnings) account is calculated.
Can be run in any open period.
Closes the YTD balances of the selected income statement accounts.
Optionally uses an income offset account, which results in the individual income statement account balances remaining in their accounts. The process books the inverse balance of the closing (retained earnings) account to the offset account.

Tip: If you run the process for the first period of a fiscal year, it closes only that period's balance. The best practice is to run the process in the last period of the fiscal year to create an auditable journal entry.

Before running the process:

Set up the last day of your fiscal year as an adjusting period.
Set up the first day of your next fiscal year as an adjusting period.
Ensure that the adjusting period is open.
Complete and post all adjustments related to the period or year you're closing.
Print your general ledger trial balance and other end-of-month or end-of-year reports.

After running the Create Income Statement Closing Journal process, you can open the next fiscal year by running the Open Period process. If you run the process:

At the end of the fiscal year, don't reverse the journal. The act of opening the fiscal year would have achieved the same effect as the journal entry by moving the income statement account balances to the retained earnings account.
In the middle of the fiscal year, reverse the journal after you run the reports that show the closed out income statement balances. The journal reversal reinstates your year-to-date income statement balances for the next period.

Note: The process closes only actual balances. You can't close budget or encumbrance balances.

Caution: If you use secondary ledgers or reporting currencies, you must define a journal conversion rule to prevent replication of your year-end closing journals from your primary ledger. Replication can cause unbalanced journal entries if different currencies and conversion rates are used in the ledgers. Instead, run your closing journal processes directly in your reporting or secondary ledgers to ensure that the balances are reduced to zero.