Question:

Toward the end of the accounting cycle more journal entries are prepared to close out the temporary accounts.

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What the purpose of these closing entries and what are the four closing entries that are generally?

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3 ANSWERS


  1. Purpose: To put the temporary account balances back to zero.

    Revenues, Expenses, Income Summary, Retained Earnings.


  2. Get rid of revenue and expenses accounts by putting them into profit and loss summary account. Then get rid of profit and loss summary account by putting it into retained earnings (company) or capital (sole trader) or capital partner 1, 2... (partnerships). Because you don't want such balances to appear in the next reporting period.

    4 closing entries:

    Dr Profit and loss summary

    Cr Expenses

    Dr Revenue

    Cr Profit and loss summary

    Dr Profit and loss summary

    Cr Retained Earnings (company and profit)

    OR

    Dr Retained Earnings

    Cr Profit and loss summary (company and loss)


  3. There are four closing entries, which transfer all temporary account balances to the owner's capital account.

    1.  Close the income statement accounts with credit balances (normally revenue accounts) to a special temporary account named income summary.

    2.  Close the income statement accounts with debit balances (normally expense accounts) to the income summary account. After all revenue and expense accounts are closed, the income summary account's balance equals the company's net income or loss for the period.

    3.  Close income summary to the owner's capital account or, in corporations, to the retained earnings account. The purpose of the income summary account is simply to keep the permanent owner's capital or retained earnings account uncluttered.

    4.  Close the owner's drawing account to the owner's capital account. In corporations, this entry closes any dividend accounts to the retained earnings account.

    Click on the link to see how the journal entries are posted.

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