Understanding Bookkeeping

The purpose of closing journal entries is to transfer the balances of ALL TEMPORARY accounts to the owner’s capital account.Temporary accounts are also known as nominal accounts which are all revenue accounts; all expense accounts & owner’s drawing. These nominal or temporary accounts are so called because after they have been used to accumulatedata, the total of these accounts are transferred to permanent accounts showing the chanes in the owner’s equity account for a period of time. This process is called the closing process.

These closing process involve:

• using closing journal entries
• normally done at the end of an accounting period
• these closing entries will make thiese temporary accounts into ZERO balances.

The closing process essentially provide three tasks:

1. closs off all the revenue and expense accounts
2. closs off the drawings account
3. help to draw up the Income Statement since the expense and revenue balances are closed off to the Income Statement. The Income Statement is then closed by transferring the net profit or loss to the owner’s equity account.

The above are represened by the following accounting double entry:-Revenues:

Debit Revenue

Credit Income Summary

Expenses:

Debit :Income Summary

Credit :Expense Account

Income Summary:

Debit :Income Summary

Credit :Owner’s Capital

Owner’s Capital:

Debit :Owner’s Capital

Credit :Income Summary

Drawings:

Debit:Owner’s equity(capital) account

Credit:Owner’s drawing account

However, permanent or real accounts are not close which are:

• all asset accounts
• all liability accounts
• owner’s capital account

This entry was posted on Saturday, October 27th, 2007 at 12:58 am and is filed under o. Closing Entry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.