Preparing Closing Entries: Introduction
At the end of an accounting period, the account balances in the ledger are reported to the financial statements. Many of these balances are reported without any changes. For example, the balance of the Cash in Bank is the amount reported in the Balance Sheet. The account balances in the Balance Sheet are carried forward each year. Since these accounts are relatively permanent, they are called Real Accounts.
The balance of the Owner’s Withdrawal account, which is reported in the owner’s equity statement, is not carried forward. Transactions within accounts such as revenue, expense, and withdrawal are reported for only one period. Therefore, these accounts are called Temporary, or Nominal, Accounts. The balances from the temporary accounts are transferred to the Owner’s Capital account. This keeps the accounts up-to-date and helps prepare the records for the next period.
This section will introduce you to the eighth and ninth steps of the accounting cycle. It explains the need to update the accounts through closing entries and describes the steps to journalize closing entries.
The final part of this section defines the key terms used. Short questions, fill in the blanks and multiple choice are given to test your reading and understanding.