Closing Entries
What are the reasons for closing entries?
Closing entries are passed so that each year the accounts can be started from zero balance so as to prevent overlapping of transactions of one accounting period to another.
What accounts are closed?
The accounts related to income and expenses are closed. In simple words nominal accounts are closed. Either these are transferred to trading account or profit and loss account. Personal and real accounts are carried forward to balance sheet.
How are closing entries done?
Closing entries are journalized and posted to appropriate ledger accounts in order to do close the temporary books. Following steps are followed in order to make closing entries :
Credit balance in the income statement is closed to income statement summary account.
Debit balance in the income statement is closed to income statement summary account.
Income statement summary account is closed to owner’s capital A/c.
Finally the withdrawal account is closed to owner’s capital account.
What is the result of the closing entries?
As a result of the closing entries the temporary accounts stand at zero balance and they are started afresh in new accounting period. Real and Personal Accounts however continue to carry on the accumulated balances.
Merchandising
Difference between a service and merchandising business. Examples of both.
Service based business is that where the revenue is generated by providing service in intangible nature. For example providing legal consultancy service or telecom service. Merchandising business is that where the revenue is generated from the sale of inventory like selling clothes, shoes or other goods of daily need in physical form.
What are three new types of merchandising accounts?
Three new types of merchandising accounts are 1. Sales (revenue) 2. Cost of Merchandise Sold (expense) and 3. Delivery expense (expense).
References
Needles, B. E., Powers, M., & Crosson, S. V. (2010). Principles of Accounting (11 ed.). Mason: South-Western Cengage Learning.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Accounting Principles. John Wiley & Sons.
