Accounting Process

Accounting Process

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Accounting Process

Closing Process-An Overview

Closing entries are those entries which are made at year end or at the end of accounting period for the purpose of bringing temporary accounts balance to zero so that we may begin the next accounting period with zero balance. Or we can define it more precisely as those journal entries that are made to transfer temporary accounts to permanent account at the end of each accounting period. Temporary accounts or nominal accounts whose balance is brought down to zero for the beginning of new accounting period includes revenue accounts, expense accounts, and drawing accounts. Accounts that are not closed at year end include owner's capital account, asset account and liabilities account. These accounts are not temporary accounts. They are referred to as permanent accounts or real accounts and whatever their ending or year-end balance is, it is always taken as the beginning balance for the beginning of next accounting period. Income summary account is created and used only during the closing period. It includes any credit balances in revenue and expense account on its debit side. It is not used in preparing financial statements.

Outline why certain accounts are closed and why this is necessary - basing your discussion on any relevant accounting relevant definitions, concepts and assumptions from the accounting framework. This should be the biggest and most important section of the presentation;

The main purpose of making closing entries, as mentioned earlier, is to bring temporary accounts balance to zero so that the company may prepare for the beginning of new accounting period. Hence, it is always necessary to close these accounts. Other main purpose is to show an increase from revenue account or decrease from dividend and expense account in retained earning accounts from the prior year.

Accountants make closing entries to update the balance of the owner capital account by closing expense, revenue and drawing accounts at the end of each accounting period. Beginning with zero entries and balance at the start of each new fiscal year, makes it easier to track the changes in expense, revenue and drawing accounts from previous year to this year.

Four closing entries are made to close all the temporary accounts to the capital account at the year-end. There are four general steps to complete the closing process in accounting:

See if the revenue accounts have credit balance in trial balance. We need to bring the balance down to zero. For that purpose we should debit the revenue account to income summary account.

After looking into revenue accounts we should next look into the expense account in trial and balance. We should bring the balance of this temporary account down to zero. For that purpose we should also debit the expense account to income summary account.

If the income summary account has a net credit balance, then it is the company's net income. After closing the revenue and expense account we should close income summary account to retained earnings account. This can be done by debiting income summary ...