Question

What are possible implications in financial reporting and the creation of financial statements if certain temporary accounts are not closed at the end of the reporting period?

Answer 1

If certain temporary accounts are not closed at the end of the reporting period then it will have negative implications for financial reporting and the financial statements will not be proper and will not report a true and fair view of the company’s financial position.

It should be noted that temporary accounts are those general ledger accounts that begins each accounting year with a zero balance. At the end of the accounting year this account is closed by transferring the amount to another account. For example temporary accounts like revenues, expenses, gains and losses will have to be closed by transferring their balance to permanent accounts and if this is not done then the retained earnings account will show a wrong balance and this will incorrectly reflect in the company’s balance sheet.

For example suppose that the “expense” account (which is a temporary account) is not closed and the balance is not transferred to the income summary account then the retained earnings will be higher than it should be and hence it will portray a wrong financial position for the company.