Closing the accounts

Closing the accounts
See also

Closing the accounts is the process of establishing the final balance of an account and then booking the entries in order to balancing the balance (The Entrepreneur's Dictionary of Business and Financial Terms (2014))

The closing process gives temporary accounts zero balances, so they are ready to collect new information for the subsequent accounting period. In regards with permanent account, their balances are brought forward for every new accounting period.

Permanent accounts contain the results of all transactions from the beginning of the business. Their balances are move forward to each new accounting period. Examples : all accounts reported on the balance sheet

Temporary accounts contain information for one accounting period. Mentioned accounts are closed at the end of every accounting period. Examples: revenue, expense drawing accounts

College Accounting, 19th edition, Chapters 1-9, (2008)

Purposes of closing accounts[edit]

Purposes of closing accounts:

  • Closing accounts clear the balances of all temporary accounts. Mentioned accounts have zero balances at the beginning of the next accounting period.
  • Closing accounts summarize a period’s revenues and expenses in the Income Summary account, thanks to that the net income or loss for the closing period can be transferred as a total to Retained Earnings.

(Financial Accounting 9TH EDITION (2007))

How to close the accounts?[edit]

The steps involved in making closing entries are as follows:

  • Close the credit balances

To close the account which has credit balance, there must be a debiting journal entry made on the account in the amount of its balance.

  • Close the debit balances

To close the account which has debit balance, there must be a crediting journal entry made on the account in the amount of its balance.

If the entries closing have been posted, it could be deduced that:

  • the balance of the Income Summary account represents a net income and
  • a debit balance represents a net loss.

4. Close the Dividends account balance The dividends account presents the amount by which cash dividends reduce profits retained during an accounting period. The debit balance of the Dividend account is closed to the Retained Earnings account.

Not all of the revenue accounts have credit balances and also not all of the expense accounts have debit balances. It means that, when referring to closing accounts instead of revenue accounts there often is uses the term credit balances and instead of expense account the term debit balances.

It is not necessary to use the Income Summary account during the preparing closing entries. Income Summary does simplify the procedure.

(Financial Accounting 9TH EDITION (2007))

After closing the accounts[edit]

Closing entries are post to the general ledger to make the accounts ready for the next accounting period. Not all accounts are closed. Permanent accounts (=balance sheet accounts) like assets, liabilities and capital accounts are not closed, because their balance is moved for the next accounting period. The nominal accounts are closing due to not moving the balance for the next accounting period.

(Fundamentals of Accounting: Basic Accounting Principles Simplified for Accounting Students (2007))

Everything is ready for the opening new accounting period, when all steps has been completed and all closing entries have been posted.

(Financial Accounting 9TH EDITION (2007))

References[edit]

Author: Kinga