Closing of books of accounts is an important area of study for accounting students. At the end of every year, companies close their accounts in order to ascertain profit or loss for the period. Unless the books are properly closed, the profits or losses calculated will not represent the correct figure.
What are closing journal entries?
Closing journal entries are the entries passed at the end of an accounting year to close the balances of all temporary accounts and transfer them to permanent accounts. All temporary or nominal accounts have to start with a zero balance at the start of year. This is also called as closing of books.
Permanent vs.temporary accounts
Before proceeding to understand closing journal entry homework answers, we need to understand the difference between a permanent and temporary account.
Permanent accounts, as the name suggests, are permanent in nature. They are those related to assets, liabilities, and equity. They are not closed at the end of accounting year. Permanent accounts are rolled over from year to year after providing for additions or subtractions made during the year.
Temporary accounts are those which are created only for a single accounting year. At the end of every year, its balance is reduced to zero. Accounts pertaining to income, expenses, and dividends are temporary accounts. They are not rolled over. The idea behind this is that income statement for a year should reflect the income of that year only.
Benefits of closing journal entries
Closing entries, also known as reconciling books of account, offers several benefits to companies.
- Zeroing of nominal accounts is helpful in bookkeeping. Every year expenses and income accounts can be started
- Closing entries are the journal entry form of statement of retained earnings. This statement shows the profits or losses of a particular year only.
- Statement of retained earnings can be used to make comparisons for knowing the actual increase or decrease in profits and losses.
Knowing the income summary account
Income summary account is a temporary account created only for the purpose of closing of books. It states the revenue and expenses for current accounting year. It is not used in preparing financial statements. It is an intermediate account created for closing temporary accounts.
The balance of income summary account is posted to retained earnings account. Students often go wrong in closing journal entry homework answers as they are not aware of implications of income summary account.
Steps in the closing process
There are basically four steps in passing closing entries.
- Closing all revenue accounts:
Revenue accounts will have a credit balance. This is nullified by transferring the balance to income summary account.
- Closing all expense accounts:
These accounts will have debit balances. They are made zero by transferring them to income summary.
- Closing income summary:
As this is a temporary account, the balance in this is transferred to retained earnings. Income summary account is thus nullified.
- Closing dividend accounts:
The debit balance in dividend account is transferred to retained earnings.
Being thorough with these steps is essential for being good in closing journal entry homework answers.
Common confusions in closing journal entry homework answers
Closing entries are part of preparation of final account statements. As this is a quintessential study for accountancy students, you cannot afford to be negligent in studies. It has been noticed that students make lots of mistakes in these assignments.
- Closing for nominal accounts:
It is very important to understand that closing is applicable only for nominal or temporary accounts. If your basic knowledge is not strong enough, you will have doubts as to what is a nominal account.
All accounts of assets and liabilities are strictly not to be closed at year-end. If you go wrong here, your closing journal entry homework answers will be erroneous.
- Income summary account:
There are two widely accepted ways of closing books. One is to transfer all temporary accounts to an income summary account, created only for closing purposes. Another way is to directly transfer all balances from temporary accounts to retained earnings. When an income summary is created, it has to be closed also. Students find this concept nagging.
- Amounts to be closed:
Finding the closing amounts is another big headache for students, especially when the number of transactions during the year are numerous. Be careful and note down each item to see whether it has been properly accounted.
Is going online the way out?
There have been several debates about the pros and cons of taking tech help for studies. Some veterans of accounting profession are against students taking help of study help sites. They argue that it kills the enthusiasm and vigor of students and makes them lazy.
While this is true to an extent, it has been proven that taking online help has helped students to no small extent. The right approach will be to listen to your professors, study your books and also take online help. Use the tech resources in the right manner.
- Get expert assistance:
Gone are the days when you needed your professors to clear doubts. Today you find expert faculty in professional educational websites. Make use of this facility by registering to a good assignment help site. Any time of the day, you can ask for assistance.
- Get help for homework:
Homework help is one of the most sought out areas on internet. The mere popularity of the concept vouches for the fact that it is working for students. When technology has taken the stage, why should you be left behind?
- Help for practicing:
Accounting is an area which calls for lots of practice to learn all nuances properly. The more you practice, the more perfect your answers will be. Look for websites which have options for practice and quizzes. They will help you by providing a fun way of learning.
Being an expert in accounting and book closing is no cakewalk. It requires learning, practice, and hard work. For those of you who are ready for this, sky is the limit.