What are Closing Entries?Closing entries are journal entries used to empty temporary accounts at the end of a reporting period and transfer their balances into permanent accounts. Temporary accounts are used to accumulate income statement activity during an accounting period. The use of closing entries resets the temporary accounts to begin accumulating new transactions in the next period. Otherwise, the balances in these accounts would be incorrectly included in the totals for the following reporting period. Show The basic sequence of closing entries is as follows:
The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders' equity section of the balance sheet. Since the income summary account is only a transitional account, it is also acceptable to close directly to the retained earnings account and bypass the income summary account entirely. Example of Closing EntriesABC International is closing its books for the most recent accounting period. ABC had $50,000 of revenues and $45,000 of expenses during the period. For simplicity, we will assume that all of the expenses were recorded in a single account; in a normal environment, there might be dozens of expense accounts to clear out. The sequence of entries is: 1. Empty the revenue account by debiting it for $50,000, and transfer the balance to the income summary account with a credit. The entry is:
All of these entries have emptied the revenue, expense, and income summary accounts, and shifted the net profit for the period to the retained earnings account. Closing ProcedureHaving just described the basic closing entries, we must also point out that a practicing accountant rarely uses any of them, since these steps are handled automatically by any accounting software that a company uses. Instead, the basic closing step is to access an option in the software to close the accounting period. Doing so automatically populates the retained earnings account for you, and prevents any further transactions from being recorded in the system for the period that has been closed. Instead of the preceding entries, the practicing accountant is more concerned with completing a series of closing activities to ensure that all material transactions have been included in the accounting period. These closing activities include the following:
The number of closing activities may be quite substantially longer than the list shown here, depending upon the complexity of a company's operations and the number of subsidiaries whose results must be consolidated. In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. In addition, if the company uses several sets of books for its subsidiaries, the results of each subsidiary must first be transferred to the books of the parent company and all intercompany transactions eliminated. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company. Finally, if the parent company is engaged in any cash sweeping activities, it may be necessary to record loans from the contributing subsidiaries to the parent company for the amount of cash swept into the investment account of the parent company, with the parent paying interest to the subsidiaries for any loaned cash. Which account will be debited in the closing entry?Accounts that are Debited in the Closing Entries
Revenue accounts. Gain accounts. Contra expense accounts.
Which of the following accounts are closed at the end of the year?Nominal accounts are accounts that are closed at the end of the accounting period. These accounts are typically the income and expense accounts that are presented in the income statement.
Which type of account is always debited during the closing process at the end of accounting period?Answer and Explanation: Revenue accounts are always debited during the closing process.
|