Closing entries

Question 1

Why do we need to ‘close the books’?

Answer 1

To make sure income and expenses from a previous accounting period don’t carry over to the current accounting period.

Question 2

Where are closing entries recorded? and where are they then posted?

Answer 2

Recorded - General journal

Posted to - General ledger

Question 3

Define Temporary accounts

Answer 3

Relate to only a given accounting period e.g. revenues, expenses, drawings/ dividends
Must be closed to set the account balance to zero balance at the end of each period

Question 4

Define Permanent (real) accounts

Answer 4

Carried forward to future accounting periods e.g. assets liabilities, equity (capital, retained earnings)

Question 5

Income and expense accounts should begin the next accounting period with a ____ ______.

Answer 5

Zero balance

Question 6

Closing entries are journal entries that effectively close all ______ _____ to the permanent equity account (capital) at the end of each accounting period.

Answer 6

Temporary accounts

Question 7

Step 1 in closing process is to Close all income accounts to the P & L summary account.
Dr _______
Cr _______

Answer 7

Dr - (each individual) INCOME account
Cr - P & L Summary

Because ‘INCOME’ accounts have a natural CREDIT balance, we must debit to close – each GL must be zero.

Question 8

Step 2 in closing process is to close all expense accounts to the P & L Summary account.
Dr _______
Cr _______

Answer 8

Dr - P & L Summary
Cr - (each individual) EXPENSE account

Because ‘EXPENSES’ have a natural DEBIT balance, we must credit all expenses to close – each GL must be zero.

Question 9

Step 3 (for sole trader) in closing entries is to close P & L summary account to the capital account

If P&L summary account has a CR balance (net profit)
Dr _________
Cr _________

If P&L summary account has a DR balance (net loss)
Dr ________
Cr _________

Answer 9

If P&L summary account has a CR balance (net profit)
Dr P & L summary
Cr Capital

If P&L summary account has a DR balance (net loss)
Dr Capital
Cr P & L summary

Note: we INCREASE Capital account if profit is made, decrease for a loss. P & L Summary account MUST be ZERO after this step

Question 10

Step 3 (for company) in closing entries is to close P & L summary account to the retained earnings account.

If the P & L Summary account has a CR balance (i.e. net profit)
DR - _________
CR - _________

If the P & L Summary account has a DR balance (i.e. net loss)
DR - ________
CR - _______

Answer 10

If the P & L Summary account has a CR balance (i.e. net profit)
DR - P & L SUMMARY
CR - RETAINED EARNINGS

If the P & L Summary account has a DR balance (i.e. net loss)
DR - RETAINED EARNINGS
CR - P & L SUMMARY

Note: we INCREASE Retained earnings account if profit is made, decrease for a
loss. P & L Summary account MUST be ZERO after this step

Question 11

Step 4 (for sole trader) in closing entries is to close DRAWINGS account to the capital account.

Dr _______
Cr _______

Answer 11

Dr Capital
Cr Drawings

Drawings are also temporary – the balance of the drawings account will equal ZERO after this step.

Question 12

Step 4 (for company) in closing entries is to close DIVIDENDS account to the capital account

Dr _______
Cr _______

Answer 12

Dr Retained earnings
Cr Dividends

Dividends are also temporary – the balance of the dividends account will equal ZERO after this step.

Question 13

What is normal balance of the Income account?

Answer 13

Credit

Question 14

What is the normal balance of the Expense account?

Answer 14

Debit

Question 15

When closing accounts, what temporary account is opened for closing income and expense accounts?

Answer 15

Profit or Loss summary account