Question

Think about what would happen if you didn't close the accounts at the end of the accounting period. Using no less than 100 words, explain what accounting principles or concepts would be violated if the accounts were not closed at the end of one accounting period when this had been done in previous years.

Answer 1

Without completing such closing entries, a company's income statement accounts are not ready to record revenue and expense transactions for the next accounting period, and the amount of retained earnings is not correctly stated, causing the balance sheet to be unbalanced. Both balance sheet and retained earnings/profit and loss account will show wrong balances.

It will affect consistency principle because following different methods in different year. All previous yearaccountsare closed but this year is not closed,matching concepts because due to this the revenue and expense jot not going to match and conservatism principle also. Because losses are not recorded in profit and loss account.

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.

The process transfers these temporary account balances to permanent entries on the company's balance sheet. Temporary accounts that close each cycle include revenue, expense and dividends paid accounts.

The balance sheet's assets, liabilities and owner's equity accounts, however, are not closed. These permanent accounts and their ending balances act as the beginning balances for the next accounting period.

The Purpose of Closing Entries

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.

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.Retained earnings are those earnings not distributed to shareholders as dividends, but retained for further investment, often in advertising, sales, production, and equipment.