6. Closing Entries.doc

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University of Toronto St. George
Rotman Commerce
Stojanovic Dragan

Closing Entries Revenue and expense accounts are called temporary accounts because at the end of each accounting period, the balance in both accounts are reduced to zero. This allows the accounts to begin fresh with a zero balance for the next accounting period. Revenue less expense determines if the company has made a profit or incurred a loss. Permanent accounts carry their balances from one accounting period to another (e.g. assets, liabilities & owner’s equity). They are not closed at the end of the accounting period but their balances are carried forward. Closing the Books: The revenue and expense accounts are closed at the end of the accounting period because: 1) To prepare the revenue and expense accounts for the next accounting period, so that each period, the entire process starts anew. 2) To update the owner equity account. The revenue and expense accounts gives us the profit or loss. This amount is used to complete the balance sheet by updating the capital account. The closing entries update the capital account in the ledger. It then agrees with the B/S. Income Summary Account: To close the revenue and expense accounts their balances are transferred to the income summary account. The credit balance in the income summary account tells us that a net income was earned. - The balance in the income summary should be the same as the net income or net loss on the worksheet. Steps to Close the Books - Revenue and expense accounts are recorded in the journal i.e. closing entries. - Journal entries are then posted to the general ledger account Steps 1) Revenue account carries a credit balance so you debit revenue and credit income summary. To close revenue account. Dr. Rev a/c Cr. Income Summary a/c To close the revenue account 2) Expense account carries a debit balance so you credit expense and debit
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