Question

Why are closing entries required at the end of an accounting period?

Answer 1

Closing entries are necessary at the end of an accounting period for numerous reasons:

1.At the conclusion of the accounting period, we may use closing entries to reset the temporary revenue and cost accounts to zero. By doing this, you can be certain that the income and expense accounts are prepared to receive transactions for the following time period. We can calculate the current period's net profit or loss by closing these accounts.

2.Closing entries are helpful in calculating the net income or loss for the accounting period. We may determine the net income or net loss by comparing total revenues and total costs, which can be done by closing revenue and expense accounts.

3.Closing entries are crucial for creating accurate financial accounts and financial statements. The temporary accounts must be closed in order to complete the income statement, which displays revenues, costs, and net income or loss. The balances in the financial statements are accurately reflected by the closing entries, which also shift net income or loss to the owner's equity part of the balance sheet.

4.Closing entries signify the conclusion of one accounting period and grant room for a new beginning in the next period. We can track sales and costs individually for each period by zeroing out the temporary accounts, giving us a clear picture of how the business was doing financially during that particular time frame.

 

In conclusion, closing entries are required to reconcile temporary accounts, determine net income or loss, appropriately produce financial statements, and enable a new beginning for the following accounting period.