Question

Discuss why closing entries are prepared at the end of the accounting period. How are the accounts affected?

Answer 1

One of the major purposes for closing your books at the end of each accounting period is to allow you to prepare financial statements that give you a picture of your business's financial status. The financial statements prepared for most small businesses are a balance sheet and an income statement.

The closing entries are recorded after the financial statements for the accounting year are prepared. The reason for the closing entries is to ensure that each revenue and expense account will begin the next accounting year with a zero balance.

The closing entries require that a debit be entered into each of the temporary accounts having a credit balance. The debit entered must be exactly the amount of the credit balance prior to the closing entry. The objective is to get the account balance to be zero.

The closing entries also require that a credit be entered into each of the temporary accounts having a debit balance. The credit amount that is entered must be exactly the amount of the debit balance prior to the closing entry.