Closing is the process of transferring balances from temporary accounts to permanent accounts at the end of an accounting period. This step ensures that temporary accounts start with a zero balance in the next period.
5 Must Know Facts For Your Next Test
Temporary accounts include revenues, expenses, and dividends.
Closing entries are typically made to the income summary account before being transferred to retained earnings.
The four main closing entries are for revenues, expenses, income summary, and dividends.
Closing helps in preparing financial statements by ensuring accurate data transfer.
The post-closing trial balance is prepared after closing entries to ensure debits equal credits.
Review Questions
What types of accounts are closed at the end of an accounting period?
Why is the income summary account used during the closing process?
What is the purpose of a post-closing trial balance?
Related terms
Temporary Accounts: Accounts that track financial results for a specific period and are closed at the end of each period
Permanent Accounts: Accounts that carry their balances into future periods and are not closed at the end of an accounting cycle
Income Summary: A temporary account used to transfer revenue and expense balances before finalizing them into retained earnings