Question

1. Explain why temporary accounts are closed.

2. Describe the four specific steps included in the Closing Process.

3. Which account types (i.e. Assets, Liabilities, Expenses etc.) are NOT closed and why?

Answer 1

1) Temporary accounts like revenue, expenses,dividends are closed and transferred to their linked accounts. Closing process determines the closing balance of these temporary accounts to zero and are transferred to the summary of income statement to be able to receive data pertaining to the next year.
2) Steps in Closing process include:
1: Closing the revenue accounts, transferring the credit balance in the revenue accounts to the income summary
2: Closing the expenses account, transferring the debit balance to the income summary
3: Closing the income summary account, transferring the balance to retained earnings account
4: Closing the dividends account, transferring the balance to Retained earnings account.
3) Balance sheet accounts like Assets, Equities, Liabilities are not closed and their closing balances are rolled over to the next year. These are continous accounts and permenant accounts in the financial statements and are closed only when an asset is sold, liability is settled and company is shut down