Question

what is on closing entries

Answer 1

Closing entries are the journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, effectively resetting the temporary accounts for the next period. Temporary accounts include revenue, expense, and dividend accounts, which report activity for a specific period.

Here’s a simple overview of the closing entries process:

1. **Close Revenue Accounts**: Transfer the balances of all revenue accounts to the Income Summary account.
- **Example Journal Entry**:
```
Debit: Revenue Account
Credit: Income Summary
```

2. **Close Expense Accounts**: Transfer the balances of all expense accounts to the Income Summary account.
- **Example Journal Entry**:
```
Debit: Income Summary
Credit: Expense Account
```

3. **Close the Income Summary Account**: The balance in the Income Summary account reflects the net income or loss for the period. This balance is then transferred to the Retained Earnings account.
- **Example Journal Entry** for net income:
```
Debit: Income Summary
Credit: Retained Earnings
```
- For a net loss, the entry would be reversed:
```
Debit: Retained Earnings
Credit: Income Summary
```

4. **Close Dividend Accounts**: If dividends were declared, the balance in the Dividends account is transferred to Retained Earnings.
- **Example Journal Entry**:
```
Debit: Retained Earnings
Credit: Dividends
```

After these steps, all temporary accounts should have a zero balance, and the permanent accounts will reflect the accumulated income or loss from the previous period. This process allows businesses to start fresh for the next accounting period.