Closing of Accounts at the Reporting Period end.

Dec 12, 2016

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Many of us have an idea about Temporary Accounts closing at the Accounting Perio
d End. But most of us do not know how to actually close the Temporary Accounts a
nd why we would need to close them?
Lets start from the Temporary Accounts. What actually these are?
A temporary account is a general ledger Account that begins each accounting year
with a zero balance. Temporary accounts include all of the income statement acc
ounts: revenues, expenses, gains, losses.
A temporary account that is not an income statement account is the proprietor's
drawing account and the dividend Account. The balance in the drawing and dividen
d account is transferred directly to the owner's capital account and will not be
reported on the income statement or in an income summary account.
An example of a temporary account is the Sales account. The Sales account is use
d to keep a log of the sales occurring only in the current accounting year. Afte
r the sales for the year have been reported, the balance in the Sales account wi
ll be transferred or closed to another account thereby returning the account bal
ance to zero.
Now the Question is that what is meant by closing of Accounts?
The process of transferring one account balance to another account balance at th
e end of Accounting period is called Closing of Accounts.
How to actually close all these Temporary Accounts?
There are normally two ways to done closing of Accounts and these depends on sit
uation and i will discussed both here.
If the only Financial statement that we need is the Balance Sheet, the way of cl
osing will be to transfer all the balances of the Income Statement, Drawings and
Dividend (Temporary Accounts) directly to Retained earnings.
If you are using Accounting software the transfer of Expenses, Drawings and Divi
dend automatically decrease retained earnings and transfer of Incomes will autom
atically increase retained earnings.
But in the case of manual closing, the entries will be:
Entry in the case of transferring the balance of Expenses, Drawings and Dividend
will be
Dr: Retained Earnings
Cr: Expense/Drawings/Dividend Account
Entry in the case of transferring the balance of Incomes will be:
Dr: Incomes Account

Cr: Retained Earning

As a result, the balance of all these accounts will be zero and retained earning
will be increase/decrease by the net figure and your temporary accounts will be
come zero and ready to use for next year.
The Second way of closing the temporary accounts will be used when your managers
, investors, owners and others need to know amounts of specific revenues and exp
enses and the amount of net income earned at the year end.
In this way we ll open a second temporary account named as " Income Statement Su
mmary ".
Please remember the Dividend and Drawings account will not be closed in this inc
ome statement summary. Because they are not part of Income statement. Therefore
we will used direct transfer to retained earnings approach as we learned above f
or these two accounts. For Income statement accounts the approach will be as
we transfer the balance of all expenses and incomes in income statement summary.
Entries: For Expenses Accounts
Dr: Income Statement Summary
Cr: Expense Account
For Income Accounts
Dr: Income Account
Cr: Income Statement Summary
Now your expenses and incomes account has been zero and all the balances are sho
wing in income statement summary.
After transferring all these balances now compute net income in income statement
summary. After that transfer this net income or loss in Retained earnings by us
ing following entries.
Dr: Income Statement Summary
Cr: Retained Earnings.
Hope it will works when you come to practically perform this process.