Post to Closing Entries

Meaning of Closing Entries

When an accounting period comes to end, there are various steps to clean the account and prepare for the next accounting period, these process is known as accounting cycle. After preparing the financial statement, one of the steps comes which is known as closing entries.

Closing entries is prepared to make the balances of temporary accounts zero and transferring all temporary accounts into permanent accounts.

Closing Entries

Features of Closing Entries

There are some features of closing entries listed as bellows:

  • It is one step of accounting cycle

  • It uses nominal accounts to make balance zero

  • It leaves temporal account with a zero balance

  • It reflects in owner's equity account 

Nature of Account for Closing Entries 

  1. Temporary accounts: It is also known as nominal account or income statement accounts that includes revenues, expenses, dividends, (or withdrawals) accounts. These accounts balance do not roll over the next period after closing. The closing process accounts balances to zero so they are ready to receive data for the next accounting period. 

  2. Permanent account: It means balance sheet accounts including assets, liabilities, and most equity accounts. These accounts balances roll over the net period. So the ending balance of this period will be the beginning balance for next period.

Steps for Closing Entries  

Basically there are four step to prepare the closing entries:

  1. Closing the revenues: It is transferring the credit balances in the Revenue Account to a clearing account called Income summary.

    Revenue A/c..................Dr.                  100,000

    To Income Summary A/c                            100,000

  2. Closing the expenses: It is transferring the debit balances in the Expenses Account to a clearing account called Income summary.

    Income Summary A/c....Dr.                   40,000

    To Expenses A/c                                          40,000

  3. Closing the income summary: It is transferring the balance of Income Summary to Retained Earning.

    Income Summary A/c ....Dr.                  60,000

    To Retained Earnings A/c                            60,000

  4. Closing the dividend: It is transferring the debit balances in the Dividend account to Retained Earnings

    Retained Earnings A/c....Dr.                    5,000

    To Dividend A/c                                         5,000

Note: After successfully posting the closing entry (kind of journal entry), post closing trial balance is sometime necessary to prepare it.

Conclusion

Closing entries is prepared to make the balances of temporary accounts zero and transferring all temporary accounts into permanent accounts. Temporary account is also known as nominal account while permanent account is also known as balance sheet account.

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Comments

  1. AnonymousSeptember 21, 2019 at 1:17 PM

    Thanks for sharing this type of useful information.
    I am grateful to this blog for helping me.
    Top CA Firms in Delhi

    ReplyDelete

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