In: Accounting
explain why the temporary accounts are closed each period
Answer
Temporary accounts are those accounts that closed at the completion of every accounting period. For example – revenue, expense etc. The balance of these accounts are closed every year to prevent it mixing with next period.
Explanation
Temporary accounts are those accounts that closed at the completion of every accounting period. For example – revenue, expense etc. The balance of these accounts are closed every year to prevent it mixing with next period.
All the temporary accounts should be closed when the accounting period ends. It consists of all accounts of income statement that all the gains, revenue, expenses and losses.
It is necessary to close the temporary accounts at the end of the year otherwise company's statement shows fall value of the company position.
For example: If the sales revenue of a company in year one is $500,000. In the next year the sales revenue of the company is $800,000. and in the third year revenue is $1,000,000. If the temporary account of the company was not closed then the statements of the company shows the sales revenue of total $2,300,000. Hence, closing of these accounts are important.