What are Permanent Accounts?

What is Closing Entry?

A closing entry is an accounting term that refers to journal entries made at the end of an accounting period to close temporary accounts. The purpose of closing entries is to transfer the balances from temporary accounts (revenues, expenses, dividends, and withdrawals) to a permanent account (retained earnings or owner’s equity). This process resets the balances of the temporary accounts to zero, preparing them for the next accounting period and accurately reflecting the financial performance and position of the company....

What are Temporary Accounts?

Temporary accounts, also known as nominal accounts, are accounts that track financial transactions and activities over a specific accounting period. These accounts are “temporary” because they start each accounting period with a zero balance and are used to accumulate data for that period only. At the end of the accounting period, the balances in these accounts are transferred to permanent accounts, resetting the temporary accounts to zero for the next period....

What is Income Summary?

The Income Summary is a temporary account used during the closing process of an accounting period to facilitate the transfer of balances from temporary accounts (revenues and expenses) to a permanent account (typically Retained Earnings). The Income Summary account is crucial because it serves as an intermediary step, ensuring that all revenue and expense accounts are accurately closed and their balances are correctly transferred to reflect the net income or net loss for the period....

What are Permanent Accounts?

Also known as real or balance sheet accounts, these are general ledger entries that do not close at the end of an accounting period but are instead carried forward to subsequent periods . Real accounts, also known as permanent accounts, are quite different compared to their temporary equivalents. They persist from one accounting period to the next and maintain their balances over time unlike temporary accounts which are closed at the end of the period. These permanent files include assets, liabilities and equity sections making them very useful in showing the company’s financial position that lasts long....

How to Record a Closing Entry?

Here are the steps typically involved in making closing entries:...

Example of Closing Entry

Assume the following balances at the end of an accounting period:...

Conclusion

In other words, the closing entry is a method of making repayments on all the costs incurred within a given financial year. To complete, this method involves transfer of funds from revenue-generating accounts such as wages payable and interest receivable to an intermediary account known as income summary. Therefore, we can calculate either profit margin for this company or how much it lost over the year. After this, these amounts go directly into items like company profits that are not moved anymore.”Temporary accounts are reset to zero, permanent accounts retain their balances. This ensures financial statement accuracy and offers a clear picture of how a company has done over the years.”...

Closing Entry – FAQs

Why are closing entries necessary?...