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July 18, 2007

How, when and why do you prepare closing entries?

We prepare closing entries for the temporary accounts such as the revenue and expense accounts (see earlier Q&A). The closing entries are recorded after the financial statements for the accounting year are prepared. The reason for the closing entries is to ensure that each revenue and expense account will begin the next accounting year with a zero balance.

The closing entries require that a debit be entered into each of the temporary accounts having a credit balance. The debit entered must be exactly the amount of the credit balance prior to the closing entry. The objective is to get the account balance to be zero.

The closing entries also require that a credit be entered into each of the temporary accounts having a debit balance. The credit amount that is entered must be exactly the amount of the debit balance prior to the closing entry.

The net amount of the debits and credits in the closing entries for the income statement accounts is the amount of the income or loss. This net amount will end up in the balance sheet account Retained Earnings (part of stockholders’ equity of a corporation) or in the owner’s capital account (part of owner’s equity in a sole proprietorship). In manual systems, there is often an Income Summary account before the entry into the equity account.

With some accounting software the closing entries are prepared and posted by selecting “closing entries.” With other accounting software, formal closing entries are not used. Instead, the user specifies the beginning and ending dates of the information needed.

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Comments

9 Responses to “How, when and why do you prepare closing entries?”

  1. Rizwan Amjad on March 27th, 2008 3:11 pm

    I m really thankful to you.because i m fully worried about our assignment.but this website are fully support and help me.I thank for you.

  2. muneer on April 6th, 2008 9:53 am

    differentiations between
    1.Cost and expense
    (4)Investor and creditor.
    (5)Manufacturing and merchandising organizations.
    (6)Receipts and payments accounts and Income and expenditure accounts.
    (7)Revenue and income.
    (8)Sales discount and sales allowance.
    (9)Trial balance and Balance sheet.
    (10)Wages and salaries

  3. Peter on April 12th, 2008 12:22 am

    Why do compaies prepare trial balance

    Peter

  4. john on May 3rd, 2008 12:29 pm

    do we close the cost of goods sold to income summary?

  5. shady on January 9th, 2009 7:03 am

    how to prepare post closing Trial balance ??

  6. Suna on February 6th, 2009 5:52 pm

    what about the accounting of Changes in Foreign Exchange Rates

  7. Ruth on June 11th, 2009 3:59 pm

    I am so thankful for this site. I have had to use this many times. Every time I have used it, I have found the information needed to help me resolve my study problem.

  8. DLW on July 16th, 2009 3:04 pm

    When selling a business, a Corp. and the owners want to keep the vehicles, how would you take care of that on their books.
    If they have NOL carryovers, do those go with the new Company?

  9. Razzy on August 10th, 2009 3:30 pm

    I know understand the entry recordings of closing entries. It really amazing to be well equip with the explanation.

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