Question

Financial Statements and the Closing Process Discussion

As the first quarter at your restaurant draws to a close, you must prepare your accounting records for a new period and a fresh start. Share with your classmates which accounts are permanent, which accounts are temporary, and why the closing entries must be completed in order for a new period to begin.

Answer 1

As we know that every organization have various stakeholders such as; shareholders, lenders, customers, regulatory bodies etc. These all stakeholders want to know the performance of the organization on regular interval that is why at the end of a period accounting records are maintained by the organization so that required information can be delivered to the stakeholders.

Folowings are the common accounting records are maintained;

Journal, ledger, trial balance, income summary, statement of owners’ equity, cash flow and balance sheet etc.

We know that there are two types of accounts; permanent account and temporary accounts. Permanent accounts are real accounts which are shown in the balance sheet whereas temporary accounts are nominal accounts which are closed by transfering into income summary.

Followings are the permanent accounts;

·        Cash

·        Building

·        Plant

·        Accounts receivable

·        Accounts payable

·        Supplies

·        Capital

·        Prepaid expense

·        Expense payable

·        Merchandise inventory

·        Equipment

·        Income tax payable etc.

Followings are the temporary accounts;

·        Wages

·        Salary

·        Depreciation expense

·        Supplies expense

·        Payroll tax expense

·        Utility expense

·        Fees earned

·        Sales revenue

·        Commission earned

·        Advertising expense

·        Miscellaneous expenses

·        Purchases

·        Sales return

·        Purchase returns etc.

Why the closing entries must be completed in order for a new period to begin?

We know that closing entries are made at the end of an accounting period so that alll temporary accounts can be closed and balance of these temporary accounts can be placed at proper places in the financial statements of an organization.

Closing entries are made to closes all expenses & losses accounts with the help of income summary. In same manner all revenues & gains also transferred with the help of income summary. Withdrawals and dividends accounts are also closed with the help of closing entries.

Thus we can say that to close all temporary accounts, closing entries are necessary so that balances of these temporary accounts can be made zero at the end of an accounting period and after closing these account final figures can be summerized & shown in the main financial statement such as income summary & balance sheet.