Question

After graduating from New York University College and passing your CPA exam, you have opened up an accounting firm that offers tax and consulting services to clients. You have just picked up a new client who is very anxious about his expenses. The client considers his in house accounting services to be too high and he feels that he could save some time and money in that area by telling his accounting staff not to do closing entries. It is your job, in this discussion, to explain to your new client the importance of doing the closing entries and why they are worth doing.

2. Please tell us about permanent and temporary accounts. Please let us know which financial statement contains the permanent accounts and which one contains the temporary accounts. Please provide an example of the two closing entries.

Answer 1

Those entries which are done at the expiration (that is end) of the accounting period are termed as closing entries. They are passed or done to transfer the balances of temporary (or nominal) accounts to the permanent accounts.

Importance of closing entries are listed as follows:

1) The financial statements depicts the true picture after passing of closing entries.

2) The goals related to profitability are properly achieved by passing closing entries.

Companies or other organizations uses closing entries to close the temporary accounts such as rent account, salaries account etc.

The accounts which are closed at the expiration of accounting period by passing closing entries are acknowledged as nominal accounts i.e. the balance are carried down to zero. These are accounts of expenses & revenues which are shown in income statement & these are also referred to as temporary accounts.

Account of salaries & wages expense and rent account are examples of it.

The accounts which are not closed by way of closing entries are termed as real (permanent) accounts. These are accounts of assets, liabilities and stockholder’s equity.

Examples of permanent accounts are inventory account, machinery account, debtors account, accounts payable account.

AN example of two closing entries are listed as follows:

Service revenue                                                                   Dr XXX

            Income summary                                                                         $XXX

(To record the closing of revenue account)

Income summary                                                                Dr XXX

            Salaries expense                                                                            XXX

            Rent expense                                                                                  XXX

            Supplies expense                                                                           XXX

(To record closing of expenses to income summary)