Question

Closing entries take place at the end of an accounting cycle. It is a vital part of the accounting cycle to prepare to the company's annual financial statements as well as for the new fiscal year.

-As a manager, what would be your procedure in setting up the closing process? What kind of policies would you put in place to avoid making mistake?

Answer 1

As a manager, what would be your procedure in setting up the closing process? What kind of policies would you put in place to avoid making mistake?

1) Closing entries are used to transfer balances in temporary accounts to their respective permanent accounts at the end of the reporting financial period. If these balances are kept untouched, they get incorrectly included in their final balances for the following reporting period.

2) So, basically, three main step of entries occur here as mentioned below:

i. Revenue accounts are debited and Income summary account is credited.

ii. Expense accounts are credited and Income summary account is debited.

iii. If there is profit, then Income summary account is debited by giving credit to the Retained earnings account and the reverse entry is followed in case of loss for the period, by closing the Income summary account to the Retained earnings account, which finally appears in the equity section of the balance sheet.

3) If the manager doesn't fully understand the estimates, processes and calculations of the accounting process by completing depending on the third parties, he might run the risk of misstatements gone undetected which he himself will be held responsible.

4) In order to be a reponsible one, the manager will have to learn the complete process right from the opening entries to the closing ones and the calculations of the adjusted ones even.

5) Various adjustment entries are to be done if something's not appropriate like starting from making out the trial balance to the adjustment entries and finally preparing the financial statements ready to be used by the decision makers.