Question

The Bible in Luke 14:28 says, “Suppose one of you wants to build a tower. Won't you first sit down and estimate the cost to see if you have enough money to complete it?” How do you think this verse might apply to this chapter on closing entries? Where do you see the connection between doing closing entries and whether a company should proceed with a business venture?

Answer 1

Closing Entries are year end or month end or any period end(might be a quarter or half year end) entries to arrive at computing closing balances of acounting ledgers, some of which are carried forward in case of assets and liabilities as Opening balances of Subsequent periods

They are necessary to arrive at Actual earnings(Net Profit) and also Retained Earnings asertain the Financial position of the company.

It is done to draft a Trial balance which is the basis for preparation of  financial statements

Examples of showing the effect of Closing entries:

Closing Cash book by arriving at difference of Cash Income and expenses will convey the Actual cash balance available which is necessary to plan for the future.It shows the Liquidity position of the company for entering into business Venture.It forms a deciding factor

Closing entries for Accounts receivable by recording all sales on account and crediting all cash received for the same and the balance( difference between the two) gives actual sum due at the end of the period which can be used to plan estimated receivables(assets) .This too helps in estimating the Short term Liquidity position to enter into Business Venture

Arriving at Net Income by recording all expenses and income on accrual basis(by passing period end closing (Due) entries) will help in arriving Retained Earnings(Surplus Funds at disposable of the company)

With the help of Retained Earnings and estimating Future cash flows one can frame a Capital Budget to decide if it is feasible to proceed with Business Venture.

Passing Closing entries will help in deriving the actual financial position which will help in deciding the feasibility(whether the company can actually enter into Business Venture)

(Financial position is arrived from Closing balances of Assets and Liabilities- Balance sheet)

Through Financial Position one can judge the company's operating effiiency and also can calculate Various Financial Ratios like Debt equity,Current ratio,Assets Turnover ratio etc to assist in deciding whether to proceed with Business Venture or not