Question

Briefly discuss the purpose for the closing process and describe the four closing entries that are required to be made in that process. Also, discuss the difference between a temporary and a permanent account.

Answer 1

Purpose for the closing process:

At the end of the financial year, entities passes closing entries to close the

temporary accounts. This is done to determine the amount of net income/loss

that the company earned/incurred during the year and to transfer such amount

to "Retained Earnings".

	Four Closing Entries are as follows:
1)	Revenue Accounts
	To Income Summary
	(Entry passed to close the revenue accounts)
2)	Income Summary
	To Expense Accounts
	(Entry passed to close the expense accounts)
3)	Income Summary
	To Retained Earnings
	(Entry passed to close the income summary
	in case the company has earned income)
	Retained Earnings
	To Income Summary
	(Entry passed to close the income summary
	in case the company has incurred losses)
4)	Retained Earnings
	To Dividend
	(Entry passed to close the dividend declared)

Temporary accounts are those accounts which gets
closed after the financial year ends. These accounts
are prepared only for a year and doesn't appear
in the Balance Sheet.
Permanent accounts are those accounts that we
get to see in the Balance Sheet of an entity.
The balances of these accounts get carried over
to the next financial years and they're not effected
with the closing entries.