Question

QUESTION 15 The important purpose of closing entries is to Adjust accounts in the general ledger. To set real account balances to zero for next year. To set nominal account balances to zero for the next accounting period. To make the financial statements more accurate.

Answer 1

          A closing entry is journal entry made at the end of accounting periods that involves shifting data from temporary accounts on the income statement to permanent account on the balance sheet. Temporary accounts include revenue, expenses, and dividends, and these accounts must be closed at the end of accounting year.

          The purpose of closing entry is to reset the temporary account balances to zero on the general ledger,The record keeping system for a company’s financial data.

Temporary accounts are used to record accounting activity during a specific period. All revenue and expense account must end with zero balance because they are reported in defined periods and are not carried over into future.

Permanent accounts on the other hand track activities that extend beyond the current accounting period, They are housed on the balance sheet, a section of financial statements that gives investors an indication of company’s value including its assets and liabilities.

Any account listed on the balance sheet, barring paid dividends, is a permanent account.

As a part of closing entry process the net income is moved to retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use.