Question

For this week's assignment please share with the class:

1. Why is closing process needed in the accounting cycle?

2. Your understanding of the Income Summary account?

3. What happens to the Retained Earnings account in the closing process?

4. Your strategy for learning the closing process.

Answer 1

Answers-:

1.   Closing entries take place at the end of an accounting cycle as a set of journal entries. The closing entries serve to transfer the balances out of certain temporary accounts and into permanent ones. This resets the balance of the temporary accounts to zero, ready to begin the next accounting period. A term often used for closing entries is "reconciling" the company's accounts. Accountants perform closing entries to return the revenue, expense, and drawing temporary account balances to zero in preparation for the new accounting period.
2. The income summary account is a temporary account into which all income statement revenue and expense accounts are transferred at the end of an accounting period. The net amount transferred into the income summary account equals the net profit or net loss that the business incurred during the period. Thus, shifting revenue out of the income statement means debiting the revenue account for the total amount of revenue recorded in the period, and crediting the income summary account.The income summary account doesn't factor in when preparing financial statements because its only purpose is to be used during the closing process.
3. Retained earnings are those earnings not distributed to shareholders as dividends, but retained for further investment, often in advertising, sales, production, and equipment.  The closing entries are also recorded so that the company's retained earnings account shows any actual increase in revenues from the prior year and also shows any decreases from dividend payments and expenses.

The sequence of the closing process is as follows:

• Close the revenue accounts to Income Summary.
• Close the expense accounts to Income Summary.
• Close Income Summary to Retained Earnings.
• Close Dividends to Retained Earnings.

4. After the closing entries have been made and all of the temporary accounts have been closed, a post closing trial balance is prepared. This is a listing of all the accounts with balances that will carry forward to the next accounting period. Since the income statement accounts don’t have balances anymore, you can think of this as the opening balance sheet for the next accounting period.