Question

Explain the process of closing the books and describe the content and purpose of a post-closing trial balance. Answer in our own words and must be at least 200 words.

Answer 1

Closing the books, is a procedure that happens each month, and at the end of each year.
Accountants follow a rigorous procedure, to make sure that accounting books are cleaned.

The closing process consists of three main steps:

1. Identify temporary accounts that need to be closed.
2. Record closing entries.
3. Prepare the post closing trial balance.

Step 1 :
There are 2 types of accounts- Permanent Accounts (Balance sheet accounts like Fixed assets, liability & equity accounts. These account balances roll over into the next period.)
Temporary Accounts ( like revenue, expense, dividend account. These account balances needs to be zeroed in at the end of particular closing period)

Step 2:
So the temporary accounts needs to be closed.(To close means to make the balance zero) Basic steps are:
- Trasfer the credit balance of revenue accounts to Income summary account
- Transfer the debit balance of expense accounts to Income summary account
- Transfer the balance of Income summary account to Retained earnings
- Transfer the debit of dividend account to Retained earnings

Journal enteries

Revenue - Debit
Income Summary - Credit

Income Summary - Debit
Salary Expense - Credit
Depreciation Expense - Credit
Interest Expense - Credit

Income Summary - Debit
Retained Earnings - Credit

Retained Earnings - Debit
Dividend Account - Credit

Step 3:
Once the closing enteries are posted and all the temporary accounts have been closed, a Post closing Trial balance is prepared.
It consists of balance sheet accounts only since all the revenue, expense & dividend accounts were zeroed away.
It demonstrates that the accounts are in balance i.e. debits and credits are equal after the closing enteries are posted.