Question

1.Why do we close the books?

2.Why do we need to zero out some accounts?

3.How do we decide which accounts to close and which to not zero out?

Answer 1

1) In order to determine whether profit or loss from the operation of, the books are closed on a specific date. ie. All the transactions which took place before and on the date of closing of books are considered to determine the financial position.

2) Nominal accounts are not carried to future year and are closed on the closing date of books of accounts. ie. Income and expenses for the period are recognised irrespective of receipts and payments (Accrual concept) Income not received is an asset and expenses not paid is a liability. They will be treated as incomes and expenses, and also assets and liabilities in the current year.

3) Real accounts and personal accounts balances (ie. not zero out) are carried forward to the subsequent years.

Accounts receivable, accounts payable, Equipment, common stock, note payable are some of the examples of accounts that will be carried forward to the future years.