Question

Rather than going directly to college, some students take time off to travel abroad, learn new skills, or volunteer. This period is known as a “gap year.” Real Gap Experience provides hundreds of gap year traveling opportunities in over 45 countries around the world. The company offers everything from volunteering to building houses in Guatemala to teaching in China (for pay) to taking a year-long, around-the-world trip. What does this have to do with accounting, and why is it important? Every company needs to keep a record of its financial activities so that financial statements can be presented and used for decision making. Real Gap Experience’s accounting records are most likely computerized, but the company still needs to go through the closing process. Why is the closing process important to a company such as Real Gap Experience? What types of accounts would be used during the closing process for this company?

Answer 1

What does this have to do with accounting, and why is it important?

Ans

Real gap experience is a company which specializes in providing services as given below

• Providing traveling opportunities in more than 45 countries to students who use “GAP year” to travel abroad , learn new skills or volunteer for work or social causes
• For providing these services it charges money

As the company is an a business for providing gap year travelling services against payment it has to maintain accounting for following reasons .

• To determine Profit and loss of the operations for the year
• To pay income tax or other statutory liabilities as per relevant country’s laws
• To prepare the balance sheet of the company which will be used by internal stakeholders like company management , employees and external stake holders like taxation department , financial institutions , creditors ,investors
• If it is listed in stock exchange or gpoint to be listed it has to prepare financial statements which is mandatory requirements

Every company needs to keep a record of its financial activities so that financial statements can be presented and used for decision making. Real Gap Experience’s accounting records are most likely computerized, but the company still needs to go through the closing process. Why is the closing process important to a company such as Real Gap Experience?

Ans

Every company which is business of making money unless specifically stated is follows the following accounting principles

• Going concern - in this priniciple it is assumed that company will be business and will operate indefinitely
• Accounting period – in this the financial statements will be prepared for a period of 12 months also called financial year
• Separate entity – this principle states that company and promoter are different and company has different legal identify in laws of the company. accordingly business transactions are recorded
• Money measurement - in this all transactions that can be measured in money are recorded in reporting currenct which the currency in which the company operates and reports its financial statements

The accounting period concepts states financial statements should be prepared normally for a period of 12 months for a financial year . this requires closing process in which all closing entries are prepared so that correct financial statements can be prepared which are as follows

• Statement of profit and loss statement for the accounting periods
• The balance sheet as on date on closing of financial year
• Statement of cash flow for the accounting period

What types of accounts would be used during the closing process for this company?

Ans

The following steps are followed in closing process of the company

• First business transactions are recorded vide journal entries
• Then it is posted in ledgers of respective chart of accounts
• At the end of accounting period triall balance is prepared in which the closing balances of each chart of accounts are taken
• Then adjusting entries are passed to give effect to accrual and matching principle of accounting conventions
• After passing adjustment entries revised trial balance is prepared
• Then all nominal accounts which are expenses and income chart of accounts are closed at end of closing period by transferring to profit and loss statements . All expenses accounts closing balance are debited to profit and loss account and credited to respective expense accounts
• All income accounts closing balance are credited to profit and loss account and debited respective income accounts
• If the credit side of profit and loss account is greater than debit side it termed as profit and this amount is transferred to capital account of the company by debiting Profit and loss account and credit Capital account. vice versa if it loss than capital account is debited and profit and loss account is credited
• All personal accounts credit closing balances are shown in liabilities side of balance sheet and all closing debit balances of Real accounts are shown in assets side of balance sheet
• The closing balances of personal and real accounts are carried forward in next account year as opening balances