Question

The accounting cycle is important because each step gives particular attention to detail. In your opinion, what important details are highlighted when an accountant prepares and recording and posting closing entries? Give an example.

Answer 1

Accounting cycle includes various phases including analyzing the transactions, preparing journal entries, preparing unadjusted trial balance, post adjusting journal entries, prepare adjusted trial balance, prepare financial statements, post closing entries and prepare post closing trial balance. All the cycles provide important details for the various transactions.

Posting closing entries is also part of the accounting cycle which highlights important details to the accountants -

Closing entries are posted to close the temporary accounts (income and expense accounts). With the closing entries a credit balance is posted for the accounts having the debit balance and vice versa. The balance posted should be equal to the transactions posted in the accounts. The purpose to post these entries is to close the temporary accounts and transfer the net balances to the permanent accounts in the form of profits to the Retained Earnings account.

The purpose of this exercise is to close the income statement for the period and carry the net balance to the balance sheet so that the expense and income account can be started with the zero balance in the following year.

Once the closing entries have been posted, the post closing trial balance only shows the permanent accounts. The trial balance only shows the assets, liabilities and equity accounts.

Example -

Revenue account has a credit balance of $10,000. To close the revenue account a debit is posted in revenue account with the credit to the income statement. Similarly various expenses like Salaries and Wages account, Rent account, Printing and Stationery account have the debit balance of $8000. A credit entry is posted to these balances with a debit to income statement.

Once the expenses and revenue accounts are closed, the income statement is closed with the net balance of $2000 (income of $10000 less expenses of $8,000) transferred to the retained earnings account in the balance sheet. Retained earnings are increased with a debit entry posted in income statement (as currently there is a net credit balance of $2,000) and credit to the retained earnings account.